Plenty of Sri Lanka’s recent economic memory is obviously and understandably coloured by the depths of the crisis we faced in 2022 and before that to some extent the economic impacts of the pandemic as well.
As a result, we have a pretty straightforward anchor to most of our thinking – the return to crisis as a realistic possibility in our minds. Yet this anchor has two critical flaws within it. It overlooks how, even outside of these two crises, we were in a ‘long recession’ for a while and how the situation since 2023 has been markedly different.
Recession and recovery
The long recession is probably one of the less known parts of Sri Lanka’s recent economic story, partly because the data behind this only became clearer much later. The conventional narrative at the time was that the economy entered a single year of sharp recession in 2020 due to the pandemic, recovered in 2021, then fell into a deeper recession in 2022 that lasted into early 2023.
Yet in reality, Sri Lanka’s recession likely began much earlier – around mid-to-late 2018. Data released later on Sri Lanka’s rebased Gross Domestic Product (GDP) shows this quite clearly (incidentally, massive shifts like this is one reason why GDP is not a great indicator even when there is no deliberate malice or fraud behind it; it simply handles these statistics in ways that aren’t particularly useful).
What does it mean if the recession started in 2018? From mid-2018 to mid-2023, we have five full years of recession. In fact, if you consider US Dollar GDP to account for currency shifts as well, it is quite clear that the recession began even earlier, from maybe early 2018 onwards.
If you consider a chart of Sri Lanka’s GDP per capita in USD terms, for example, you can see that it peaked in 2017 at around $ 4,400 and then fell fairly consistently until 2022, before a mild pickup in 2023. More critically, it puts the 2021 recovery and even the movement in early 2023 in context; these were not actual recoveries but more immediate rebounds that only mattered if they continued. In 2021, they did not, but in 2023, they did.
Before getting into the 2023 recovery, the idea of what a long recession means is something worth spending some time on. When there is a long period of weakening economic activity, the kind of economic decisions that are taken across the system begin to change.
Businesses become accustomed to specific price targets, weak volume targets, and even the metrics followed starting to shift in importance. Perhaps instead of seeking volume growth, strategies will shift towards cost cutting, which will make some departments more important compared to others.
When this continues for a while, even the skills required will begin to shift, both from within organisations as well as across the education system. I don’t think it is necessarily a coincidence that Sri Lanka’s university rankings seem to have fallen to their lowest around the long recession as well.
From those psychological anchors, and more critically, from the actual structure of the economy that was adjusted towards a long recession, we moved into the 2023 recovery. There is no question that Sri Lanka’s economic recovery since then has been stupendous. The initial expectations were for a single year of 3% rebound before slowing below that level.
When that failed to materialise, the benchmark shifted to the difficulty of maintaining 3%. When that was exceeded, it was said that 3% would be possible, but that 5% wouldn’t be. Now that 5% is the baseline, the conversation has shifted to 7–8%. Regardless of whether we achieve this or not, the actual economic performance since then is significant since it lasted long enough to bring us to where we are.
A new economic context
From this very long preamble, we arrive at the current moment Sri Lanka is in. There were multiple crises in 2025: a trade war, a hot war in the Middle East, the kind of debt repayments that would usually trigger a currency crisis, a massive jump in vehicle imports, and the worst natural disaster since the tsunami. Yet, the economy grew 5%, interest rates fell across the year, and the currency only depreciated by around 5%.
The fundamental macroeconomic strength improved despite all these shocks – the primary fiscal surplus was at around 5.4% of GDP compared to a 2.3% target, the external current account surplus was at $ 1.7 billion despite initial expectations of a deficit, inflation stayed low despite all these supply shocks, and private credit grew at 25% with a far better distribution than before.
It is this same economic strength that seems to be helping us through the current moment as well. Skyrocketing global fuel prices are clearly negative and the war in the Middle East will have multiple repercussions.
Yet, in March, the Central Bank of Sri Lanka (CBSL) still recorded excess inflows for it to purchase foreign exchange (incidentally, that it chose to do this despite some depreciation pressure tells us that the CBSL is actually following a flexible exchange rate policy and isn’t in a currency-defending stance again).
Remittances still grew nearly 18% (although down from the previous months’ growth rate) and tourism from the Asia-Pacific region grew dramatically. If the economic story of 2025 is true, we might even have a manufacturing capacity of some significance this year compared to last year, which might mean that some new growth dynamics are underway as well.
All of this is not to say that the current crisis is not real, or that it will not have any impact. Yet, the fact is that Sri Lanka is in a new economic context – a fundamentally different one to what we have been used to in the past, both in the recent past of the long recession and the longer history of its twin deficits.
As a result, Sri Lanka’s engagement with the current crisis must also be different. And that difference alone could mean a completely different outcome from anything we might otherwise expect – good or bad.
(The writer is the Head of Macroeconomic Advisory at Frontier Research, a Colombo-based firm that engages in macroeconomic research and advisory for corporate and investment clients on Sri Lanka, South Asia, and Southeast Asia. He can be reached at chayu@frontiergroup.info)
(The views and opinions expressed in this article are those of the writer and do not necessarily reflect the official position of this publication)