By early 2026, Sri Lanka had begun to look like a different country: two years of 5% economic growth, below target inflation, a current account in surplus for three consecutive years, and a budget deficit of just 2.3% in 2025, down from nearly 12% of GDP in 2021.
Sri Lanka draws around 40% of its oil from the Middle East, and has yet to diversify its trade relationships through free trade agreements. Just as the investment narrative was shifting, conflict broke out in late February, the Strait of Hormuz came under severe disruption, and fuel prices jumped between 40% and 125% within five weeks.
The 2026 HSBC Power Breakfast in Colombo, themed “Energy, Trade and the New Cycle”, gathered senior voices from banking and economics to examine an economy better placed than at any point in recent years to absorb what the world is throwing at it.
Aayushi Chaudhary, Economist for India, Indonesia and Sri Lanka at HSBC
Mark Surgenor, CEO at HSBC Sri Lanka, gave the welcome address. Aayushi Chaudhary, HSBC’s Economist for India, Indonesia, and Sri Lanka, spoke on Sri Lanka’s path to expansion; Aditya Gahlaut, the bank’s Regional Head of Global Trade Solutions for Asia Pacific, on capital decisions in a shifting global economy; and Frederic Neumann, HSBC’s Chief Asia Economist and Co-head of Global Investment Research in Asia, on Asia’s resilience and outlook. Central Bank Governor Dr Nandalal Weerasinghe joined the closing panel.
Sri Lanka’s Supply Shock
“Just when the narrative around Sri Lanka was changing,” Chaudhary told the audience, “it was jolted by another shock.”
The past decade has rarely been kind to Sri Lanka. What sets 2026 apart, Chaudhary argues, is not simply that oil prices have surged. The deeper problem is supply.
She identified imports which are most exposed: naphtha, crude oil, LPG, and jet fuel, all flowing through the Strait of Hormuz. Beyond fuel, the region supplies industrial inputs now growing scarce: ethylene, a building block of plastics; naphtha, vital for both plastics and chip manufacturing; and fertiliser, without which the country’s agriculture cannot function. Since the conflict began, prices for each have surged.
Neumann, presenting the Asia-wide picture, put Sri Lanka’s energy exposure in a regional context. The country imports around 4% of GDP in net energy — neither the most nor the least vulnerable economy in Asia — though its dependence is concentrated in oil rather than gas or coal. The fuel price surge — between 40% and 125% across categories in five weeks — has driven electricity tariffs higher, and inflation, which spent most of two years below the Central Bank’s target, has started to climb. Restaurants and hotels are running above 10% year-onyear; transport is similar; and producers are only beginning to pass higher input costs to consumers. HSBC expects headline inflation to breach the Central Bank’s 7% upper limit for two or three quarters from September 2026.
Why 2026 Isn’t the 2022 Crisis Year
“Sri Lanka isn’t immune,” said Chaudhary, “but it’s far more resilient.” The country, she argued, “isn’t starting from a point of macroeconomic exhaustion.” The recovery has been more substantial than the headline figures suggest. Private investment and construction have picked up, with gross fixed capital formation recovering more earnestly in the past few quarters.
The fiscal improvement has come from higher revenue, not spending cuts alone. Tax collections from goods and services were over 5% of GDP by late 2025, rising from 2-3% before the pandemic. The government has also moved quickly this time. As Chaudhary’s presentation detailed, fuel prices were raised to deter hoarding, rationing measures and adjusted public transport fares were introduced to curb demand, and cooking gas prices were revised upward. On May 16, the Ministry of Finance imposed a 50% surcharge on customs import duties for vehicles for three months via the presidential gazette. On the currency: “The Central Bank is splitting the impact of market volatility between the exchange rate and FX reserves,” she said.
Frederic Neumann, Chief Asia Economist and Co-head of Global Investment Research Asia at HSBC
Neumann, who put HSBC’s year-end rupee target at around Rs330 to the dollar, called the Central Bank’s rate increase “a very effective defence against a stronger dollar.”
