During the Budget presentation, President Anura Kumara Disanayake noted that the expected economic growth for 2025 would be around 5%.
However, during a recent parliamentary session, the Government announced that Sri Lanka’s real economic growth rate was projected to decline from the current 5% to 3.5% by 2026, and further to approximately 3.1% by the end of 2026. This rate is expected to remain at around 3.1% annually until 2030.
In order to sustain a higher economic growth rate as required by the country, economists highlight the necessity of placing further emphasis on sector-specific growth and addressing structural and policy barriers.
Slow implementation as a concern
In Parliament, Deputy Minister of Finance and Planning Dr. Harshana Suriyapperuma stated that the projected nominal Gross Domestic Product (GDP) growth was 7.1% for 2025, 8.5% for 2026, 8.4% for 2027, and 8.3% annually thereafter until 2030. Furthermore, he indicated that the real GDP growth was projected at 3.5% for 2025 and 3.1% for subsequent years up to 2030.
In response, Samagi Jana Balawegaya (SJB) Member of Parliament (MP) Harsha de Silva questioned the Government’s economic model in relation to the projected decline. De Silva critiqued these projections, emphasising the importance of the economic growth rate. He urged the Government to adopt an economic model to fit the country’s specific needs, rather than being imprisoned by the ideology of the International Monetary Fund (IMF).
Adding to the Opposition’s perspective, SJB MP Kabir Hashim told The Sunday Morning that the country had experienced a period of positive growth following its bankruptcy, with 2024 marking a turnaround. He noted that this year’s growth was also influenced by prior developments.
However, Hashim added that the economy was experiencing a slowdown under the current Government due to slow implementation. He pointed out a considerable delay in implementing existing policies initiated by the former administration, in addition to new policies.
As a result, Hashim claimed that investors were facing difficulties in progressing, noting the necessity of policy decisions to accelerate exports and attract more investment. He also added that the Government had entirely disregarded the local industrial sector, particularly Small and Medium-sized Enterprises (SMEs) by failing to provide alternative solutions or support to manage their loan portfolios following the removal of the parate law suspension, leading to pessimism within the market.
“The Government is responsible for this situation. The Asian Development Bank (ADB) predicts even slower growth next year, and at such a rate, the country will be unable to service its debt, potentially risking a second default,” he noted.
Multiple attempts by The Sunday Morning to reach out to the Deputy Ministers of Finance and the Treasury Secretary were unsuccessful.
Slow sector-wise growth
Sri Lanka’s GDP grew by 5.0% in 2024, marking a notable recovery from the economic setbacks experienced in 2022 and 2023. The growth was reportedly driven by increased export and import volumes, higher container handling at Sri Lankan ports, and a stabilised foreign exchange rate.
Speaking to The Sunday Morning, University of Peradeniya (UOP) Department of Economics and Statistics Professor Wasantha Athukorala noted that growth in some sectors of the country had been relatively slow.
He pointed out that following the third quarter of 2023, Sri Lanka had sustained positive economic growth. Specifically, the growth rates for the first, second, third, and fourth quarters of that year were -10.7%, -3%, +1.6%, and +4.5%, respectively. Furthermore, the country experienced consistent positive growth throughout all quarters of 2024, staying around the 5% mark.
Despite the Government’s initial intention to achieve a 5% growth rate this year as well, Prof. Athukorala highlighted that an examination of sectoral growth revealed that even in the fourth quarter of 2024, the agricultural sector had reported a contraction (-2.2%), whereas the industrial and service sectors had demonstrated positive growth.
He explained that the industrial sector had endured more severe repercussions during the pandemic and the economic crisis compared to other sectors, adding that it was now in a phase of gradual recovery. However, the agricultural and service sectors are not demonstrating the same degree of progress.
“There are significant barriers to this growth. People had expectations with the new Government, anticipating radical shifts to transform the economy. But we are yet to see such changes due to many structural barriers in the economy, especially in the rural economy,” he said.
He further noted the necessity for the Government to overcome these barriers by introducing radical reforms, adding that the lack of reform was one reason for the slow growth rate. Accordingly, he stated that achieving a higher growth rate was unattainable without undertaking these essential reforms.
Prof. Athukorala highlighted the three key markets within the country crucial for maintaining higher growth, which were land, labour, and capital. However, all these markets are burdened with substantial barriers.
For example, there is a lack of freehold land ownership in the land market, which is critical for its competitive functioning. The labour market also has many barriers, including unnecessary regulations and certain trade unions prioritising their own interests. Meanwhile, the capital market is plagued by instances of fraud and illicit activities.
