SRI LANKA Trends and Developments Contributed by: Ayanthi Abeyawickrama, Varners
Sri Lanka: Navigating a New Economic Chapter Introduction Sri Lanka is in the midst of a profound economic transition. Following the unprecedented crisis of 2022, the country has embarked on a comprehen - sive programme of fiscal consolidation, institutional reform and structural adjustment, supported by the International Monetary Fund (IMF). For both foreign and domestic investors, this transformation presents a dynamic mix of opportunity and complexity. This article provides an updated account of key devel - opments shaping Sri Lanka’s current investment and economic climate. While reforms are ongoing, nota - ble progress has been made across multiple sectors, ranging from tax policy and public finance to digital transformation and tourism resurgence. Post-Crisis Stabilisation and IMF Support Under the 48-month IMF Extended Fund Facility (EFF) arrangement, now in its final year, Sri Lanka has con - tinued to meet reform milestones. On 27 May 2026, the IMF Executive Board completed the combined Fifth and Sixth Reviews, providing access to approxi - mately SDR508 million (around USD695 million) and bringing total disbursements under the arrangement to about USD2.4 billion. Programme performance has been assessed as generally strong, with the economy having grown by an estimated 5% in 2025; gross offi - cial reserves reached approximately USD7 billion by the end of the first quarter of 2026 and external debt restructuring nears completion, including the conclu - sion of SriLankan Airlines’ debt exchange. This trajectory has, however, been tested by exter - nal shocks. In late November 2025, Cyclone Ditwah caused widespread loss of life and displacement, with direct physical damage estimated by the World Bank at approximately USD4.1 billion (around 4% of GDP). In December 2025, the IMF approved emergency financing of approximately USD206 million under the Rapid Financing Instrument to address the result - ing balance-of-payments and fiscal pressures. The cyclone, together with the conflict in the Middle East and the attendant rise in global energy prices, has tempered the near-term outlook, with growth for 2026 now projected to moderate to approximately 3%.
The Central Bank of Sri Lanka has cautiously eased policy rates, having moved in November 2024 to a single policy interest rate mechanism centred on the Overnight Policy Rate (OPR). Following a sustained period of easing, the Monetary Policy Board raised the OPR by 100 basis points to 8.75% in May 2026 (with the linked Standing Deposit Facility Rate and Standing Lending Facility Rate at 8.25% and 9.25%, respectively), responding to the upward pressure on domestic energy prices and headline inflation, which reached 5.4% year-on-year in April 2026. Private sec - tor credit has continued to expand, and revenue col - lection has exceeded expectations. The temporary relief granted to small and medium- sized enterprises (SMEs) from parate execution lapsed on 30 June 2025 for loans exceeding LKR50 million. The parate execution enables licensed banks to repossess secured assets without recourse to court proceedings, thereby expediting debt recovery. Its enforcement had previously been suspended, ini - tially for six months by the previous government and subsequently for an additional three months by the present administration. With the expiry of the morato - rium, the law has now resumed full effect, potentially triggering a wave of enforcement actions by banks seeking to recover non-performing loans. Strong Revenue Performance and Fiscal Discipline Government revenue continued to strengthen through 2025. The tax-to-GDP ratio, having fallen to approxi - mately 8.2% in 2022, recovered to around 13.5% in 2024, and total government revenue is estimated to have reached approximately 15% of GDP in 2025. Customs collections were buoyed by the resumption of motor vehicle imports following the lifting of the 2020 import ban, which proved one of the principal drivers of the 2025 revenue out-turn. Fiscal performance also improved significantly, with the primary surplus expanding and the overall budget deficit shrinking. These gains reflect both stronger rev - enue collection and restraint in current expenditure, despite a rising public sector wage bill. The 2026 Budget, presented to Parliament on 7 November 2025 under the theme “Steady and Strong: Committing to Fiscal Discipline for a Resilient Economy”, maintained this revenue-based consolidation, targeting a primary
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