ADB sees slower growth, higher inflation for Sri Lanka through 2027

• The Manila-based lender maintained Sri Lanka’s growth forecast for 2026 at 4.0% but cut the 2027 projection to 4.0% from the 4.2% forecast issued in April
• South Asia’s growth forecast was also lowered to 6.0% for 2026 from 6.3% projected in April
• Raises its inflation forecast for Sri Lanka to 6.0% in 2026 from the 5.2% projected in April and increased the 2027 forecast to 5.2%  from 4.0% previously

The Asian Development Bank (ADB) has lowered Sri Lanka’s economic growth forecast for 2027 and sharply raised its inflation projections, warning that prolonged disruptions to global energy markets are likely to weigh on the country’s recovery over the medium term.

In its July 2026 Asian Development Outlook update, the Manila-based lender maintained Sri Lanka’s growth forecast for 2026 at 4.0 percent but cut the 2027 projection to 4.0 percent from the 4.2 percent forecast issued in April.

The downgrade comes as the ADB reduced its overall growth forecast for developing Asia and the Pacific to 4.9 percent from 5.1 percent projected in April, citing the economic fallout from the Middle East conflict, including higher energy prices, elevated freight costs and supply chain disruptions.

South Asia’s growth forecast was also lowered to 6.0 percent for 2026 from 6.3 percent projected in April, reflecting the impact of higher oil prices, rising transport costs and uncertainty over remittance flows.

While Sri Lanka’s near-term growth outlook remains unchanged, the ADB highlighted growing concern over inflationary pressures that could undermine the pace of recovery.

The bank raised its inflation forecast for Sri Lanka to 6.0 percent in 2026 from the 5.2 percent projected in April and increased the 2027 forecast to 5.2 percent from 4.0 percent previously.

The revisions suggest inflation is likely to remain above the Central Bank’s target level for longer than previously anticipated as higher global energy prices feed through to transport, production and consumer costs.

The report noted that downward revisions to 2027 growth forecasts across South Asia, including Sri Lanka, were partly driven by the continuing effects of elevated energy prices.

Sri Lanka remains particularly exposed to developments in global oil markets due to its dependence on imported fuel and the importance of energy costs to domestic inflation and economic activity.

The ADB also highlighted Sri Lanka among a group of regional economies that raised policy interest rates between April and June 2026 in response to mounting inflationary pressures. According to the report, Sri Lanka increased policy rates by 100 basis points during the period as authorities moved to contain the impact of higher global commodity prices and emerging inflation risks.

Despite the more challenging external environment, some indicators point to continued resilience in domestic activity. The report showed Sri Lanka’s services Purchasing Managers’ Index at 56.9 in May, indicating expansion in the sector and placing the country among the stronger performers in the region.

The ADB further warned that higher energy and fertiliser costs are expected to place additional pressure on government finances across the region. Its analysis suggests Sri Lanka’s primary fiscal balance could weaken in 2026 compared with the previous year, underscoring the challenges facing policymakers as they seek to preserve fiscal gains achieved under the country’s economic reform programme.

While the economy is expected to sustain growth following last year’s recovery, the ADB cautioned that persistent energy market uncertainty, higher imported inflation and tighter financial conditions could pose risks to the country’s economic trajectory in the years ahead.