Sri Lanka’s economic recovery continued into 2025, as reported in the Central Bank’s Annual Economic Review. This follows a significant downturn in 2022, although ongoing global uncertainties stemming from geopolitical tensions and climate challenges remain potential risks to long-term stability.
The Central Bank highlighted in its announcement that the implementation of stability-oriented policies and reforms has enabled Sri Lanka to create economic buffers and maintain a stable macroeconomic environment. However, persistent global uncertainties—such as geopolitical conflicts, trade interruptions, and climate-related threats—are expected to complicate the economic outlook, particularly influenced by the ongoing conflict in the Middle East and its potential repercussions on global energy prices, trade dynamics, and financial stability.
Notably, inflation, which has been relatively low, is predicted to reach target levels sooner than previously expected, largely due to the impact of the Middle Eastern conflict, according to the Central Bank of Sri Lanka (CBSL). The Central Bank emphasized the importance of maintaining policy buffers and accelerating structural reforms in a landscape marked by global uncertainty and the ongoing effects of climate change to enhance resilience and ensure macroeconomic stability.
Central Bank Governor Nandalal Weerasinghe formally presented the report to President Anura Disanayake, summarizing key insights about the state of Sri Lanka’s economy.
The Annual Economic Review outlines significant developments in the Sri Lankan economy as follows: In 2025, the economy continued its recovery trajectory, supported by ongoing macroeconomic stabilization and the implementation of policy reforms. Despite facing heightened global uncertainties, particularly concerning trade and geopolitical issues, as well as adverse weather conditions and natural disasters at the end of 2025, domestic economic activities showed resilience. Improved macroeconomic conditions and consistent policy measures bolstered investor confidence, laying the groundwork for sustainable growth and enhancing the economy’s ability to withstand external shocks.
The economy exhibited robust performance in 2025, with real GDP growth estimated at 5%, marking the second consecutive year of growth. Labor market conditions improved in tandem with the recovery, and inflation turned positive starting in August 2025 after a period of deflation, driven mainly by declining energy prices and increased food costs amidst steady demand. Additionally, lower interest rates, resulting from relaxed monetary policy, led to significant growth in private sector credit. The easing of vehicle import restrictions also contributed to a rise in imports and increased demand for credit throughout the year.
The external sector demonstrated further improvement, with the current account achieving a surplus for the third consecutive year, bolstered by historically high levels of remittances and enhanced service exports, despite a widening trade deficit. These foreign exchange inflows facilitated the accumulation of reserves while managing external debt service payments, even as the Sri Lankan rupee experienced a slight depreciation under the flexible exchange rate system. Fiscal performance remained strong, with the primary balance recording a surplus for the third consecutive year, supported by revenue-driven fiscal consolidation efforts along with continued assistance for vulnerable populations.
The financial sector saw improvements as well, benefiting from strengthened macroeconomic conditions. The profitability of both banking and non-banking financial institutions increased in 2025, alongside notable enhancements in asset quality, fueled by robust credit growth. Banks and finance companies maintained liquidity and capital buffers that exceeded regulatory minimums, demonstrating the financial sector’s resilience.
In 2025, the Central Bank’s policy focus remained on ensuring price and financial system stability. The accommodative monetary policy, aimed at supporting credit expansion in a low-inflation environment amidst global uncertainties, helped maintain low interest rates. Efforts to bolster foreign reserves through the purchase of foreign currency also aimed to strengthen economic buffers and enhance resilience in the external sector.
Moreover, the enhanced performance of the external sector allowed for a gradual relaxation of capital flow management measures, culminating in the complete removal of vehicle import restrictions. The Central Bank implemented a wide array of regulatory and supervisory initiatives to align the financial system with evolving economic and technological landscapes while ensuring stability. Resilience was further bolstered through enhanced macroprudential measures and a strengthened regulatory framework. The introduction of recovery planning requirements and enhancements to the resolution and deposit insurance framework also advanced crisis preparedness. Efforts towards modernizing the financial system progressed, promoting digital payments, cybersecurity, and technology risk management, alongside initiatives to combat money laundering and terrorism financing supported by legislative reforms.
Despite the achievements in building economic buffers and maintaining stability, Sri Lanka continues to face significant global uncertainties that could affect the economic outlook. The economic trajectory remains closely tied to the ongoing conflict in the Middle East and its potential impacts on global markets. While inflation is anticipated to stabilize, monetary policy will continue to focus on data-driven strategies to anchor inflation expectations. Credit growth is expected to persist, albeit at a moderated pace, while external sector conditions should remain manageable despite challenges from the ongoing conflict. The Central Bank will prioritize revenue-based fiscal consolidation measures essential for ensuring medium-term debt sustainability.
Overall, the progress made in restoring macroeconomic stability, combined with ongoing policy consistency and reforms, is expected to foster sustainable and inclusive growth in the future. However, in a world characterized by heightened uncertainty and the persistent effects of climate change, it is crucial to maintain policy buffers, accelerate structural reforms, and commit to their implementation to reinforce resilience and uphold macroeconomic and financial stability.
