The Sri Lankan economy experienced significant strain in the years following the COVID-19 outbreak in 2020. The situation has been improving in recent years with the South Asian nation reporting economic recovery in 2025, supported by broad-based growth, benign inflation and robust financial situation, despite disruptions from Cyclone Ditwah late in the year, according to a recent report by the IMF.

The real GDP growth was 5% in 2025, underpinned by broad-based growth. The country’s agriculture grew by 1.4% and industry witnessed robust expansion of 7.8%, albeit slower than the year before, reflecting normalisation from the crisis-era lows, the IMF said. Construction expanded 9.2%, mirroring a 19.8% increase in domestic cement production. The services sector reported growth of 3.3%, with financial services growing at 10.6% and accommodation and food services expanding at 12.4%, reflecting strong tourism momentum. The cyclone hit Sri Lanka in November 2025, resulting in floods and landslides across 22 districts and causing major damage to the country’s supply chain. This dampened activity in the fourth quarter, with GDP growth slowing to 4.8%, from 5.5% in the same quarter of 2024, and causing $1.4bn of losses, as estimated by the Post Disaster Needs Assessment.

Consumption meanwhile saw strong expansion, growing by 7.7% in the first nine months of 2025 compared with just 0.7% in the same period in the previous year. Private consumption drove gains as it expanded by 8.6% versus 1.3% the year before. The growth was buoyed by benign inflation, softening interest rates and the normalisation of retail and trade activity. Investment growth saw a sharp deceleration though, with gross capital formation growing by 2.2% compared with 29.3% in 2024, as the post-crisis rebound in private investments tapered off and public investment remained weak. Net exports were broadly neutral for growth, with import growth slightly offsetting export growth, the IMF added.

Easing lending rates and the broader recovery supported credit growth of 25.2% by end-2025, compared with 10.7% by end-2024, expanding total outstanding credit to 31.2% of GDP. The annual Average Weighted Prime Lending Rate fell to 8.4% from 9.9%. Demand was broad-based, led by wholesale and retail trade, financial and business services, including leasing for vehicle imports following the relaxation of import restrictions in early 2025, personal housing, and pawning. Services sector lending surged 41.8%, its highest rate in over a decade, followed by industry at 16.9% and agriculture at 26.2%.

Moderation in GDP growth expected

Sri Lanka’s GDP growth is projected to moderate to 4% in 2026, climbing to 4.2% in 2027, assuming the conflict in the Middle East does not escalate further or become even more protracted. The IMF’s projection takes into account an estimated 0.4 percentage point drag from the conflict on growth primarily due to four factors: elevated global oil prices results in higher energy and logistics costs and compressing household real incomes, a partial decline in remittance inflows from the countries in the Middle East, reduced tourist arrivals due to disrupted air connectivity through Gulf hub carriers and possible exchange rate depreciation amplifying imported inflation pressures.

Post-Ditwah relief and rehabilitation will partly support growth, the IMF said, but persistent structural weaknesses, including low productivity, possible capital spending under execution, and weak institutional capacity, will still constrain the economy. The early-2026 Purchasing Managers’ Index (PMI) for manufacturing shows continuing economic momentum. A 4.4% year-on-year growth in the Index of Industrial Production in January this year indicated a sustained industrial momentum at the start of this year. The PMI for Construction pointed to a robust activity at the start of the year, reflecting the resumption of projects that were stranded earlier. However, rising costs of energy and input due to the Middle East conflict are likely to weigh on industrial growth. The PMI for services continued to signal growth through February 2026, although at a slower pace compared with late 2025.

The country’s agricultural production is likely to remain subdued, as damage inflicted by the cyclone during the initial stages of the cultivating season is projected to have impacted about a tenth of the output, the IMF said. As global oil prices jumped past $100 per barrel in March 2026, Colombo reinstated fuel rationing and declared Wednesdays a public holiday to help cut energy consumption.

In April this year, the IMF reached a staff-level agreement with Sri Lanka, which is likely to pave the way for around $700mn in fresh funding, subject to approval by its executive board, as the country continues its recovery from the recent economic crisis.

Tea and rubber industries under pressure

Sri Lanka's tea and rubber industries, which are vital for the country's export sector, are facing renewed pressure due to rising costs and softer prices. Tea prices have been falling while input costs have been rising. The Sunday Times in March this year reported that the cost of producing a kilo of tea has climbed to around LKR1,400 ($4.46). Meanwhile, prices have dropped by LKR50–60, even as key inputs such as fertiliser and fuel have surged by roughly 50% and 40%, respectively.

The industry expects the situation to remain challenging going forward with further increases expected in transport, electricity, firewood and fertiliser costs.

The situation in the rubber industry has been similarly challenging. In 2025, the industry faced issues such as a 15% wage increase, persistent disease outbreaks, labour shortages and rising production costs, according to a report by The Morning Money.

In 2025, rubber-based export earnings dropped to around $945mn versus $1.01bn in 2024, a decline of about 5-6%. The impact of this slowdown was primarily visible in tyre and value-added manufacturing segments, especially due to tariffs levied by the United States, Sri Lanka’s biggest market for rubber exports.

The Morning Money reported that there are limited prospects for price recovery or fresh investment. With rising costs and weak margins, the sector’s survival will depend on improving return on investments and restoring investor confidence, the report added.