May exports were strong, but the export engine is still weak

By Dhananath Fernando

Originally appeared on The Morning

Sri Lanka has reported its highest-ever export performance for the first five months of a year. From January to May 2026, total exports reached $ 7.39 billion, recording a year-on-year growth of 7.5%.

The May numbers are particularly interesting. Merchandise exports grew by around 18%, while services exports also recorded a similar growth rate. For the first four months of the year, export growth was only around 4.3%. With May’s performance, the overall growth for the first five months was pushed up to about 7.5%.

What is more interesting is that this performance has not really come from the apparel industry. Tea exports were also low, partly due to tensions in the Middle East. The growth has come from areas such as electrical and electronic components, processed food and beverages, coconut products, seafood, and a few other sectors. On the services side, Information and Communication Technology/Business Process Management (ICT/BPM) has shown good growth.

This export performance is commendable. But we should not misunderstand one good month as proof that Sri Lanka has solved its export problem.

Building competitiveness

Exports are a function of competitiveness. Some parts of competitiveness come naturally. But most of it has to be built over time.

For example, Sri Lanka’s soil structure and climate may give our cinnamon a unique aroma and our coconut products a distinctive quality. But developing cinnamon and coconut as globally competitive products is a local game. Our coconut has to compete with coconut products from India, Indonesia, and the Philippines. At the same time, coconut-based products also compete with substitutes such as almond-based products, palm oil, and even olive oil in certain categories.

Cinnamon has a similar challenge. Sri Lankan cinnamon has to compete with cinnamon from Indonesia and Vietnam. At the same time, it also competes with other spices such as cloves, cardamom, and nutmeg in the wider global spice market.

So competitiveness is not just about one product competing with the same product from another country. It is also about one category competing with another category. That is where Sri Lanka still has a serious structural problem.

Factor market challenges

The first problem is our factor markets: land, labour, and capital.

For any product category or investor, accessing land has become a major issue. From a cinnamon cultivator to an electronic component manufacturer, land is a binding constraint. The solution is to invest more in Bim Saviya, speed up land titling, and identify industrial zones using underutilised Government land, including land held by major State-Owned Enterprises (SOEs).

But to make this happen, Sri Lanka needs institutions that can move fast. At the moment, we do not have that machinery.

Then comes labour. Sri Lanka has a serious labour problem. On one hand, we do not have enough workers in the domestic market, partly because many skilled people have migrated. On the other hand, female labour force participation remains low. Childcare, unsafe and unreliable public transport, and rigid workplace structures make it harder for women to join and remain in the labour market.

Our labour regulations are also rigid. Hiring is costly. Exiting is complicated. As a result, firms become cautious about expanding. This affects exporters directly, because export competitiveness depends not only on wages, but also on flexibility, productivity, and the ability to scale.

Land and labour constraints also affect access to capital. Because of land title issues, banks are reluctant to accept land as collateral or extend credit easily. For a long time, access to capital was also difficult because the Government was the main borrower in the economy. A large share of credit from financial institutions flowed to the Government and SOEs instead of the private sector.

Now private sector credit is recovering, but these changes take time. Exporters cannot become competitive overnight when the supporting system has been weak for years.

In simple terms, Sri Lanka’s factor markets do not really support our exporters to compete, either on price or quality.

A system lagging behind

Then there are the supporting costs. Construction costs are high. Electricity, which is a key input for almost every export product, is expensive. As a result, energy-intensive industries struggle to maintain their edge under the current cost structure.

On top of that, Customs procedures remain difficult and cumbersome. We still operate with a century-old Customs Ordinance. That does not support a modern export economy. Exporters need speed, predictability, and simplicity. What they often get is delay, discretion, and paperwork.

Another major issue is productivity. Sri Lanka’s productivity drive across sectors is weak. In coconut, tea, rubber, and dairy, the average output per unit remains low compared to many regional peers. Those countries also have problems. But we are far behind. Without improving productivity, we cannot expect our exports to compete purely through branding or sentiment.

In the modern world, competitiveness also comes through market access. When countries sign trade agreements or join trade blocs, their exporters get access to markets at lower tariff rates. That makes a big difference when investors decide where to locate production.

Sri Lanka receives some benefits through arrangements such as the Generalised Scheme of Preferences Plus (GSP+). But countries with wider trade agreement networks have a stronger advantage. They can offer investors access to more markets, better certainty, and greater scale.

Sri Lanka has free trade agreements with India and Pakistan. We also signed the Singapore-Sri Lanka Free Trade Agreement and a trade agreement with Thailand. But the status, implementation, and practical benefits of these agreements are still not very clear to the wider business community. Signing agreements is one thing. Using them to attract investment and expand exports is another.

No other choice

So while May’s export performance is good, Sri Lanka’s export structure is still not properly organised. One strong month has changed the narrative for the first five months of 2026. But it has not changed the fundamentals.

What Sri Lanka needs is export growth driven by structural reforms. That means fixing land markets, improving labour flexibility, expanding female labour force participation, easing access to capital, reducing input costs, modernising Customs, improving productivity, and widening market access.

Of course, structural reforms take time. They are complicated. Multiple teams have to work hand in hand for a reasonable period before we see real results.

But sadly, Sri Lanka has no other choice.

If we want exports to grow sustainably, we cannot depend on one good month. We have to fix the system that produces exports.