Comparing Sri Lanka’s position today with the crisis of 2022, Governor Weerasinghe says, “We are in a much better position to handle this external shock,” citing the fiscal buffers, monetary policy actions, and the foreign reserves that have materialised since then. He also supports renewable energy as a longer-term insurance against future supply disruptions, pointing to a government target of 70% renewable generation. Hydro and renewables already meet around 50% of the country’s capacity needs, he noted, though weather patterns play a role. “This is an opportunity to expedite the enhancement of energy production by alternative sources other than fossil fuels.”
Moving From Stability to Expansion
HSBC’s central scenario assumes the Strait of Hormuz reopens by mid-June and conditions stabilise by end-September, with Brent averaging around $95 a barrel for the year. Sri Lankan exports to the Middle East — about 13-15% of the total, including around a third of its tea — are likely to soften.
Tourist arrivals in March and April slipped below 2025 levels, hurt by airspace restrictions and higher travel costs. With half of Sri Lanka’s remittances coming from the Middle East, a regional contraction would weigh on in ows, though Chaudhary notes that “remittance income has a very high correlation with higher oil prices,” meaning elevated Brent would pull in the other direction.
Ships rerouting via the Cape of Good Hope, as they did during the 2023-24 Red Sea crisis, have lifted port activity at Colombo. With ports and tourism each contributing roughly 2.5-3% of GDP, gains from one could offset the drag from the other. The net effect, Chaudhary estimates, would leave growth around 100 basis points lower if the conflict lingers a year. “If the conflict persists,” she said, “this price shock can become a growth shock.”
Her sharper argument looked beyond the shock entirely. Real GDP has now returned to its pre-pandemic level. Growth in the past two years has been partly a catch-up. The recovery is, in effect, complete. The next 5%, she argued, is not a given. “Don’t just recover,” she said. “Expand.”
She identified four areas where Sri Lanka could find its next leg of growth. The first is logistics. Three deep-water ports face three directions: Colombo, Hambantota and Trincomalee. Colombo alone accounts for about 0.8% of global container traffic; the country represents just 0.05% of global trade — a ratio of 15 to 1 that shows how far Sri Lanka already punches above its weight, and how much room remains. The route to value runs through smart logistics technology, deeper port infrastructure, and marine repair and auxiliary services.
The second is tourism. Arrivals have recovered, but revenue remains around 3% of GDP. The MICE segment (meetings, incentives, conferences and exhibitions) accounts for roughly a tenth of arrivals. “We’ve seen tourism in economies like Singapore, Thailand and Indonesia benefit a lot by attracting MICE travellers.” The segment spends materially more per visit than the average leisure tourist.
The third is the digital economy, which the UN estimates at around 4.5% of GDP in Sri Lanka. Chaudhary argued that there is a need to invest more in the digital economy so that Sri Lanka is able to reap the efficiency gains which digital transformation and AI have to offer.
The fourth is public capital expenditure, which has fallen below its 2010-19 average of 4.5% of GDP. Reviving it, she argued, is important for crowding in the foreign direct investment.
Speaking during the panel discussion, the Governor credited the IMF programme with catalysing important reforms, the Central Bank Act, the Banking Act, the Public Finance Management Act and anti-corruption measures, among them, before turning to “Land reforms, [and] labour reforms,” which he added have not been covered yet.
State-owned enterprise reform, public-private partnerships, ease of doing business and the trade regime are areas where reforms are underway, with scope to accelerate implementation. Reflecting on the crisis period, he noted it created an opportunity to fast-track medium-to-long-term reforms, and that while progress has begun, the pace could be faster.
“Sri Lanka has displayed enormous resilience in recent years,” Neumann said. “This energy crisis is not of our making; it’s external, it will dissipate.” He also said he often detected “a little bit of pessimism around the competitive position of Sri Lanka,” a sentiment he did not share. With Sri Lanka’s wage costs running at roughly 20% of China’s, he argued the country is well placed to capture market share as China cedes ground in labour-intensive industries.
