China emerged as Sri Lanka’s largest trading partner in value terms, surpassing India and the United States the third largest trading partner in 2025. Together, these three countries accounted for around 41% of Sri Lanka’s total merchandise trade, a Public Lecture on the State of the Economy as Reflected in the Annual Economic Review – 2025 conducted by CBSL said.
It revealed that Sri Lanka’s trade deficit with China widened to USD 4.9 billion US driven by increased imports of vehicles and construction materials while exports remained low. Sri Lanka maintained a USD 2.5 billion US trade surplus with the United States mainly due to apparel exports. The services account surplus increased further to US dollars 3.7 billion in 2025 from 3.4 billion US in 2024.
Workers’ remittances reached the historic high of USD 8.1 billion increasing by 22.8% year on year. Remittances played a critical role in offsetting the widened trade deficit and cushioning the current account balance. The financial account remained modest during the year 2025. Foreign direct investment inflows improved in 2025 with FDI foreign direct investments excluding loans increasing to US1 billion. Foreign direct investments investment inflows were mainly directed towards port container terminals, rubber product manufacturing and textile and garment sectors. The government securities market recorded a net inflow during the year reflecting improved investor confidence. Meanwhile, the Columbus stock exchange including primary and secondary markets recorded the net outflow during the year.
Net international reserves improved significantly to USD 4.3 billion in 2025 from USD 2.5 billion in 2024. Overall, the external sector has improved supported by strong inflows from remittances, tourism and official financing. However, structural challenges remain. Total assets of the banking sector continue to expand mainly due to the significant increase in loans and receivables during 2025. Accordingly, the year-on-year growth of loans and receivables considerably increased from 4.1% at end 2024 to 21.4% at end 2025. The stage three loans ratio of the banking sector decreased from 12.3% at end 2024 to 9.7% at end 2025 primarily due to the significant credit expansion.
However, the stage three loans ratio remained elevated at end 2025 compared to the pre-crisis levels. The financial company sector expanded rapidly with the significant increase in loans and advances by 56% year on year at end 2025 compared to a 22.6% growth at end 2024. Financial leases and vehicle loans continue to dominate the loans and advances portfolio of the sector followed by loans secured by gold. Along with this high credit expansion and a decline in stage three loans, the gross stage three loans ratio of the sector declined to 6.1% in 2025 compared to 11.5% at end 2024. Mainly as a result of the high credit expansion in 2025 the Sri Lankan equity market maintained a strong upward trend.
Source : Daily News
