Business Confidence hits 20-month low amid economic headwinds

June’s economic narrative remained complex as fuel price revisions, currency volatility and geopolitically driven inflationary pressures continued to test the resilience of Sri Lanka’s fragile recovery.

The Sri Lankan Rupee came under pressure in June amid heightened external sector challenges with the Central Bank of Sri Lanka reporting that the currency depreciated by 7.8 percent against the US Dollar on a year-to-date basis as of 5 June.

In response to the growing demand for foreign exchange, the central bank reportedly sold in excess of US$ 223 million in the domestic forex market in May and purchased 12 million dollars over the same period.

Despite this development, the bank maintains that the country’s financial system remains resilient. In its latest Financial Stability Review, the monetary authority states that domestic macro financial conditions remained broadly supportive during the first quarter of the year, underpinned by a recovery in financial intermediation and an acceleration in lending activity.

However, the review cautioned that elevated energy prices, commodity market volatility, adverse weather conditions and exchange rate pressures could pose risks to financial stability, and that inflation could spiral up to seven percent (from 5.5% in May) in the short term.

But there are indications that currency pressures may ease in the months ahead. BMI, a unit of Fitch Solutions, expects the rupee to recover by the end of 2026, supported by an anticipated moderation in global oil prices and the central bank’s tighter monetary policy stance.

Meanwhile, Sri Lanka’s broader economic reform programme gained an endorsement from the IMF, which approved a further disbursement of US$ 695 million following completion of its fifth and sixth reviews under the Extended Fund Facility (EFF) arrangement.

THE INDEX Against this backdrop, the LMD-PEPPERCUBE Business Confidence Index (BCI) fell by 16 points to 132 in June – from 148 in the month prior. The decline effectively reversed the modest recovery recorded in May.

From a broader perspective, the barometer remains six notches above its historic median of 126 although it sits 42 points below the 12 month average of 174. By comparison, the BCI stood at 210 in June last year.

And most tellingly, the index is now at a 20 month low – it hasn’t fallen below 139 basis points since October 2024.

According to PepperCube Consultants, the June index reflects a deterioration in business sentiment as firms remain cautious amid lingering economic uncertainty. It notes that prevailing economic headwinds are likely to continue shaping business confidence.

PROJECTIONS Looking ahead, the index is likely to remain subdued in the near term.

While a modicum of policy stability may offer a degree of reassurance, persistent concerns over rising costs, exchange rate pressures, political machinations and broader economic uncertainties are likely to leave corporates in cautious territory – the silver lining however, could be the US-Iran deal to end hostilities.

- LMD