Sri Lanka economy to grow 4.5% in 2025

Sri Lanka’s consumer prices are expected to rise in the third quarter and gradually return to entral bank’s 5.0 percent target by mid-2026, while the economy is projected to expand 4.5 percent in 2025, the Central Bank of Sri Lanka (CBSL) said in its latest Monetary Policy Report.

The bank cautioned that weaker external demand and an uncertain global geo-economic environment could weigh on near- to medium-term growth prospects.

“The latest forecasts expect real Gross Domestic Product (GDP) growth for 2Q-2025 to be robust, continuing the positive momentum observed in 2024 and 1Q-2025. As per the currently available information, economic growth for 2025 is projected to be around 4.5 percent,” the report said.

The report, mandated under the 2023 Central Bank Act, provides forecasts on inflation and growth and assesses risks to its projections. The CBSL said the publication was aimed at improving transparency and accountability around monetary policy decisions. Major central banks such as the U.S. Federal Reserve and the European Central Bank also publish minutes of policy meetings to enhance transparency.

The CBSL noted that the peak deflation seen in the first quarter had eased, driven by higher food prices and an increase in electricity tariffs, with the impact expected to continue through the third quarter. Statistical base effects are also set to push inflation higher after three consecutive quarters of deflation, with further price gains projected into the fourth quarter.

Headline inflation is forecast to rise through the second half of 2025, temporarily exceeding the 5 percent target, before converging towards it by mid-2026. The bank attributed the shift to recovering domestic demand and a normalisation of energy and transport prices after a prolonged period of deflation. Core inflation, which excludes food, energy and transport, is expected to rise gradually in the near term before stabilising around the 5 percent target with lower volatility than headline inflation. The bank said this adjustment would be supported by stronger demand and imported inflation linked to global food and commodity trends. Energy and transport costs are seen lifting headline inflation in the medium term, although temporarily elevated global oil prices could add further pressure. Food inflation, which recently picked up on supply factors, is projected to moderate due to a healthy harvest, though weather-related disruptions could drive volatility.

An inflation expectations survey conducted in July 2025 showed respondents anticipating a gradual pickup in prices over the next three months and beyond, though medium-term expectations remain broadly anchored to the 5 percent target.