“Simultaneously, Sri Lanka has many institutional barriers, with many not functioning properly and failing to provide efficient service, as well as bureaucratic barriers and low productivity,” he noted.
Addressing the related issues of debt sustainability and investor confidence, Prof. Athukorala stated that as Sri Lanka must prepare for debt repayment within the next few years, sustaining a higher growth rate was crucial. He added that despite the restructuring of both domestic and foreign debt, concerns remained, with the total debt standing at $ 106 billion and nearly Rs. 3,000 million in the Budget being allocated for interest payments.
“The only solution is actually maintaining a high growth rate and introducing radical reforms would enable this,” he added.
Sri Lanka’s annual real GDP growth was -7.3%, -2.3%, and 5% for 2022, 2023, and 2024, respectively.
Doubling down on policy
Economist Dr. Roshan Perera noted that the previous year’s growth came against the backdrop of the negative growth in 2022 and 2023, a period of economic contraction. Therefore, the effect of rebounding from a weaker starting point is also evident in the growth rate last year.
She further noted that in order to at least sustain a comparable level of growth this year or ideally surpass it, the identification of key growth sectors was essential.
“We cannot expect growth by simply adopting the same approaches. We must reflect on whether policy changes have been made to enable other sectors to grow or even to identify new growth areas. We are also yet to see how the geopolitical landscape will affect the country’s growth projections,” she said.
Dr. Perera, noting debt sustainability concerns, highlighted that even with debt restructuring, Sri Lanka’s debt-to-GDP ratio remained high – close to 100% – which was unsustainable. Beyond that, reducing debt servicing is also necessary. To make these sustainable, growing the economy is essential.
“Sri Lanka must attain at least a 5% growth rate, although even this figure is insufficient. Also, this growth must be sustained for at least the next 10 years to bring the fiscal and debt position to a more sustainable level. Therefore, a rate of 3-3.5% won’t really be enough,” she added.
Commenting on projected growth stimulating sectors, Dr. Perera noted that with labour migration, it was important to assess whether the identified growth sectors had the capacity to generate employment opportunities within the country.
According to Dr. Perera, policymakers need to thoroughly analyse the existing barriers. She added that as a country with limited resources, there would always be a prerequisite for reliance on imports. However, in order to afford them, building and maintaining reserves is necessary.
“From a policy perspective, it is also crucial to place greater emphasis on exports, as the country is currently overly reliant on a limited number of options. Additionally, nations that have achieved growth have successfully attracted Foreign Direct Investments (FDIs) to fuel necessary expansion, and therefore, attracting investments is crucial. We need to identify what is preventing Sri Lanka from attracting FDIs.”
Lack of proposals to improve sector-wise productivity
Despite the Government’s initial 5% forecast, the World Bank also reported that Sri Lanka’s economic growth was expected to moderate to 3.5% in 2025, reflecting scarring effects of the crisis and structural impediments to growth amid global headwinds and unprecedented trade policy uncertainty.
Meanwhile, the ADB notes Sri Lanka’s GDP growth at 3.9% in 2025 and 3.4% in 2026, inflation rates at 3.1% in 2025 and 4.5% in 2026 , and per capita GDP growth at 4.1% in 2025 and 3.7% in 2026.
Speaking to The Sunday Morning, University of Kelaniya (UOK) Department of Economics Professor W.M. Semasinghe observed that despite the Government’s initial 5% growth forecast, it was already apparent that the prevailing economic conditions would likely result in a lower figure.
Elaborating on this, he pointed out that the 2025 Budget lacked clearly defined measures or strategies to even sustain the current growth rate or demonstrate ways in which a 5% growth rate could be achieved.
Explaining the possible reasons for this anticipated decline, Prof. Semasinghe drew attention to concerns surrounding the expansion of the agricultural sector.
“Despite the agricultural sector being a key driver of GDP growth, the Government Budget has not allocated the necessary priority to uplifting its production or productivity. Under such circumstances, expecting higher growth than the previous year is not feasible,” he said.
Prof. Semasinghe further noted the absence of new proposals aimed at improving production and productivity within the industrial sector. Moreover, he highlighted the geopolitical risks to this sector, particularly the tariff proposals put forth by US President Donald Trump, which posed a challenge to realising the industrial sector’s planned contribution to overall growth.
“If the Government implements measures to overcome the prevailing shortcomings, an increase in the growth rate in the coming year is possible. However, it is my understanding that the Government will be unable to meet its initially set target of 5% for the current year,” he concluded.