Beyond recovery: Policy priorities to achieve durable growth in Sri Lanka

ECONOMYNEXT – Sri Lanka must sustain macroeconomic stability through productivity-enhancing reforms, stronger export competitiveness and higher investment if it is to achieve durable long-term growth and return to its pre-crisis trajectory, a Colombo-based think tank has said.

While the island’s recovery from its economic crisis has been encouraging, growth remains vulnerable to external shocks, weak competitiveness and low investment, researchers and economists of the Institute of Policy Studies (IPS) said at a roundtable discussion on its publication, Sri Lanka State of the Economy 2026.

Sri Lanka would need average annual growth of about 8.3 percent between 2026 and 2030 to regain its pre-crisis growth path, exceeding the government’s medium-term target of 7 percent growth, IPS Research Fellow Asanka Wijesinghe said.

Sri Lanka’s economy expanded 4.2 percent in the second quarter of 2026, supported by a pickup in investment, but rising imports and higher global fuel prices have widened external sector pressures, he said.

Wijesinghe warned that growth driven largely by domestic demand would be insufficient and stressed the need to expand exports to support higher growth.

He said Sri Lanka’s export competitiveness is under pressure as competing economies negotiate preferential trade agreements with key markets.

Indonesia’s access to the European Union market and India’s trade agreement with the United Kingdom could erode Sri Lanka’s relative position, while any loss of existing trade preferences such as GSP+ would further weaken competitiveness.

To address these risks, Sri Lanka should accelerate tariff reforms, simplify its tariff structure and secure more predictable market access abroad, while providing support for industries and small firms adjusting to increased competition, he said.

IPS Research Fellow Lakmini Fernando said fiscal policy must move beyond crisis stabilisation and support long-term growth by increasing productive investment.

She noted that government capital expenditure had fallen to historically low levels during the adjustment period and said achieving 7 percent growth could require gross fixed capital formation equivalent to between 30 and 42 percent of GDP, depending on investment efficiency.

Fernando called for greater investment in education, healthcare, skills development, social protection, climate-resilient infrastructure and green projects, alongside reforms to public financial management and procurement systems.

She also stressed the need to maintain debt sustainability through stronger fiscal institutions, adherence to a medium-term debt management strategy and continued engagement with international financial institutions.

Central Bank Deputy Director of Economic Research Yashodha Senadheera said monetary policy has limited ability to directly offset supply-side shocks but may need to respond when such shocks create persistent inflationary pressures or threaten inflation expectations.

Asian Development Bank Senior Country Economist Liliya Aleksanyan said Sri Lanka should improve energy security through renewable energy investments and diversify exports towards Asian markets such as India while maintaining access to traditional destinations in Europe and the United States.

Sampath Bank Senior Economist Sanjaya Ariyawansa highlighted the need to improve tax administration, broaden the tax base by integrating more small and medium enterprises into the formal system and strengthen fiscal oversight.

He warned that climate-related risks could have significant implications for agriculture, energy, public finances and financial sector stability.

Participants at the discussion said stronger institutions, improved implementation capacity and better utilisation of public investment allocations would be critical to translating policy recommendations into sustained growth.

The economists said durable economic expansion would require coordinated reforms in macroeconomic management, trade policy, public investment, fiscal governance and climate resilience, while maintaining policy consistency amid continued domestic and global uncertainties. (Colombo/Oct22/2026)