Monday Jan 19, 2026
Monday Jan 19, 2026
Monday, 19 January 2026 05:23 - - {{hitsCtrl.values.hits}}
HNB Stockbrokers Director – Research Shehan Cooray – Pic by Lasantha Kumara
By Devan Daniel
Sri Lanka has emerged from the crisis phase with stronger macroeconomic buffers, but the economy is now confronting a more familiar constraint: how to generate durable growth without reopening old vulnerabilities, according to HNB Stockbrokers Director – Research Shehan Cooray.
Speaking at the HNB Investment Bank (HNBIB) Investment Outlook and Market Strategy 2026 Forum last week, Cooray said the economic impact of Cyclone Ditwah was likely to be contained, largely because the shock is occurring against a far stronger macro backdrop than in the past.
“We are not expecting a major economic impact from the cyclone because, compared to previous natural disasters, Sri Lanka is entering this period with both a primary surplus and a current account surplus,” he said.
He noted that the worst-affected regions account for only a modest share of national output and industrial capacity, while official reserves have risen to about $ 6.8 billion, providing additional resilience.
On growth, Cooray said HNB Stockbrokers expects real GDP to expand by about 4.5% in 2026, with nominal GDP rising to around Rs. 35 trillion as output finally moves beyond the 2018 pre-crisis peak.
“Real GDP will surpass the 2018 high watermark during the course of the year, but where that growth is coming from is important,” he said. “Most of the recovery so far has been driven by consumption, exports, and Government spending.”
Investment, however, remains the weakest part of the picture. Gross capital formation is forecast at around 27% of GDP in 2026, well below the levels seen during Sri Lanka’s higher-growth phases, when investment ratios consistently exceeded 30% of GDP.
“For a small economy like Sri Lanka, consumption-led growth has limits,” Cooray said. “Sustained higher growth has always gone hand in hand with higher investment, and that is still missing.”
He said subdued national savings mean that raising investment without widening the current account deficit will be difficult unless foreign direct investment (FDI) plays a larger role than it has historically.
“The old approach of financing investment through external debt is no longer available,” Cooray said. “If investment is to rise meaningfully, FDI will have to do much more of the heavy lifting.”
Turning to public debt, Cooray said the next major test for the economy would be securing credit rating upgrades that allow Sri Lanka to return to international Bond markets around 2028.
“When Sri Lanka last accessed Bond markets between 2010 and 2018, average debt-to-GDP was about 73%,” he said. “To realistically regain access, debt-to-GDP will likely need to fall below 80%, which is materially lower than the International Monetary Fund’s (IMF) indicative anchor of around 95%.”
While maintaining a primary surplus remains important, he said debt reduction will ultimately depend on sustaining growth rather than extracting further fiscal tightening from an economy that has already undergone significant adjustment.
On the monetary front, Cooray said inflation remains well below the Central Bank of Sri Lanka’s (CBSL) 5% target, even as private sector credit growth has accelerated to above 20% year-on-year (YoY).
“That combination argues for caution,” he said. “Despite low inflation, strong credit growth means the CBSL is likely to wait before considering further rate cuts.”
HNB Stockbrokers’ analysis places the implied policy rate band at around 7-8%, assuming inflation gradually moves back towards target in the second half of 2026.
Fiscal risks from Cyclone Ditwah-related spending also appear manageable, according to Cooray. While additional expenditure of about Rs. 500 billion could, on paper, reduce the primary surplus from the Budgeted 2.5% of GDP to closer to 1%, he noted that capital expenditure is typically under-executed.
“In practice, actual outcomes may remain closer to the original fiscal targets,” he said, pointing to the Government’s discretionary capital spending envelope and existing Treasury cash buffers.
On the external sector, Cooray said the current account surplus, estimated at over $ 1 billion in 2025, is forecast to narrow sharply to about $ 275 million in 2026 as vehicle imports normalise and annual external debt servicing remains in the $ 3-3.5 billion range.
“Even with continued strength in remittances and services exports, lower surpluses alongside steady debt servicing suggest some further pressure on the currency,” he said, estimating a depreciation of around 3-4%.
Cooray said Sri Lanka’s macro story has shifted decisively away from crisis management.
“The buffers are stronger and policy credibility has improved,” he said. “What happens next will depend less on emergency measures and more on whether the economy can attract investment and grow fast enough to bring debt down to market-access levels.”
