22.05.2026
Sri Lanka’s economy continued its post-crisis recovery in 2025, with growth supported by industry, tourism-related services, financial services and recovering private consumption. However, the outlook for 2026–2027 is more moderate, reflecting the impact of Cyclone Ditwah, higher commodity prices, external uncertainty and the need to preserve macroeconomic stability under the IMF-supported reform programme. Inflation is expected to rise from the unusually low 2025 level but remain far below the crisis-period peaks. Fiscal consolidation has strengthened, with a large primary surplus in 2025, while public debt remains high but is projected to decline gradually. The external position has improved, but remains vulnerable to import demand, energy prices, tourism, remittances and global trade conditions.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 5.0 | 3.6 | 3.8 |
| Inflation (%, yoy) | -0.5 | 5.4 | 4.4 |
| Employment rate (% of working-age population, 15+) | 47.3 | 47.3 | 47.3 |
| Fiscal balance (% of GDP) | -2.3 | -2.9 | -1.9 |
| Central government debt (% of GDP) | 95.0 | 88.0 | 83.9 |
| Current account balance (% of GDP) | 1.6 | -0.3 | 0.5 |
Recovery remains strong but is set to moderate
Sri Lanka’s real GDP growth reached 5.0% in 2025, marking a second year of recovery after the severe economic crisis. Growth was broad-based, with industry rebounding strongly and financial and tourism-related services continuing to expand. Lower inflation, higher wages and rapid private-sector credit growth supported private consumption.
Growth is projected to slow to 3.6% in 2026 before rising slightly to 3.8% in 2027. The moderation reflects post-cyclone reconstruction needs, higher commodity prices, weaker external demand and continued structural constraints. The recovery remains vulnerable because real wages, labour-force participation and household welfare have not fully returned to pre-crisis levels.
Inflation rises from unusually low levels
Inflation was negative on average in 2025, at -0.5%, after several months of deflation and subdued price pressures. It turned positive again in late 2025 and early 2026 as energy, food and import costs increased.
Inflation is projected to rise to 5.4% in 2026 before easing to 4.4% in 2027. This would keep inflation much lower than during the crisis period, but higher commodity prices and Middle East-related disruptions could push prices above the central bank’s target. Monetary policy will need to remain flexible, while the exchange rate should continue to absorb external volatility.
Fiscal consolidation has strengthened
Sri Lanka’s fiscal position improved significantly in 2025. The overall fiscal deficit narrowed to 2.3% of GDP, while the primary surplus reached 5.4% of GDP, well above the budget target. Stronger revenues from motor-vehicle imports, higher consumption and under-execution of capital spending helped improve the fiscal balance.
The deficit is projected to widen to 2.9% of GDP in 2026, partly due to reconstruction spending after Cyclone Ditwah, before narrowing to 1.9% in 2027. Public debt remains high, but central government debt is projected to fall from 95.0% of GDP in 2025 to 83.9% in 2027. Maintaining primary surpluses, completing debt restructuring and improving revenue mobilisation will remain essential.
External position remains fragile
The current account recorded a surplus of 1.6% of GDP in 2025, supported by tourism, remittances and resilient exports. Official usable reserves increased, but reserve accumulation slowed due to high import demand, foreign-exchange purchases and debt-service pressures.
The current account is projected to shift to a small deficit of 0.3% of GDP in 2026 before returning to a modest surplus of 0.5% in 2027. Higher oil and commodity prices, strong import demand and trade uncertainty remain key risks. Tourism and remittances should continue to support the external position, but Sri Lanka remains exposed to external financing conditions and global demand.
Overall outlook
Sri Lanka’s outlook has improved markedly since the crisis, but the recovery remains incomplete. Growth is expected to moderate in 2026–2027, inflation will rise from unusually low levels, and public debt remains high despite a declining path. The main policy challenge is to preserve macroeconomic stability while supporting reconstruction, poverty reduction and structural reforms. Sustained progress will depend on continued fiscal discipline, debt restructuring, stronger export competitiveness, investment climate reforms and protection for vulnerable households.
Sources:
World Bank, Sri Lanka Macro Poverty Outlook, April 2026.
International Monetary Fund, Sri Lanka: Extended Fund Facility Review and Article IV-related materials, 2025–2026.
International Monetary Fund, World Economic Outlook, April 2026.
Asian Development Bank, Asian Development Outlook, April 2026: Sri Lanka.
Central Bank of Sri Lanka, Annual Economic Review 2025.
Central Bank of Sri Lanka, Inflation and Monetary Policy Updates, 2026.
