Tuesday Sep 30, 2025
Tuesday Sep 30, 2025
Friday, 19 September 2025 00:00 - - {{hitsCtrl.values.hits}}
From left: Central Bank of Sri Lanka former Governor Dr. Indrajith Coomaraswamy, Advocata Institute Chair Murtaza Jafferjee, and Moderator and Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe
Sri Lanka’s fragile yet recovering economy was placed under the spotlight at the Sampath Bank Economic Forum 2025, held recently at Cinnamon Life, Colombo. Themed “Sri Lanka at the crossroads: Navigating trade turbulence, currency risk & the global reset”, organised exclusively for the bank’s trade, treasury, and corporate customers. The event reinforced Sampath Bank’s commitment to providing foresight and strategic guidance amidst global economic shifts, bringing together policymakers, economists, and corporate leaders to debate the country’s position in an increasingly uncertain global order.
Opening the discussion, Sampath Bank Chairman Harsha Amarasekera set the tone by warning that geopolitical realignments, volatile capital flows, and recalibrating financial markets are reshaping the very foundation of Sri Lanka’s growth model. “Trade turbulence, currency risk and the global reset are no longer abstract concepts,” he noted. “Each of these forces touches every business, every investor and every household in our country.”
Amarasekera urged stakeholders to look beyond defensive strategies, stressing that resilience in trade is now an imperative rather than an option. Traditional export markets are no longer guaranteed, he argued, and Sri Lanka must diversify, innovate, and move exports higher up the value chain. He also highlighted the necessity of managing currency exposure through hedging and deeper financial market reforms to anchor long-term stability.
The Chairman cautioned that the global reset, from energy transition to digitisation and shifting supply chain alliances, presents both risks and opportunities. Sri Lanka cannot afford to stand on the sidelines but must determine how and where it positions itself in this reordering of the global economy. “This is not an academic dialogue, it is a strategic conversation about our future,” he stressed, calling for collaboration across government, business, and finance to drive forward-thinking solutions.
Central Bank Governor charts path from crisis to resilience
Delivering the keynote address, Central Bank Governor Dr. Nandalal Weerasinghe described Sri Lanka’s economic recovery since the 2022 crisis as remarkable, highlighting both progress made and the challenges that remain. He noted that the country broke a six-quarter streak of economic contraction in late 2023 and has sustained positive growth since then, with GDP expected to expand by around 4.5% in 2025, exceeding projections by several international agencies.
Inflation, which reached record highs at the peak of the crisis, was brought down to single digits within a year through tight monetary policy, an achievement Dr. Weerasinghe described as unprecedented in comparable global cases. Inflation is now anchored around the Central Bank’s 5% target, allowing monetary policy to adopt a more accommodative stance that supports growth while maintaining stability.
On external balances, Dr. Weerasinghe highlighted a historic turnaround: the current account returned to surplus in 2023 for the first time in decades, and the country is on track to record three consecutive years of surpluses by end-2025. Foreign reserves have been rebuilt to levels exceeding 2016, supported by remittances, tourism, and export gains, with reserve accumulation now largely organic rather than debt driven. The Sri Lankan Rupee, though modestly weaker this year, is trading under a flexible exchange rate regime that reflects market fundamentals.
Fiscal consolidation has been equally pivotal, with the primary balance shifting to surplus and government revenue rising sharply from 8% of GDP in 2022 to nearly 15% in 2025, aided by tax reforms and improved SOE pricing policies. Structural reforms, including amendments to the Banking Act, the Public Financial Management Act, and the 2023 Central Bank of Sri Lanka Act, have strengthened institutional independence, governance, and transparency.
Turning to risks, Dr. Weerasinghe warned that geopolitical tensions, renewed protectionism, and tariff shifts could weigh on exports, particularly as the US, Sri Lanka’s largest single export market, accounts for nearly a quarter of total shipments. While recent US tariffs on apparel have been negotiated down to 20%, he stressed the urgency of diversifying both products and markets to reduce vulnerability. Emerging sectors such as ICT, maritime logistics, and high-end services, alongside deeper integration into regional trade frameworks, were identified as critical pathways for resilience.
