Sri Lanka’s economy is poised for a significant rebound, with projections indicating that the nation’s output will exceed its 2018 pre-pandemic levels by next year.
A recent Bloomberg Economics report forecasts a continued economic recovery through this year and the next, buoyed by strong domestic tailwinds, even as the potential trade headwinds loom.
The report projects a robust gross domestic product (GDP) growth of 5 percent in 2024, followed by a 3.5 percent expansion in 2025 and 2.9 percent in 2026. This sustained growth trajectory is expected to propel the economy past its 2018 peak, signalling a remarkable turnaround after a period of economic hardship.
Fuelling this optimistic outlook are several positive domestic factors. Falling borrowing costs, a direct result of the Central Bank of Sri Lanka’s (CBSL) 825-basis-point rate cuts, are expected to boost credit demand. Consumer spending is also likely to receive a lift from the rising wages, a recent cut in income taxes and near-zero inflation anticipated for 2025.
The tourism sector, a vital component of the Sri Lankan economy, is experiencing a strong resurgence. The first half of 2025 saw a 16 percent year-on-year increase in visitor arrivals, reaching 1.2 million and surpassing the pre-pandemic peak of 2018. The government initiatives such as a global tourism promotion campaign and visa-free entry for citizens of several countries are contributing to this revival.
Furthermore, improved investor sentiment, bolstered by successful debt restructuring and adherence to the International Monetary Fund (IMF) loan targets, is playing a crucial role in the recovery. The recent approval of the fifth tranche of the IMF bailout, amounting to US $ 350 million, has further boosted confidence among investors.
However, the report also highlights the potential risks, with the primary concern being uncertainty surrounding the US reciprocal tariffs. An assumed increase in these tariffs on Sri Lankan exports to the US from the current 10 percent to 30 percent from August 1, 2025, has been factored into the growth estimates.
While the government is negotiating to lower these tariffs, a prolonged period of higher rates could significantly impact exports, particularly textile products and potentially lead to a rise in unemployment. According to an in-house global trade model, a 30 percent reciprocal tariff rate could reduce exports to the US by approximately 36 percent and place 0.6 percent of GDP at risk over the next three years.
On the monetary policy front, with inflation expected to rise from July, after a period of deflation, there is limited scope for further rate cuts by the CBSL. The report suggests a possible 25-basis-point cut in September to 7.5 percent to mitigate any economic impact from higher tariffs, which would likely mark the end of the current easing cycle. Inflation is projected to average 0.2 percent this year, a significant drop from 20.5 percent in 2023 but is expected to climb to 5.6 percent in 2026.