Sri Lanka's Economy Shifts to Global Trade Gains

With its natural beauty, wildlife and culture, Sri Lanka is known as the "pearl of the Indian Ocean" , and attracts millions of tourists every year.

But my research suggests that the country might not be so reliant on tourism in the future, as it looks to become a major player in global maritime trade. The island's numerous harbours and enviable location along international sea routes have led to major investment from China and the US, as they seek to extend their strategic influence in the region.

That investment is being welcomed after years of economic and political turmoil in Sri Lanka.

The Easter bombings of 2019 targeted Catholic churches and hotels, killing 269 people and devastating tourism . The same year, significant tax cuts slashed government revenue before COVID did serious damage to the economy .

In 2021, a ban on chemical fertilisers led to nationwide agricultural failure , while excessive borrowing and money printing triggered soaring inflation, which peaked at 70% in August 2022. The country ended up failing to pay its foreign debts .

Following huge protests in 2022 and the resignation of the president, Sri Lanka began a major political and economic shift. It secured a bailout from the International Monetary Fund and implemented reforms aimed at stabilising the economy .

So far, some of the effects have been positive . Inflation has eased , investor confidence has improved and more tea, clothing and rubber products are being exported up .

Key to this has been improved logistics and port infrastructure. Business at the port of Colombo, the country's largest, is booming , aided in part by global shipping disruptions, including the Red Sea crisis , which rerouted vessels through the Indian Ocean.

But international maritime ambitions can be a complex affair, and Sri Lanka needs to be wary of becoming just a well-positioned commodity for the world's economic superpowers.

China for example, has secured a controversial 99-year lease of Hambantota port . India, wary of Chinese encroachment , has ramped up its own investments, including the development of a container terminal in Colombo .

In 2023, the US announced a US$500 million (£372 million) plan to develop a deep-water shipping container terminal at the port of Colombo. And the potential US tariffs of 30% on imports from Sri Lanka have been interpreted by some as a pressure tactic to get greater access to its waters.

Balancing these interests is a delicate act. While foreign investment is crucial for infrastructure development, Sri Lanka needs to protect its sovereignty and ensure that port operations serve national, not just international, interests.

My research suggests that one way of building a resilient and diverse Sri Lankan economy would be to focus on its surrounding waters. Sri Lanka's vast "exclusive economic zone", an area of sea where it controls marine resources, holds massive untapped potential.

Blue economy

This potential lies in traditional sectors like fisheries and tourism, but also emerging industries such as marine biotechnology.

This growing field offers opportunities in things like bioengineering and marine-based pharmaceuticals. With other countries rapidly advancing in these sectors, Sri Lanka is well-positioned to follow suit and become a regional leader in the blue economy (economic activities associated with the sustainable use of ocean resources).

But there is still a complex web of geopolitical interests and economic pressures to navigate, as well as environmental challenges.

At the moment for example, the Sri Lankan government is making plans for the deep natural port at Trincomalee to become a major marine repair and refuelling centre between Dubai and Singapore. Other proposed projects include offshore wind farms and oil rig facilities .

The country also needs to compete with the likes of Malaysia, which is investing heavily in AI-driven port operations . To stay competitive, Sri Lanka must modernise infrastructure and streamline processes.

And despite the progress, challenges persist. Poverty in Sri Lanka has doubled since 2021 , while youth unemployment remains high .

Sri Lanka faces rising maritime threats like piracy and illegal fishing , requiring stronger maritime surveillance. Simultaneously, port expansion risks damaging marine ecosystems. Green technologies and stricter environmental regulations are essential for long-term security and sustainability.

Sri Lanka's strategic location and maritime heritage offer a foundation for economic renewal. With wise governance, sustainability, and balanced geopolitics, its ports could once again become vital gateways to regional prosperity and global trade.

Hemamali Tennakoon does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.