Sri Lanka’s economy is set for a strong recovery, with forecasts indicating that its output will surpass pre-pandemic levels from 2018 by 2026.
A recent Bloomberg Economics report projects GDP growth of 5 percent in 2024, followed by 3.5 percent in 2025 and 2.9 percent in 2026, reflecting a steady upward trajectory.
The recovery is driven by domestic factors such as lower borrowing costs due to the Central Bank’s significant rate cuts, increased consumer spending supported by rising wages, tax reductions, and low inflation expected in 2025.
The tourism sector is rebounding strongly, with visitor arrivals in the first half of 2025 increasing by 16 percent year-on-year to 1.2 million, exceeding the pre-pandemic peak of 2018.
Government initiatives like global tourism promotion and visa-free entry for several countries have contributed to the tourism revival.
Investor confidence has improved thanks to successful debt restructuring, compliance with IMF targets, and the recent approval of a US $350 million IMF bailout tranche.
Despite positive momentum, risks remain, especially regarding possible increases in US reciprocal tariffs on Sri Lankan exports, which could rise from 10 percent to 30 percent starting August 1, 2025.
Higher tariffs could sharply reduce exports to the US, particularly in textiles, potentially cutting exports by 36 percent and threatening 0.6 percent of GDP over the next three years.
The government is negotiating to lower these tariffs, but a prolonged increase could lead to higher unemployment and slower growth.
Inflation is expected to rise from July 2025 after a period of deflation, limiting the Central Bank’s ability to further cut interest rates beyond a possible 25-basis-point reduction in September.
Inflation is forecast to average 0.2 percent in 2024, down from 20.5 percent in 2023, but rise again to 5.6 percent by 2026.
