Sri Lanka: Maritime Matters in a Month of Choke points

Col R Hariharan in Sri Lanka Perspectives April 2026  outlines how the AKD government is managing one of the gravest economic and energy crisis faxed by the Island Nation eve as it is on the path of fiscal recovery.

During the month of April, the Straits of Hormuz continued to face the ‘double blockade’ of both the US and Iran. The word ceasefire in West Asian wars has lost its meaning as Israel continues to pound Iran’s proxies in Southern Lebanon.  The war has triggered an energy crisis in most of Asia, particularly India, China and Japan. This is more so in the case of import-dependent small nations like Sri Lanka and Maldives, already struggling with economic recovery in the post-Covid period. After the US’ ill-conceived leadership decapitation operations in Iran there is leadership confusion in Teheran. With POTUS Donald Trump in “full flow” at the other end of the table, nobody really seems to know when maritime traffic will be restored in the Straits of Hormuz.

President Anura Kumara Dissanayaka’s current plight in handling the economic uncertainties triggered by the turbulence in world order due to the “choking” fits of Iran war brings to mind, George Bernard Shaw’s famous lines from My Fair Lady of the heroine Eliza Doolittle: "I sold flowers. I didn't sell myself. Now you have made me a lady, I am not fit to sell anything." Despite such adverse circumstances, Sri Lanka celebrated the Sinhala and Tamil New Year (Avurudu) on April 14, 2026, with traditional rituals. The AKD government timed its relief package—fuel subsidies, electricity concessions, and cash transfers—to coincide with the festival easing household expenses during the celebrations to shield citizens from the economic shock of the West Asia war. It focuses on key elements of shortage: fuel, energy, fertilizer and cash transfers. Fuel subsidies in terms of litres amount to diesel LKR 100 and petrol LKR 20 cost. Fuel subsidies will cost the government LKR 20 billion/month. Electricity concessions of the Government cover the cost for households consuming under 90 units/month for three months.

The government has introduced a QR-code based rationing system limiting weekly fuel quotas by vehicle type, ensuring equitable distribution. Temporary 4-day work week was introduced to conserve energy; however later it was increased to 5 days/week. Last month, Sri Lanka managed to get an emergency supply of 38,000 MT petroleum (20,000 MT diesel + 18,000 MT petrol) from India. The government is now in talks with Russia and China to secure fuel, gas, coal and fertilizer supplies.

An Economic Monitoring Committee has been established to track supply chains and negotiate with partner nations. To ensure macroeconomic stabilisation, the Central Bank purchased USD 700 million to strengthen forex reserves to nearly USD 7 billion. Relief package aligned with ongoing IMF program (USD 2.9 billion assistance since the 2022 crisis).

Sri Lanka’s approach so far blends short-term relief (subsidies, cash transfers) with long-term resilience (energy diplomacy, IMF programme). The aim appears to be to protect citizens without derailing fiscal recovery. However, securing reliable external energy supplies and sustaining confidence in economic management can only guarantee success of the government’s current relief measures targeted at fuel, energy, and cash transfers to cushion citizens from the West Asia war. This is in contrast with Gotabaya Rajapaksa’s COVID-era measures (2020–2022) focused on moratoriums, debt relief, and food security during lockdowns. The key difference lies in the present government’s emphasis on external energy diplomacy versus Gotabaya’s reliance on domestic fiscal concessions.

However, the question remains on how long the government can offer a relief package of LKR 100 billion beyond three months. Current fuel stock is expected to last until end-May 2026. Beyond fuel supply stability depends on successful deals with Russia and China.

Sri Lanka and China are formalising a framework to settle trade directly in Renminbi (RMB) as a strategic move by both to move away from a traditional reliance on the US Dollar for their trade. Governor of the Central Bank, Dr. Nandalal Weerasinghe and the Governor of the People’s Bank of China, Dr. Pan Gongsheng are believed to have discussed this on the sidelines of the recent IMF-World Bank Spring Meetings in Washington. According to the Sunday Times the process is built on a direct clearing and settlement mechanism designed to bypass intermediary western banks. China has an agreement with Sri Lanka for RMB 10 billion (about US$1.4 bn) bilateral currency swap, renewed in early 2025. This will provide the necessary “liquidity cushion” to facilitate these settlements. This will mean Sri Lanka shifting a portion of the $4.3 billion annual trade with China to RMB thereby reducing the pressure on Sri Lanka’s limited US dollar reserves.

