Saturday Apr 11, 2026
Saturday Apr 11, 2026
Saturday, 11 April 2026 04:25 - - {{hitsCtrl.values.hits}}
From left: ADB Senior Country Economist Lilia Aleksanyan, Principal Economic Officer Lakshini Fernando, Economic Analyst Nirukthi Kariyawasam, and Senior Economics Assistant Dinuk de Silva
Releasing its latest economic outlook for Sri Lanka yesterday, the Asian Development Bank said that containing the economic fallout from the Mideast war and sustaining growth will depend on maintaining reform momentum and improving the execution of underperforming public investment.
Sri Lanka’s economic growth is expected to moderate to 4.0% in 2026 and edge up to 4.2% in 2027, following two consecutive years of 5.0% expansion, according to the Asian Development Outlook (ADO) April 2026. The projections are based on an early stabilisation scenario for the conflict, with risks firmly tilted to the downside.
However, if the Mideast war continues and the shock deepens the GDP growth projections could take a 0.5-0.8 percentage point hit, and inflation could escalate to between 3-5 percentage points.
The ADB cautioned that the external shock is already feeding through multiple channels, including higher energy prices, disrupted shipping routes, weaker tourism flows and rising global uncertainty, all of which are expected to weigh on growth and external balances.
“Sri Lanka has come a long way since the recent economic crisis, and its economic performance over the last two years is a major achievement,” said ADB Country Director for Sri Lanka Shannon Cowlin. “However, the risks ahead are real and significant. This is not the moment to ease up on reforms. Fiscal discipline must be maintained and resilience must be strengthened against the external shocks that will keep testing this economy.
At the same time, scaling up and executing public investment will be essential to sustaining the recovery.”
ADB Sri Lanka Resident Mission Senior Country Economist Lilia Aleksanyan said the current outlook is being shaped by a far more volatile global backdrop than a year ago, with the Middle East conflict now central to the region’s economic trajectory.
She said disruption to shipping through the Strait of Hormuz, which carries around 20% of global oil trade, alongside sharp volatility in crude prices, has significantly raised uncertainty. Oil prices have risen from about $ 60 per barrel earlier in the year to peaks above $ 110 before easing, with Asian benchmarks reacting more sharply.
Aleksanyan said Sri Lanka enters this period from a position of strength following 5% growth in 2025, but warned that a prolonged conflict could cut growth and push inflation higher, with additional pressure from rising fertiliser costs and continued trade uncertainty.
She noted that fertiliser prices have increased sharply, raising production costs in agriculture and posing risks to food prices later in the year, while disruptions to air connectivity are already affecting tourism flows.
ADB Sri Lanka Principal Economic Officer Lakshini Fernando said the effects of the external shock are already visible in inflation and tourism indicators.
She said March inflation of 2.2% was driven mainly by transport and utilities, reflecting early energy price pass-through, with further increases expected following fuel price adjustments and electricity tariff revisions.
Tourism arrivals fell 20% year-on-year in March to around 184,000, largely due to disruptions in Gulf airspace, with further downside risks from higher airfares and global uncertainty.
Fernando said reserves, which rose to $ 7.3 billion in February, showed early signs of pressure, while equity markets also reflected investor sensitivity to the conflict.
She warned that risks remain tilted to the downside, including prolonged conflict, weaker inflows from tourism and remittances, and potential weather-related disruptions to agriculture that could increase food import requirements.
ADB Sri Lanka Economic Analyst Nirukthi Kariyawasam said weak execution of public investment remains a critical constraint on growth and has taken on greater importance in the current environment.
She said while capital expenditure has typically been budgeted at around 5% to 6% of GDP, actual utilisation has averaged closer to 3%, reflecting persistent implementation bottlenecks.
Capital spending is often compressed to accommodate rising recurrent expenditure, particularly interest payments, while disbursements are heavily back-loaded, with a significant share occurring in the final quarter of the year.
ADB estimates that a 1 percentage point increase in public investment could raise output by around 1.5% over four years, underscoring the potential gains from improved execution.
Kariyawasam said reforms are needed to improve project preparation, procurement, monitoring and coordination, alongside greater private sector participation, to ensure capital spending translates into growth.
She warned that failure to address these structural issues could constrain Sri Lanka’s recovery at a time when reconstruction needs and external pressures are intensifying.
ADB Sri Lanka Resident Mission Senior Economics Assistant Dinuk de Silva said the stronger-than-expected growth in 2025 provides a buffer, but highlighted underlying structural weaknesses.
He said growth was broad-based across agriculture, industry and services, but largely consumption-driven, supported by lower inflation, easing interest rates and improved confidence. However, investment remained weak, and stronger domestic demand contributed to a widening trade deficit through higher imports.
Inflation, which averaged -0.5% in 2025, has turned positive and is expected to rise further in 2026, while the earlier low inflation environment had supported strong private sector credit growth.
De Silva said Sri Lanka entered 2026 with improved fiscal and external indicators, including a primary surplus of 5.4% of GDP and a third consecutive current account surplus supported by remittances of around $ 8 billion.
However, he cautioned that these buffers remain limited in the face of external shocks, with higher fuel import costs, potential moderation in remittances and weaker tourism expected to exert pressure.