He also highlighted the importance of sustaining reforms in debt management, state-owned enterprise restructuring, and fiscal discipline to prevent a relapse into crisis. “Stability is not an end in itself,” he said, “but a foundation upon which we must build a more competitive, investment-driven economy.”
Panel discussion explores risks, reforms and private sector momentum
Sri Lanka’s economy faces a critical juncture, driven by structural reforms, private sector momentum, and a rapidly shifting global landscape. Moderated by Frontier Research’s Chayu Damsinghe, the discussion highlighted how the country can sustain its recovery and avoid repeating past crises.
Former Central Bank Governor Dr. Indrajith Coomaraswamy argued that a qualitative shift in macroeconomic management has taken place, built on five critical reforms:
He stressed that sustaining these reforms is essential to prevent a relapse into the cycles of instability that have defined Sri Lanka’s past. “Macroeconomic stability is a public good,” he noted, urging the private sector, academia, and civil society to defend the framework rather than rely solely on policymakers.
Adding to this, Advocata Institute Chair Murtaza Jafferjee cautioned that the greatest threat to reform is not institutional rollback but short-term memory and poor economic literacy. Without a broad understanding of economic fundamentals, he argued, the public could be swayed by populist narratives, risking a reversal of hard-won gains.
Wealth creation and private sector dynamics
Jafferjee also highlighted that historically, roughly 50% of wealth creation in Sri Lanka over the last 15 years was linked to dealings with Government entities, either through underpriced purchases like bonds or overvalued sales, reflecting governance weaknesses. The current recovery, however, is largely private-sector-led, supported by macro stability, low inflation, a stable fiscal outlook, and resilient external sector performance. Key sectors such as construction, consumer electronics, and FMCG are seeing a strong rebound, although some discretionary spending remains uneven.
Risks of policy reversal
Dr. Coomaraswamy emphasised that the current reforms are legally embedded, but their sustainability depends on collective vigilance. Maintaining the integrity of reforms from debt management to flexible inflation targeting and SOE pricing is critical for sustained growth. The panel stressed that all stakeholders, including the private-sector and civil society, play a role in preventing backsliding, highlighting that protecting the framework is as important as implementing it.
On growth dynamics, Dr. Coomaraswamy emphasised that unlike past cycles fuelled by unsustainable fiscal deficits, the present recovery is underpinned by external surpluses and declining government borrowing, leaving more credit available to the private sector. Private credit is expanding by nearly 18% year-on-year, making the current cycle more sustainable than past episodes, provided reforms are protected.
Global trade shifts, export strategy and FX market dynamics
The panel then turned to the global context, exploring how changing international trade dynamics intersect with Sri Lanka’s economic trajectory.
Moderator Chayu Damsinghe noted the shifting global trade system, particularly the US-China relationship, and asked Dr. Indrajith Coomaraswamy to reflect on lessons from past global transitions. Dr. Coomaraswamy highlighted that Sri Lanka has historically struggled to capitalise on resets in the international trading system, including the Uruguay Round of trade liberalisation, the ICT revolution, and the expansion of cross-border supply chains. Policies such as para-tariffs had, in effect, excluded Sri Lanka from supply chains, leaving the country without significant presence or advantage in global trade. More recently, as global trade tensions have intensified and de-globalisation trends emerge, Sri Lanka has limited engagement with plurilateral trade agreements and operational bilateral FTAs, reducing opportunities to secure market access and protect its export sector.
Murtaza Jafferjee added that Sri Lanka’s economic footprint on the global stage remains extremely small, representing just 0.1% of global GDP and 0.05% of global exports. He emphasised that the country’s export growth has largely plateaued within existing products, highlighting the need for diversification into new sectors and industrial zones, leveraging FDI and diaspora knowledge to foster innovation and expand product offerings. Jafferjee stressed that US consumption dominates global demand, and navigating American economic diplomacy is essential for exporters seeking growth.
