By The Pulseline News Desk
Sri Lanka’s economy has continued its recovery trajectory, posting strong growth and improved fiscal performance, even as policymakers grapple with renewed inflationary pressures and currency depreciation risks.
At a special briefing for members of parliament (MPs) on Wednesday (10), the Central Bank of Sri Lanka (CBSL) presented an overview of the country’s economic outlook, monetary policy direction, exchange rate developments, and fiscal performance. The session, held under the patronage of the Speaker, was led by CBSL Governor Dr. Nandalal Weerasinghe and senior officials.
The briefing underscored the remarkable turnaround achieved since the country emerged from its worst economic crisis in decades, while highlighting emerging challenges that require continued policy vigilance.
Growth momentum continues
One of the strongest signals of recovery has been the sustained expansion of economic activity. According to CBSL, positive growth momentum has been maintained since the third quarter of 2023, with the economy recording growth of around 5 per cent in both 2024 and 2025.
The rebound reflects improved macroeconomic stability, stronger business confidence, and the gradual restoration of economic activity following the severe contraction experienced during the crisis years. The sustained growth performance places Sri Lanka among the faster-recovering economies in the region after a period marked by debt distress, shortages, and high inflation.
Inflation re-emerges as a concern
Despite the encouraging growth outlook, inflation has accelerated in recent months, prompting concern among policymakers.
CBSL attributed the rise largely to upward revisions in domestic energy and fuel prices, influenced by global oil market volatility and ongoing geopolitical tensions in the Middle East. The increase in fuel and energy costs has filtered through the economy, placing pressure on transportation, production, and household expenses.
With inflation expectations beginning to rise, CBSL has moved to prevent broader demand-driven price pressures from becoming entrenched.
Shift toward monetary tightening
In response, CBSL increased its Overnight Policy Rate (OPR) by 100 basis points in May 2026.
The move marked a significant policy shift after nearly three years of monetary easing, during which interest rates had been reduced by approximately 800 basis points since June 2023 to support economic recovery.
According to CBSL, the latest rate increase is intended to contain inflationary pressures, stabilise market expectations, and preserve the gains made in restoring macroeconomic stability.
Market interest rates have already begun adjusting upwards in line with the tighter monetary policy stance.
Why the rupee faces pressure
The briefing also addressed recent depreciation pressures on the Sri Lankan rupee.
Officials pointed out several factors contributing to increased demand for foreign exchange. These include higher import expenditure, particularly for fuel and motor vehicles, as economic activity strengthens.
At the same time, foreign exchange inflows from tourism have been lower than expected, reducing a key source of dollar earnings.
CBSL also noted behavioural factors within the market. Some exporters may be delaying the conversion of export proceeds in anticipation of a weaker rupee, while importers have reportedly accelerated orders and foreign exchange purchases to hedge against potential depreciation.
These developments have increased pressure on the foreign exchange market despite broader improvements in external sector stability.
Private sector lending drives credit growth
Another notable feature of the recovery has been the expansion of domestic credit, driven primarily by increased lending to the private sector.
Businesses and consumers have gradually regained access to financing as economic conditions have improved, supporting investment and consumption.
Meanwhile, net credit to the government and public corporations has recorded repayments in recent periods, reflecting a departure from the heavy reliance on domestic borrowing seen during the crisis years.
CBSL views this trend as evidence of improving fiscal management and reduced pressure on the banking system.
Fiscal reforms deliver results
Perhaps the most significant progress highlighted during the briefing was the strengthening of the fiscal sector.
Revenue-based fiscal consolidation measures have substantially improved government finances. Officials reported that all three key fiscal balances have shown improvement following the implementation of tax reforms and expenditure rationalisation measures.
Enhanced revenue collection, together with tighter control of government spending, has helped narrow the budget deficit and strengthen overall fiscal discipline.
The gains are particularly important as Sri Lanka continues its debt restructuring efforts and seeks to maintain confidence among international lenders and investors.
Balancing growth and stability
CBSL’s message to lawmakers was clear: Sri Lanka’s economic recovery remains firmly on track, but preserving stability will require continued discipline.
Strong growth, improving public finances, and expanding private sector activity point to an economy that has regained momentum. However, inflation risks, exchange rate pressures, and global uncertainties remain significant challenges.
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