“If I look broadly at the region,” he said, “we’re still in a very good position, despite the energy shock, to take market share from China in some of these markets.” What he hoped would remain in place was urgency. “Speed of decision-making, both at the corporate level and the government level,” he said, “is key.”
HSBC’s 134 Years and Counting
Opening the morning, Surgenor told the room the world had become a more complicated place — one where businesses still had to make investments, commit capital and take decisions under uncertainty. “It is perhaps one of the most uncertain times ever to make those calls,” he said. “If you don’t, you end up falling behind.”
Mark Surgenor, Chief Executive Officer at HSBC Sri Lanka
HSBC has been in Sri Lanka for 134 years and is the world’s largest trade bank, he said. UK-based, with a presence in more than 57 countries, the bank and its Global Service Centre together employ around 3,000 people in Sri Lanka. Euromoney and Finance Asia rate it the best bank for corporates and MNCs; it has held the title of best international bank for close to a decade. Four out of every five people employed by a foreign bank in Sri Lanka work for HSBC.
HSBC operates a Business Process Outsourcing centre in Sri Lanka, making it not only a bank but an importer, an exporter and a user of the very trade infrastructure its clients navigate. “We learn as a practitioner as well as a bank,” he said, “and I think that helps us serve you much, much better.” He acknowledged the bank’s recent changes to its retail business, making clear they had not diminished its commitment to the market. “We absolutely look forward,” he said, “to being here for the next 134 years.”
What Does Resilience Cost
Gahlaut’s keynote argued that for more than 50 years, efficiency was the governing logic of global business. Supply chains optimised for cost, capital went where returns were highest, and trade routes followed the path of least resistance. That era, he said, is over.
Dr Nandalal Weerasinghe, Governor at the Central Bank of Sri Lanka
“When you start hearing phrases where people say disruption is the new normal, volatility is now part of every corporation’s playbook,” he said, “it seems like lessons from a leadership coaching course, but that’s what you’re hearing.” The word he had heard most in the past 12 months was resilience. The problem, he argued, is that resilience is not just a philosophy. “It’s actually an item on your balance sheet. It sounds nice, but ultimately there’s a cost associated with resilience.”
Gahlaut laid out four choices every corporation now faces, each with a capital cost attached.
The first was the supply chain. The old model — lean and optimised for scale — had been exposed by five years of sequential shocks. The new standard demands a portfolio approach: diversified manufacturing footprints, multiple supplier bases, buffer inventory and warehouses closer to end customers. “If you want to build for resilience,” he said, “you have to give up efficiency.” The choice, in practical terms, is how much working capital to commit to insuring against the next disruption.
The second was capital deployment. Future-shaping industries — semiconductors, data centres, renewables, resources and critical raw materials accounted for three quarters of greenfield FDI globally in the last 3 years. Every CFO now faces the same question: defend margins in conventional industries, invest in future-shaping ones, or move upstream to secure the raw materials that underpin both.
Aditya Gahlaut, Managing Director and Regional Head, Asia Pacific, Global Trade Solutions at HSBC
The third, and what Gahlaut called the least understood, was the shift towards servitisation: the move from selling products to selling outcomes. Services account for 64% of world GDP but only a quarter of global trade; services trade is growing 2-2.5 times faster than goods trade, and more than half of incremental trade growth through 2030 is expected to come from services driven by changing consumer behaviour and digitisation. Buyers are increasingly passing the burden of capex to their suppliers, but in turn are willing to sign longer-term contracts, with the nature of the contract shifting from supply of goods to provision of services, often carrying outcome-based terms. The implications for corporate business models are stark: suppliers having to incur fresh capex and revenue profiles shifting from one-off sales into long-term contracted receivables.
The fourth was artificial intelligence. Global spending on AI infrastructure is on track to exceed $1 trillion in 2026. Underinvest, Gahlaut said, and you risk irrelevance. Overinvest, and you risk the balance sheet.
