The latest Current Account reading for LK, released on October 2, 2025, shows a surplus of 501 million LKR. This figure falls short of the estimated 620 million LKR and improves from the previous 926 million LKR surplus recorded in July 2025. The Current Account has exhibited notable volatility over the past 18 months, swinging from deficits to surpluses amid shifting external and domestic pressures.

Drivers this month

• Exports of goods and services remained resilient, supporting the surplus.
• Import costs rose moderately, narrowing the surplus compared to prior months.
• Remittance inflows stabilized after a dip in early 2025.

Policy pulse

The current surplus aligns with the central bank’s target to maintain external stability, though it is below market expectations. Monetary policy remains accommodative, aiming to support growth without exacerbating external imbalances.

Market lens

Immediate reaction: The LKR currency weakened 0.30% against the USD within the first hour post-release, reflecting disappointment versus estimates. Short-term bond yields edged higher by 5 basis points, signaling cautious investor sentiment.

Core macroeconomic indicators provide context for the Current Account's trajectory. LK’s GDP growth rate for Q2 2025 was 3.10% year-on-year, slightly below the 3.40% average of the previous four quarters. Inflation remains contained at 4.20% YoY, within the central bank’s 4–6% target range.

Monetary Policy & Financial Conditions

The central bank’s policy rate stands at 6.50%, unchanged since mid-2025. Financial conditions have tightened marginally due to global rate hikes, but domestic credit growth remains steady at 7.80% YoY. The LKR’s real effective exchange rate appreciated 1.20% over the past quarter, impacting export competitiveness.

Fiscal Policy & Government Budget

Fiscal consolidation efforts continue, with the government reducing its budget deficit to 4.50% of GDP in Q2 2025, down from 5.20% a year earlier. Public debt remains elevated at 72% of GDP, constraining fiscal space amid rising global borrowing costs.

External Shocks & Geopolitical Risks

Global commodity price volatility and regional geopolitical tensions have pressured trade balances. LK’s export markets face uncertainty due to supply chain disruptions and fluctuating demand in key partners.

Drivers this month

• Goods exports increased by 3.50% MoM, driven by textiles and tea.
• Services imports rose 2.10% MoM, reflecting higher energy and transport costs.
• Net income and transfers remained stable, supporting the surplus.

Market lens

Immediate reaction: The LKR/USD pair depreciated 0.30% post-release, reflecting market disappointment. Two-year government bond yields rose 7 basis points, indicating increased risk premiums amid external uncertainty.

Looking ahead, the Current Account balance for LK faces mixed prospects. The baseline scenario projects a moderate surplus averaging 450–550 million LKR over the next two quarters, supported by steady export growth and stable remittances.

Bullish scenario (25% probability)

• Global demand rebounds sharply, boosting exports by 5–7% YoY.
• Energy prices stabilize or decline, reducing import costs.
• Fiscal reforms attract foreign investment, strengthening external balances.

Base scenario (50% probability)

• Exports grow modestly at 3–4% YoY amid moderate global growth.
• Import costs rise slightly due to inflationary pressures.
• Remittance inflows remain stable, supporting the surplus.

Bearish scenario (25% probability)

• Global slowdown reduces export demand by 2–3% YoY.
• Energy price spikes increase import bills significantly.
• Geopolitical tensions disrupt trade routes, pressuring the Current Account.

Policy pulse

Monetary authorities may consider tightening if external pressures intensify, balancing inflation control with growth support. Fiscal discipline remains critical to maintain investor confidence.

In summary, LK’s Current Account surplus of 501 million LKR in October 2025 reflects a partial recovery from earlier deficits but falls short of expectations. The external sector shows resilience amid global uncertainties, yet vulnerabilities persist due to import cost pressures and geopolitical risks.

Policymakers face a delicate balancing act to sustain external stability while fostering growth. The outlook remains cautiously optimistic, with upside potential contingent on global demand and commodity price trends.

Key Markets Likely to React to Current Account

The Current Account data historically influences several key markets. The LKRUSD currency pair often reacts sharply to external balance shifts. The COL stock index, representing major exporters, correlates with trade performance. The BTCUSD crypto pair sometimes reflects risk sentiment linked to macroeconomic stability. The CEY stock, a local financial sector proxy, is sensitive to capital flow changes. Lastly, the USDLKR pair provides an inverse perspective on currency movements tied to the Current Account.

FAQs

What is the Current Account and why does it matter for LK?

The Current Account measures trade in goods, services, income, and transfers. It reflects LK’s external economic health and influences currency stability and policy decisions.

How does the Current Account affect monetary policy in LK?

Large deficits or surpluses can prompt central bank action to stabilize the currency and control inflation, impacting interest rates and liquidity.

What are the main risks to LK’s Current Account outlook?

Risks include global demand shocks, commodity price volatility, geopolitical tensions, and domestic fiscal imbalances.

Takeaway: LK’s Current Account surplus signals external resilience but requires vigilant policy to navigate global uncertainties and sustain growth.

This has been drafted with AI assistance and then thoroughly reviewed, refined, and approved by our human editorial team to ensure accuracy, and originality.