In a recent projection, the World Bank anticipates Sri Lanka’s economy to grow by 3.5% in 2025, maintaining its October forecast despite facing significant external pressures, notably from substantial U.S. tariffs and ongoing recovery efforts from a severe financial crisis. (Economic Outlook)
A Resilient Rebound
Emerging from a profound financial downturn triggered by a record shortage of U.S. dollars three years prior, Sri Lanka achieved a 5% growth rate in 2024. This recovery was bolstered by a $2.9 billion assistance program from the International Monetary Fund (IMF), which provided critical support for economic stabilization.
The World Bank’s consistent growth projection underscores the country’s resilience and the effectiveness of implemented reforms. However, the path forward is fraught with challenges that require strategic navigation.
Tariff Headwinds and Trade Dynamics
A significant external challenge arises from the imposition of 44% tariffs by the U.S. on approximately $3 billion worth of Sri Lankan exports. These tariffs pose a substantial risk to the nation’s export-driven sectors, potentially hindering the momentum gained in recent years.
In response, Sri Lankan officials are actively seeking to engage with U.S. counterparts to mitigate these trade barriers and explore avenues for strengthening bilateral trade relations. Such diplomatic efforts are crucial to safeguarding the country’s export markets and sustaining economic growth.
Socioeconomic Challenges Persist
Despite positive growth indicators, Sri Lanka continues to grapple with significant socioeconomic issues. The poverty rate remains alarmingly high at 24.5% as of 2024, with household incomes and employment levels still below pre-crisis standards. This situation has led to an increase in citizens seeking employment opportunities abroad, highlighting the need for domestic job creation and economic inclusivity.
David Sislen, World Bank division director for the Maldives, Nepal, and Sri Lanka, emphasized that while the economy is showing signs of recovery, a significant portion of the population remains vulnerable to poverty.
Structural Reforms and Fiscal Discipline
The World Bank underscores the importance of continued macroeconomic stability, advocating for a flexible exchange rate, reform of loss-making state-owned enterprises, and increased investment in trade. These measures are essential for sustaining growth and building economic resilience.
Under the IMF agreement, Sri Lanka is tasked with reducing its budget deficit to 5.2% in 2025 from 7.6% the previous year, increasing public revenue, and achieving a primary surplus of 2.3% of GDP. Meeting these targets is vital for improving the country’s credit rating and regaining access to international financial markets.
Monetary Policy and Inflation Control
The Central Bank of Sri Lanka has maintained its key policy rate at 8% to support economic recovery, aiming to steer inflation towards the target of 5%. In February, the consumer price index contracted by 4.2% year-on-year, largely due to a 20% reduction in household power tariffs. Inflation is expected to return to positive territory by mid-2025, aligning with the central bank’s objectives.
Looking Ahead
While the projected 3.5% growth in 2025 is a positive sign, the World Bank cautions that growth may slow to 3.1% in 2026. This outlook underscores the need for sustained reform efforts, strategic economic planning, and proactive engagement with international partners to navigate the complex global economic landscape.
Sri Lanka’s journey towards economic stability and growth is marked by resilience and the implementation of critical reforms. Continued commitment to structural adjustments, fiscal discipline, and inclusive policies will be key to ensuring long-term prosperity for the nation.
