The Asian Development Bank (ADB) has revised its economic growth forecasts for Sri Lanka in its December 2025 Asian Development Outlook (ADO), indicating a promising recovery driven by substantial private sector credit growth, robust consumer spending, and heightened investor confidence. Nevertheless, the report issues a cautionary note regarding the potential impact of Cyclone Ditwah, which struck on November 28, 2025, with the full economic implications of the disaster still to be determined.
As reported in the ADO, Sri Lanka’s GDP growth projection for 2025 has been improved, owing to strong economic performance in the first half of the year. During this period, significant strides were made in both the industrial and services sectors. The surge in private sector credit, alongside increased investments and steady consumer demand, has been a focal point of this growth. This positive trajectory is expected to persist into 2026, prompting an upward revision of that year’s forecast, supported by planned infrastructure initiatives and an optimistic business environment.
While on one hand, the ADB highlights the recovery, it also notes the ongoing challenges posed by low external demand linked to global trade policy uncertainties, particularly in light of recent tariff adjustments made by the U.S. Despite these hurdles, there has been a notable improvement in Sri Lanka’s services sector, with data from October indicating sustained growth in wholesale and retail activities. The resilience of the economy is reflected in the mixed results of the Manufacturing and Services Purchasing Managers’ Indexes (PMIs), which point to ongoing activity despite regional variations.
In terms of inflation, the ADB has lowered its projections for both 2025 and 2026. In 2025, Sri Lanka experienced prolonged deflation, with inflation only becoming positive towards the end of the year. This downward adjustment was influenced by lower-than-anticipated fuel costs, reduced transport fares, and improved supply conditions resulting from enhanced domestic production capabilities. Looking ahead to 2026, inflation is expected to gradually rise, spurred by necessary energy tariff adjustments and fading base effects, while food prices are projected to stabilize, thanks to a stronger agricultural output.
The positive revisions in Sri Lanka’s economic outlook align with wider trends in South Asia, where growth for 2025 is now projected at 6.5%, reflecting an increase attributable to the strong performance of India. The ADO underscores the resilience of regional growth, albeit with warnings about potential downside risks stemming from tariff disputes, geopolitical tensions, and vulnerabilities in property markets of major economies like China that could affect the overall outlook. Despite facing past difficulties such as debt restructuring and external shocks, Sri Lanka’s economy is on an upward recovery path, with the ADB’s upgraded forecasts highlighting progress in economic stabilization while simultaneously emphasizing the critical need for ongoing reforms to enhance resilience against global challenges.
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