Growth at 4.2%: The real test facing Sri Lanka’s economy

The Department of Census and Statistics reports that Sri Lanka’s real GDP grew by 4.2% in the second quarter of 2026, compared with 5.1% in the first quarter. Although the economy continued to grow, the reported rate was lower in the second quarter. The figures have prompted differing views about what this means for the country’s economic and political future. 

In this article, I share my views on the Department’s figures and the comments they have prompted. I consider whether slower economic growth can lead to an economic crisis or political instability. Drawing on Sri Lanka’s latest economic indicators and examples from other countries, I examine how economic difficulties can affect public confidence and, in turn, political stability.

Economic analyst Dhananath Fernando has warned that political leaders may seek to consolidate control over the judiciary, state institutions and other centres of political power. But if they fail to grow the economy and improve people’s lives, they may eventually lose power. This is an important warning. Yet the relationship between economic growth, people’s wellbeing and political power is not automatic. These factors influence one another in complex ways.

What the growth figures tell us

According to the Department, Sri Lanka’s real GDP grew by 4.2% in the second quarter of 2026 compared with the same period in 2025. In the first quarter, growth was 5.1% compared with the same quarter a year earlier. The reported rate was therefore 0.9 percentage points lower in the second quarter. This indicates that the pace of year-on-year growth eased and deserves attention. It does not mean that the economy contracted or is collapsing. Since both figures compare a quarter with the same quarter of the previous year, they cannot, on their own, show whether the economy shrank from one quarter to the next.

The IMF’s forecast also needs to be considered. In May 2026, the IMF said Sri Lanka’s economy had grown by 5% in 2025 and projected growth of 3% for 2026. It identified higher oil prices, conflict in the Middle East and lower tourism receipts as risks to growth and the country’s external finances. The IMF also projected public debt at about 100.1% of GDP in 2026. 

The key question is not only whether GDP is growing. We must also ask whether that growth creates secure, good-quality jobs; raises household incomes after allowing for price increases; and gives small businesses the confidence to invest and expand

The IMF’s 3% figure and the Department’s 4.2% figure measure different things. The IMF figure is a forecast for the whole of 2026; the Department’s figure measures the change in economic output in the second quarter compared with the same quarter a year earlier. The IMF forecast was also issued before the second-quarter results were published. The two figures should not be treated as directly comparable, or as if one disproves the other. Read together, however, they point to a central challenge: keeping growth on track while protecting the economy from external shocks.

Growth also varied across sectors. In the second quarter, industrial activity expanded by 7.3%, while services grew by 2.7%. Agricultural activity, by contrast, contracted by 2.3%. Growth in construction and mining supported industry, while information technology, financial services and telecommunications contributed to growth in services. However, the Department reported slower growth in some services, including tourism-related activities, than in the same period a year earlier. 

The decline in agriculture deserves particular attention. According to the Department’s figures, value added in rice cultivation fell by 15.1%, while freshwater fishing and aquaculture fell by 61%. Agriculture’s importance cannot be judged only by its share of GDP. A decline in agricultural activity can affect food supplies, farmers’ incomes, rural employment, food prices and the need for imports. It is therefore more than a figure in the national accounts: it can affect rural household incomes and the cost of food for consumers. 

The key question is not only whether GDP is growing. We must also ask whether that growth creates secure, good-quality jobs; raises household incomes after allowing for price increases; and gives small businesses the confidence to invest and expand. If the cost of living remains high, or if the gains from growth reach only a small part of society, people may not feel the improvement shown in the official figures. Public confidence depends not only on the growth rate, but also on whether people experience the benefits of growth in their daily lives.

Lessons from other countries

Sri Lanka’s 2022 crisis is the clearest example of how severe economic hardship can affect political stability. It was not simply a period of slower growth. Foreign exchange shortages, the suspension of debt payments, shortages of fuel and other essential goods, and rising living costs reinforced one another. The World Bank reported that jobs were lost, while food insecurity and poverty increased during the crisis. Shortages and the hardships of daily life contributed to mass protests, and the President resigned. The crisis showed how economic distress can shake political power. But it was a far deeper breakdown than a modest decline in the growth rate: the country faced a debt crisis and a collapse in its ability to pay for imports. 

Argentina’s crisis in 2001 offers another example. As the country’s financial and debt problems worsened, public protests grew. The President resigned, the government defaulted on its debt, and the exchange-rate system was abandoned. Argentina’s experience shows how an economic crisis can become a crisis of public confidence when people’s incomes, savings and jobs are all under pressure. 

Greece offers a different lesson. A prolonged recession, high unemployment and painful economic adjustment weakened public support for established political parties, while new political forces gained ground. This shows that the way people experience economic policies—and whether they believe the costs are being shared fairly—can shape their political response. Difficult reforms may be necessary, but carrying them out without public trust and support for those most affected can deepen political instability.

Zimbabwe, however, shows that economic decline does not always remove a government from power. The country experienced prolonged periods of high inflation, currency instability and falling production. Yet restrictions on opposition activity and the concentration of state power helped the ruling party remain in office. Economic failure can increase the risk that a government will lose power, but it does not guarantee that outcome. Electoral rules, independent institutions, media freedom, the strength of the opposition and people’s ability to organise also matter.

Sri Lanka needs more than a higher growth rate. It needs a stronger economic base that can sustain growth over time. This means expanding exports and competitive production, creating a stable environment for private investment, improving agricultural productivity, providing young people with good jobs, and protecting those most affected by economic reforms. If growth is not broad enough to benefit many people, it may appear in the statistics without restoring public confidence

Debt, growth and public confidence

Slower growth can increase debt risks, but debt sustainability depends on more than the growth rate. Interest costs, Government revenue, the Budget balance, the maturity of debt, and whether it is owed locally or abroad all matter. The IMF’s 2026 estimate puts public debt at about 100.1% of GDP. Reducing that burden will require growth, stronger public revenue and careful spending to work together. 

Sri Lanka therefore needs more than a higher growth rate. It needs a stronger economic base that can sustain growth over time. This means expanding exports and competitive production, creating a stable environment for private investment, improving agricultural productivity, providing young people with good jobs, and protecting those most affected by economic reforms. If growth is not broad enough to benefit many people, it may appear in the statistics without restoring public confidence.

The claim that political leaders will inevitably lose power if the economy fails to grow should be treated as a serious warning, not an unbreakable rule. Long periods of economic weakness can increase public dissatisfaction, strengthen political opposition and raise the risk of a crisis of government. Whether this leads to a change in power also depends on the country’s political and institutional conditions.

In the end, leaders must answer a simple question: do people feel the recovery in their incomes, jobs and daily lives, or do they see it only in the statistics? If the answer is no, it will become harder for any government to retain public confidence—and harder to remain in power.

(The author is Emeritus Professor of Economics, University of Colombo)