Since 2022 India and Sri Lanka have a similar arrangement to conduct trade in Indian Rupees (INR) to facilitate international trade settlement in local currency, reducing reliance on the US Dollar. To facilitate this, Sri Lankan banks open Special Rupee Vostro Accounts (SRVA) with Indian banks to settle export and import invoices directly in INR. Sri Lanka's Central Bank officially designated the INR as a "designated foreign currency" in August 2022. The RBI allowed trade transactions with Sri Lanka to be settled in INR outside the usual ACU mechanism. This has helped Indian importers pay in INR into the SRVA, and Indian exporters receive their proceeds in INR from these accounts. Sri Lankan citizens are permitted to hold up to USD 10,000 (approximately INR 8.14 lakhs) in physical Indian currency. Indian tourists can use INR for transactions in Sri Lanka, and students or tourists can withdraw up to $5,000 equivalent in INR as a travel allowance.

The biggest advantage of this arrangement is that the National Payments Corporation of India (NPCI) and LankaPay have integrated the Unified Payments Interface (UPI) to simplify digital transactions for Indian tourists in Sri Lanka. 

India strengthens its strategic relations

During the month, India strengthened its strategic relations with Sri Lanka with the first ever visit of its Vice President CP Radhakrishnan to Sri Lanka. During the visit, several Indian aided projects including the development of Trincomalee as a regional energy hub, completion of 50,000 houses under Indian Housing Project, restoration of Northern Railway services with new bridge infrastructure came up for discussion.

On the maritime front, the biggest news was India's premier defence shipyard Mazagon Dock Shipbuilders Limited (MDL) acquiring a 51% controlling stake in Colombo Dockyard PLC (CPDLC) for approximately $26.8 million (₹249.5 crore). As Times of India says the acquisition is a strategic hedge against China's 99-year lease of Hambantota Port in the South. CPDLC is located at the junction of the vital East-West shipping lanes in the Indian Ocean Region (IOR). This gives MDL an offshore node for the repair, maintenance, and refit of naval and commercial vessels without straining domestic infrastructure.

India gains access to four graving dry docks with a maximum capacity of 125,000 deadweight tonnes (DWT) and a skilled workforce of 3,000, immediately augmenting its shipbuilding ecosystem.  Sri Lanka is equally benefited because the CPDLC had been facing severe financial stress. In 2023, it recorded a loss of LKR 11.1 billion. MDL’s capital infusion and backing will help the resolve "going concern’s" audit issues and stabilized the company's finances.

More than all this, with MDL's support, CPDLC has secured the largest contract in its history—a $150 million deal with France's Orange Marine to build two advanced cable-laying vessels. Moreover, CPDLC now has access to Indian supply chains, enhancing its global competitiveness. MDL’s partnership will help CPDLC to secure bank guarantees.

Tailpiece: The new year hasn’t got off on the right foot for AKD and the ruling NPP. The “clean” government is bugged by two scams: continued import of substandard coal and the breach of the Finance Ministry’s computer systems, which resulted in a loss of USD 2.5 million to hackers. AKD at the helm would do well to follow the leadership advice of Lee Iacocca, the legendary American automotive executive. The “capitalist” who steered Chrysler to recovery, said "In times of great stress or adversity, it's always best to keep busy, to plow your anger and your energy into something positive."  Already the President seems to be busy on the lines suggested by Lee.

[Col R Hariharan VSM, a retired MI specialist on South Asia and terrorism, served as the head of intelligence of the Indian Peace Keeping Force in Sri Lanka 1987-90. He is associated with the Chennai Centre for China Studies. Website: https://.col.hariharan@net  Email: haridirect@gmail.com,]