Sri Lanka continues to aspire for a 5 percent growth in its economy this year, despite tightening monetary policies and declining consumption rates amid increasing prices, according to Deputy Finance Minister Anil Jayantha Fernando.
The government had initially set a goal of maintaining a 5 percent growth rate, consistent with the previous year. The economy, valued at $109 billion, recorded a 5.1 percent growth in the first quarter of the year.
In May, the Central Bank increased its primary monetary policy rate by 100 basis points to address excessive demand and prevent overheating, as private sector credit growth reached approximately 27 percent.
Deputy Minister Fernando stated that discussions were held last week with development partners and other stakeholders regarding strategies to achieve Sri Lanka’s medium-term growth target of 7 percent. “We remain committed to our growth aspirations,” he informed journalists during a press conference on Wednesday, June 17.
“Naturally, an increase in interest rates can lead to a temporary decline in demand. However, we will implement suitable measures once conditions stabilize to invigorate the economy,” he added.
He emphasized the importance of maximizing government capital expenditures while encouraging the private sector to maintain confidence and proceed with investments. Although the rise in interest rates may create a short-term dip in demand, he believes the overall impact will not be severely detrimental.
The International Monetary Fund (IMF) has already revised its growth forecast for Sri Lanka down to 3 percent, while the Central Bank indicated that growth might fall within the lower end of its anticipated range of 4-5 percent.
The recent decision by the Central Bank of Sri Lanka to increase the policy rate to 8.75 percent, combined with rising domestic fuel prices—up nearly 48 percent due to escalating tensions in the Middle East—poses significant challenges to the country’s growth prospects for the latter half of 2026.
Despite a solid 5.1 percent GDP growth in the first quarter of 2026, driven by rebounds in the industrial and construction sectors, this positive trend is being constrained by stringent monetary policies and rising costs.
The central bank’s rate hike, aimed at stabilizing a depreciating currency and combating a 27-month peak inflation rate of 5.5 percent, has immediately increased borrowing costs domestically.
This tightening financial environment serves as a structural impediment to credit-fueled growth, directly affecting the profit margins of local small and medium-sized enterprises (SMEs) and hindering private sector investments in crucial manufacturing industries.
Moreover, the significant shock from energy prices—retail petrol now priced at Rs. 434 and diesel at Rs. 407 per liter—has significantly raised production, transportation, and operational costs throughout various supply chains.
As the government is compelled to eliminate fuel subsidies by September 2026 under the IMF’s cost-recovery pricing framework, the dual impact of imported inflation and stringent monetary policies is severely dampening domestic consumer demand and purchasing power.
Consequently, international observers caution that these combined stabilization pressures may lead to a slowdown in the real economy. GDP growth is anticipated to decelerate notably during the latter quarters of 2026, as the country navigates IMF-imposed structural reforms while grappling with a deteriorating global energy crisis.
