Sri Lanka pays for high cost of war Iran & GCC countries

Sri Lanka Perspectives by Col R Hariharan Assesses the impact of Gulf War 3.0 on the Island nation caught on the active periphery of the conflict

War in perspective

The plight of Sri Lanka, an island nation of about 23 million people caught in the after effect of a war in faraway Iran and GCC countries (Bahrain, Qatar, Kuwait, Oman, Saudi Arabia and the United Arab Emirate - UAE) reminds one of Satyajit Ray’s acclaimed 1973 film Asani Sanket (Distant Thunder). The movie depicts the sufferings of a small village in Bengal due the great Bengal famine triggered by World War II. 

Sri Lanka was rudely awakened to the reality of the war in Iran, when US Navy submarine USS Charlotte (SSN-766) torpedoed and sank a Iranian navy warship IRIS Dena, barely 40 Km from Sri Lanka coast on March 4, a week after the war started. The Sri Lankan Navy carried out a search and rescue mission to pick up 32 survivors and 87 dead bodies of Iranian sailors. Sixty of them were reported missing.

Sri Lanka has had friendly relations with Iran for decades. It had signed a barter agreement with Iran for continuing the earlier “tea-for-oil” settlement mechanism. It was designed to reduce outstanding petroleum debts of Sri Lanka by exchanging Ceylon tea, during foreign currency crisis. By mid‑2025, Sri Lanka had cut its debt to Iran’s National Iranian Oil Company from about $191 million to $130.6 million through this arrangement. So the sinking of the Iranian frigate so close to Sri Lanka by the US submarine created an embarrassing political storm for President AK Dissanayake’s government.

As March ends it will be a month since the US and Israel started the war against Iran. During the month, U.S. and Israeli forces claim to have hit over 11,000 to 15,000 targets within Iran, targeting their military infrastructure, Islamic Revolutionary Guard (IRGC) bases and industrial sites. Israeli strikes have targeted Iranian proxy forces - Hezbollah and Radwan Force in Southern Lebanon. The US expectation of regime change after the decapitation of Iran’s head of state and top military and intelligence leadership by Israelis has been belied. Iran's leadership change was smooth, despite Trump’s appeals to the Iranian population to rise up against the Islamists.

Iran’s missile and drone attacks on American military bases in the six GCC countries have surprisingly yielded results. The Al Udeid Air Base in Qatar where 10,000 US troops and the forward headquarters of the US Central Command (CENTCOM) are located suffered multiple Iranian strikes that damaged buildings and communication infrastructure. Troops are now housed in hotels and Iran has warned those also can become targets.

According to Al Jazeera’s estimate of March 30, 2026, the ongoing conflict has resulted in over 3,200 fatalities and approximately 33,000 injuries across the Middle East with Iran and Lebanon bearing the brunt. Iran has closed the world’s most critical choke point – Strait of Hormuz – for marine traffic. The Strait normally handles 138 ships per day. Roughly half of them are tankers carrying oil and gas.  According to the International Energy Agency (IEA), normally the Strait facilitates the transit of about 21 million barrels of oil daily. That represents roughly 35% of global seaborne oil trade. Iran's parliament has passed a resolution that introduces a toll system to cross the Strait. 

POTUS Trump has massed troops and threatened to launch operations against Iranian oil facilities in Kharg Island unless Iran opens the Strait of Hormuz for international marine traffic. The US is also after recovering Uranium reserves of Iran.

However, Iran seems to be in no mood to accept US terms for a ceasefire. Pro-Iranian Houthis in Yemen have also joined the operations against Israel; if they become more active the alternate Red Sea route  can become unsafe for marine traffic. So, we can expect the war to continue even if Americans escalate the scale of their operations by landing troops on Kharg Island to forcibly try to open the Strait of Hormuz. We can then expect Israelis to intensify their operations against Iranian proxies in Southern Lebanon and Houthis to keep the Red Sea route open.

Effect of war

Prolonged war in the Middle East and the closure of the international marine and air traffic is playing havoc with global supply chains, already frayed by four years of war in Ukraine. 

The choking of marine traffic in Strait of Hormuz, particularly of tankers carrying petroleum and gas, is hitting South Asian countries' economy hard as they are dependent on imported energy resources. They have to find alternate sources of oil and gas and take measures to curb surge in energy costs; rework disrupted trade routes and strategize for likely fall in tourist traffic. There is also likely to be a fall in remittances from expatriates living in GCC countries.