Each corporation today is faced with a Choice Map, each having capital implications. The question increasingly is not whether the corporation needs the financing but how it is structured.
The four choices, he said, have remade the CFO role beyond recognition. “Go back 15 years,” he said, “all that CFOs and treasurers were required to do was traditional financial stewardship. Today, you’re expected to be masters at AI, digital transformation leaders, geopolitical strategists, and architects of new supply chain resilience.”
Asia’s Moment & Burden
Neumann, presenting the Asia and global outlook, opened with a chart of global geopolitical risk stretching back to the mid-1980s. The current reading is among the highest in decades, surpassing the first Gulf War, September 11 and the Iraq War.
The period between 1990 and 2015 was the anomaly: an unusually stable era underwritten by American power and a broad consensus on free trade. What the world is experiencing now is not a departure from normal. “It is just a return of that uncertainty that we really had since the Second World War,” he said. And the global economy, he added, can still grow in this environment.
The clearest support for that argument, he said, is the United States. Despite the noise, the US economy has kept surprising on the upside. Non-residential investment as a share of GDP is near historically high levels, with $450 billion spent on data centres alone last year. Corporate profits as a share of GDP are among the highest since the Second World War. Real wage growth is holding, unemployment remains broadly low, and fiscal policy is loosening. The risk, in Neumann’s view, is not recession but the opposite: that robust demand and tariff-driven price pressures push core inflation well above the Federal Reserve’s 2% target, possibly forcing the Fed to tighten further before the end of 2026 and keeping the dollar strong.
Across the Atlantic, Europe imports rather than exports energy, meaning the same supply disruption hitting Asia is also hitting European households; consumer confidence is falling, and retail sales are easing. Unlike the Federal Reserve, which is tightening into a strong economy, the European Central Bank is raising rates in one that is already struggling to grow.
Some 80% of the oil passing through the Strait of Hormuz, Neumann said, goes to Asia — not the United States, not Europe. The energy shock is Asia’s problem. Even once the Strait begins to reopen, returning oil wells to full pressure takes around six months, and countries racing to refill reserves will keep prices elevated. HSBC expects Brent to average around $95 a barrel in the second half of the year.
Sri Lanka, Neumann said, “ended up with quite high effective tariffs, among the highest, along with Bangladesh, Brazil and mainland China.” Yet global trade is running at a record high. “85% of global trade is not with the US,” he said, and the rest of the world has responded to American protectionism by cutting its own barriers and accelerating free trade agreement negotiations. “India next door,” he added, “is suddenly seeing the light on free trade agreements.” The lesson, he said, is unambiguous: “We need to secure free trade agreements with other countries. That’s what Vietnam has done very successfully. That’s what India is doing right now.”
Of the $450 billion the United States spent on AI infrastructure last year, $380 billion came from Asia. Taiwan’s exports are growing at close to 50% year-on-year, and its economy expanded 13% in the first quarter of 2026. The big four AI spenders — Google, Meta, Microsoft and Amazon — have published spending plans pointing to a sharp further surge in the years ahead.
China is losing competitiveness in labour-intensive industries to economies with cheaper workforces, while gaining global market share in vehicles, chemicals, pharmaceuticals and electronics through extraordinary productivity gains. In 2024, China installed more industrial robots than the rest of the world combined and now has double the robot density per manufacturing worker of the United States. “They’re gaining market share,” Neumann said, “but against the big boys.” For ASEAN economies whose wage costs sit at a fraction of China’s, the opportunity in labour-intensive industries is real and growing.
Neumann closed with a simple question: Where is the world’s spending power accumulating over the next five years? Southeast Asia adds around $300 billion a year, India $450 billion. The United States and China each add over a trillion. Europe, for all its difficulties, still generates over a trillion dollars in new demand annually. “The growth is there,” he said. “The question for an exporter is where it is coming from, and which markets to focus on.”