Remittance surge cushions widening external cracks in February

• External account remained in surplus for a 4th straight month in February
• Current account recorded a surplus of US $ 117.2mn in February, bringing cumulative surplus for first 2 months of 2026 to US $ 487mn
• Worker remittances emerged as single strongest support to external account with inflows expanding 33% YoY in February

Sri Lanka’s external account remained in surplus for a fourth straight month in February. 

However, the underlying composition signals a growing imbalance, where the worker remittances are increasingly offsetting the weakening fundamentals across trade, tourism and services.

The current account recorded a surplus of US $ 117.2 million in February, bringing the cumulative surplus for the first two months of 2026 to US $ 487 million. This resilience came despite a sharp widening of the merchandise trade deficit to US $ 776.1 million for the month, as the imports surged 25.2 percent year-on-year (YoY), outpacing the marginal export growth of just 0.5 percent.

The import bill was notably driven by a rebound in vehicle imports, which reached US $ 194 million in February alone, indicating a revival in the domestic demand. This also raises questions over the sustainability of external balances, if consumption-led imports persist.

At the same time, the terms of trade deteriorated, reflecting a deeper structural concern: the export prices are weakening faster than the import prices, eroding the country’s external competitiveness.The services account, traditionally a key buffer, showed signs of strain. Net inflows declined 16.7 percent YoY in February, weighed down by the lower tourism earnings and a sharp rise in outbound travel spending. While the tourist arrivals continued to grow, the earnings fell 4.2 percent to US $ 352 million, pointing to a declining per-visitor value.

Meanwhile, worker remittances emerged as the single strongest support to the external account. Inflows rose 33 percent YoY to US $ 729 million in February, driving a 32 percent increase in cumulative remittances for the first two months of the year.

Financial flows reflected a mixed investor sentiment. Foreign inflows into government securities recorded a net gain of US $ 53 million. The Colombo Stock Exchange saw a net outflow of US $ 30 million, possibly a tilt towards a short-term fixed income exposure over equity risk.

The gross official reserves rose to US $ 7.3 billion by end-February, supported by the Central Bank purchases, even as external debt servicing continued. However, the emerging global pressures are beginning to filter through, with the rupee depreciating 1.6 percent against the US dollar year-to-date by end-March, following the escalation of geopolitical tensions in the Middle East.