In short, they have to manage an inflationary economy with the attendant negative political impact while the war in Iran shakes up the strategic world.

The continuation of the war in Iran is affecting the lives of 62 million people living in GCC. It includes 35 million foreigners (who form the 56% majority of the population). South Asians form the bulk of the foreign population. Sri Lankans form a significant share of the workforce, particularly in retail, domestic work and service sectors. Remittances from Sri Lanka expatriates in 2025 reached a historic record of $7.8 billion, marking a 19% increase from the previous year.  Sri Lanka runs the risk of their remittance drying up in the coming days.

There are 100,000 to 120,000 foreign workers in Israel at present. They are mainly from Thailand, Philippines, India, Sri Lanka, Nepal, Moldova, and Eastern Europe. Indian and Thai workers dominate agriculture. Large numbers from Sri Lanka, Philippines and Nepal are involved in caregiving. Construction and services are dominated by Indians, Chinese and East Europeans.

As of early 2026, 15,000 to 20,000 Sri Lankans are estimated to be employed in Israel. About 8000-9000 Sri Lankans are employed in home-based caregiving for the elderly. Nearly 2,000 workers departed in the first three months of 2025 alone to be employed in construction jobs. with thousands more following after Israel extended re-entry visas for Sri Lankan workers until April 30, 2026. In 2025, Sri Lanka and Israel signed agreements to expand employment opportunities in caregiving, agriculture, construction, hotels, housekeeping and manufacturing.

Despite ongoing regional tensions, the Sri Lankan Embassy in Israel reports that most workers have chosen to stay due to high wages—often ranging from Rs. 800,000 to Rs. 1 million per month—and strong social welfare. While employment opportunities go up in Israel for Sri Lankans, their safety will always be an added concern for the Sri Lanka government in the coming days.

Sri Lanka is one of the world’s top tourist destinations. Tourism industry not only earns foreign exchange but provides employment to a host of other service sector industries in hospitality and transport. GCC countries have emerged as hubs of tourist air traffic from the West. The war is already affecting it as evidenced by 17.3 percent less tourist arrivals recorded during the first 22 days of March 2026 when compared with the figures for the same period last year.

Government in action

President AK Dissanayake will have to cope with all these issues, while implementing the conditionalities of the  International Monetary Fund (IMF) being followed for recouping the bankrupt economy. The IMF Team is already in Sri Lanka for the Fifth and Sixth Reviews under the Extended Fund Facility (EFF) programme. Once completed, this could potentially release around $ 700 million.

The President held a meeting of ministers and officials on March 15 to discuss the disruptions to global energy supply networks caused by the War. The meeting examined measures to deal with interruptions to coal, gas and oil supply chains. After that the government has taken a number of measures to minimise the adverse impact on the national economy. Some of these are listed below.

President Dissanayake spoke to PM Narendra Modi to seek India’s help in overcoming Sri Lanka’s petroleum shortage due to non-arrival of supplies. Within four days India sent two ship loads, one carrying 38,000 MT of oil and the other carrying 18,000 MT of diesel and 18, 000 MT of high-octane petrol to Sri Lanka.

The government has reintroduced the ‘Fuel Pass QR code’ system, a rationing mechanism first implemented during the economic crisis in 2022. This system limits private motorists to roughly 15 litres of fuel per week.

To conserve energy, the government has introduced a four-day week for work in government institutions, schools, universities and the judiciary with Wednesday as a mid-week holiday.

As expected in any democracy, the government has come under flak from opposition leaders, right from the sinking of an Iranian warship by USN submarine. But AK Dissanayake seems to be the best choice among the political leaders; at least he is pursuing old cases of political corruption and misuse of power by many political leaders. They will probably welcome the four-day week for the judiciary so that they can buy time.

Tailpiece – War and cuisine: Sri Lankan cuisine is suffering from the war in Iran. Two essential commodities for a Sri Lankan meal - sprat and dhal – bulk of which imported respectively from Iran and Canada have become scarce. Before Vesak is celebrated, we can expect the AKD government to ensure these culinary essentials are back on the table.

[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,]