Turning to the domestic foreign exchange environment, the discussion noted that current account surpluses are creating a fundamentally different FX market than in past deficit-driven cycles. Murtaza Jafferjee explained that while surpluses indicate a positive savings-investment balance, Sri Lanka remains in a restricted financial environment, and gross reserves are only partially available after accounting for liabilities. As the economy recovers, imports are expected to rise, but high taxes and targeted fiscal measures have temporarily moderated demand.
Dr. Coomaraswamy noted that historically, exchange rate volatility stemmed from unsustainable fiscal and monetary policies, which pumped excess aggregate demand into the system and created recurring reserve crises. The new framework, driven by fiscal discipline, monetary autonomy, and market-determined rates, is expected to allow controlled volatility within a narrow range, enabling businesses to better manage hedging and FX exposure.
Jafferjee concluded that, for exporters, the focus has shifted away from macro variables toward core business fundamentals, as the current framework reduces systemic risks and allows for more predictable market conditions. This represents a significant shift in how Sri Lankan businesses can plan and participate in global trade while managing currency risk.
Debt, interest rates, productivity, and long-term prospects
The panel concluded by addressing the implications of portfolio inflows, public debt, and long-term growth prospects for Sri Lanka.
Moderator Chayu Damsinghe opened the discussion by asking about potential portfolio inflows following recent credit improvements and investor roadshows. Dr. Indrajith Coomaraswamy highlighted past lessons, noting that when portfolio limits were raised to 12.5% of rupee securities, the inflows became destabilising, complicating exchange rate management and undermining monetary policy autonomy. He emphasised that current limits, lowered back to around 5%, make inflows manageable and protect the integrity of monetary policy.
On public debt, Jafferjee observed that despite debt restructuring, Sri Lanka’s public debt remains elevated at around 105–110% of GDP, largely due to domestic debt excluded from restructuring. Interest costs are mitigated by step-down coupons on roughly a third of rupee debt, yet long-term bonds still carry high term premiums, keeping real interest rates relatively high. He stressed that economic growth and productivity are the primary levers to reduce interest burdens sustainably, noting that competition and openness in tradable sectors are critical for driving productivity and export-led expansion.
Dr. Coomaraswamy reinforced this view, noting that demographic dynamics limit growth through labour force expansion, placing a premium on productivity-enhancing policies as the key driver of sustainable growth. Both panellists agreed that structural reforms and system-wide incentives must focus on increasing productivity across sectors to sustain macroeconomic stability.
Looking toward the future, the discussion explored the long-term outlook for Sri Lanka, with Jafferjee expressing optimism for 2035 and highlighting the importance of macro framework stability, systemic reforms, and incentives to unlock the potential of Sri Lankan talent. He emphasised the need for institutional mechanisms such as the Productivity Commission, investment zones, and investment promotion agencies, alongside stronger competition in state-owned enterprises.
Dr. Coomaraswamy added that central bank independence remains crucial to withstand political pressures, manage future debt repayments, and maintain monetary policy flexibility. He stressed that past failures in structural reform were due to short electoral cycles, entrenched vested interests, and resistance from powerful individuals, but expressed hope that the current government’s lack of historical baggage may enable meaningful reform.
Closing the discussion, Chayu Damsinghe summarised that Sri Lanka has entered a new macroeconomic framework while the global economy continues to evolve. He noted that the country now has a once-in-a-lifetime opportunity to leverage these reforms domestically and internationally, with the outcome depending on both local execution and engagement with global shifts.
Closing the forum, Sampath Bank’s Managing Director Designate, Sanjaya Gunawardana, delivered a clear and decisive message. Sri Lanka now stands at a pivotal moment, supported by a robust macroeconomic framework that calls for vigilance and active engagement. The focus, he emphasised, must be on action rather than hesitation, with policy makers, businesses, and financial institutions working together to turn challenges into opportunities and ensure that the country’s recovery leads to sustainable growth and shared prosperity. He reaffirmed the bank’s commitment to partnering with all stakeholders on this journey, underlining that collective effort and adherence to reforms can secure a more resilient economic future for Sri Lanka.
