Sri Lanka’s economy is poised for a significant rebound in 2025, building on the momentum of an impressive 5 percent real GDP growth in 2024, the highest in seven years. This growth marks a critical turning point as the island nation continues its recovery from a severe financial crisis that gripped the country in 2022. The announcement was made by P. Nandalal Weerasinghe, the Governor of the Central Bank of Sri Lanka (CBSL), during the annual policy agenda launch on Wednesday.
The economic turmoil of 2022 saw Sri Lanka grappling with a debilitating foreign exchange crisis, which led to acute shortages of essential goods, skyrocketing inflation, and a collapse in investor confidence. However, the implementation of a $2.9 billion International Monetary Fund (IMF) program in March 2023 and the successful completion of a $25 billion debt restructuring in December 2023 laid the groundwork for a faster-than-anticipated recovery.
“We have navigated through one of the most challenging periods in our economic history,” said Governor Weerasinghe. “Our growth in 2024 exceeded expectations, reaching 5.2 percent in the first nine months alone, well above the initial 3 percent projection by CBSL.”
The robust growth figures for 2024 were fueled by a resurgence in key sectors, including tourism, agriculture, and manufacturing, all of which benefitted from improved external conditions and policy reforms. The tourism sector, in particular, experienced a revival as global travel restrictions eased, contributing significantly to foreign exchange earnings.
In parallel, Sri Lanka experienced a unique phenomenon with inflation rates dipping into negative territory by December 2024, recording minus 1.7 percent. This unusual trend was attributed to base effects and the stabilization of commodity prices. The central bank seized this opportunity to adopt a new single policy rate of 8 percent, a shift from previously used benchmarks, aimed at fostering stronger private sector credit growth.
Looking ahead, CBSL has set an ambitious agenda to sustain and accelerate the economic recovery. A key focus will be on maintaining inflation at a stable 5 percent, expected to be achieved by mid-2025. This target aligns with the broader objective of enhancing the country’s debt-carrying capacity, crucial for long-term fiscal sustainability.
“Achieving a transformative acceleration in growth trajectory is essential to catch up and enhance the growth potential,” Weerasinghe emphasized. “Our policy measures will aim at creating a conducive environment for investment and economic expansion.”
CBSL’s strategy includes strengthening monetary policy forecasting and improving reserve buffers under the IMF program. The introduction of a benchmark spot exchange rate in 2025 is anticipated to further stabilize the currency and boost investor confidence.
The central bank also announced plans to continue the recapitalization of banks and the consolidation of large finance companies. This move is intended to fortify the financial system, ensuring resilience against potential external shocks. Additionally, a review of the Statutory Reserve Ratio (SRR), currently at 2 percent, is on the agenda to enhance financial stability.
“We are committed to ensuring a robust and resilient financial system that can support the growth ambitions of the economy,” said Weerasinghe. “These reforms will be pivotal in restoring confidence and attracting both domestic and foreign investment.”
While the economic outlook appears promising, challenges remain. The global economic environment, geopolitical tensions, and climate-related risks could pose potential headwinds. Nonetheless, the central bank remains optimistic, leveraging lessons learned from the past crises to build a more resilient economy. The government has also pledged to support the recovery through structural reforms, infrastructure development, and policies aimed at boosting productivity and competitiveness.
