First Capital predicts ‘snail pace’ growth for 2026

• Urges aggressive reforms to unlock potential
• GDP growth projected at sluggish 3-4% for 2026
• Vehicle tax revenue drops to widen budget deficit to 5.9%
• Urgent reforms needed to attract FDI and escape low-growth trap

By Nishel Fernando

Sri Lanka is poised to navigate a period of moderate economic expansion in the coming year, a trajectory described as “snail pace slow” by First Capital Holdings PLC, with Gross Domestic Product (GDP) growth projected to hover between 3 and 4 percent for 2026. 

The research house highlighted that while the country has secured political stability and fiscal discipline, the sluggish pace of crucial structural reforms prevents the economy from shifting into a higher gear. 

First Capital assigned a 70 percent probability to this base-case scenario, contrasting it with a more optimistic “monorail dream” scenario of over 5 percent growth, which they deem less likely at present.

Presenting the outlook, First Capital Assistant Vice President – Research, Ranjan Ranatunga, noted that the economic environment is shifting from the rapid recovery seen previously to a more subdued phase. 

While inflation is edging up, it remains below the Central Bank’s target of 5 percent. However, the interest rate environment is expected to tighten, with market yields projected to rise by 50 to 100 basis points. Consequently, the one-year Treasury bill rate is forecast to move between 8.5 percent and 9.5 percent by the end of 2026.

“We think that reforms are crucial to move forward,” Ranatunga said at the launch of their Investment Strategy at the 12th Investor Symposium  in Colombo last week.

He explained that current growth levels may not be sufficient to meet aggressive external targets. The research house forecasts foreign reserves to reach approximately US$ 7.25 billion in 2026, falling short of the International Monetary Fund (IMF) target of US$ 8 billion. 

This gap is attributed to a widening trade deficit, a projected 5 percent depreciation of the rupee, and the resumption of significant debt repayments.

On the fiscal front, challenges loom large regarding revenue collection. Ranatunga highlighted a significant potential shortfall, noting that while the government generated approximately Rs. 900 billion from vehicle taxes last year, this figure is expected to drop as the pent-up demand for vehicles dissipates.

With this revenue hole widening and expenditure pressures remaining, First Capital projects the budget deficit to expand from 4.1 percent in 2025 to 5.9 percent in 2026. To bridge this gap, the government is expected to rely heavily on digitalization initiatives, such as the national digital ID and GoPay, to widen the tax net.

The subsequent panel discussion, moderated by First Capital Vice President – Corporate Finance Deshani Ratnayake, broadened the conversation to sector-specific challenges, with a strong focus on the aftermath of the recent cyclone. JAT Holdings PLC Chief Executive Officer Nishal Ferdinando termed the reconstruction need a “silver lining,” emphasising the opportunity to “build back better” using resilient designs and futuristic materials rather than simply restoring what was lost. With damages estimated at US$ 4.1 billion, Ferdinando noted that while this provides a stimulus, the industry must proactively manage labor shortages and upskilling to prevent delays.

In the tourism and leisure sector, John Keells Holdings PLC Deputy Chairman and Group Finance Director Gihan Cooray pointed to a strategic pivot from volume to value. 

While visitor numbers are growing, the demographics are shifting towards younger travelers focused on adventure, necessitating a change in service offerings. Cooray highlighted the “City of Dreams” project and a focus on MICE (Meetings, Incentives, Conferences, and Exhibitions) tourism as key drivers to attract high-spending corporate travelers to Colombo, noting that the city currently captures only a fraction of total tourist arrivals compared to regional peers like Bangkok. 

Meanwhile, Hemas Consumer Brands Managing Director Sabrina Esuffally observed a transformation in the consumer goods sector, where growth is shifting to premium segments catering to smaller, nuclear families and working professionals.

First Capital Chief Research and Strategy Officer Dimantha Mathew stressed the delicate balance between maintaining fiscal consolidation and fostering growth. 

He warned that growing too slowly carries its own dangers, particularly regarding debt sustainability. “You can’t really afford to grow too slow as well... the problem here is the debt sustainability risk,” Mathew cautioned. 

He emphasized that the reform agenda is vital not just for internal efficiency but as a catalyst for attracting Foreign Direct Investment (FDI), which he identified as a key missing component needed to drive growth beyond the current trajectory.