ADB sees Sri Lanka’s growth at 3.9% in 2025

Warns debt risks remain

From left: ADB Sri Lanka Resident Mission Country Director Takafumi Kadono, ADB Sri Lanka Resident Mission Senior Country Economist Lilia Aleksanyan, ADB Sri Lanka Resident Mission Senior Economics Officer Lakshini Fernando and ADB Sri Lanka Resident Mission Senior Economics Assistant Dinuk de Silva
PIC BY NISAL BADUGE

• Real sector: Growth will continue at a moderate pace and will be broadly based. Domestic demand will remain sluggish
• Inflation: Inflation will pick up on an expected hike of electricity tariffs, relaxation of import restrictions, wage increases and exchange rate pass-through as rupee depreciates 
• Fiscal sector: Government remains committed to pursuing fiscal consolidation, though stronger revenue creates some room for higher expenditure
• External sector: Current account will fall into deficit in 2025 and 2026 as imports accelerate and interest payments resume on external debt
• Risks to outlook include fiscal reversals that could undermine macroeconomic stability under-execution of capital spending, a loss of reform momentum and full implementation of US tariffs of April 2

Sri Lanka’s recovery is expected to continue at a moderate growth of 3.9 percent in 2025 and 3.4 percent in 2026, following a strong rebound in 2024, the Asian Development Bank (ADB) said in its Asian Development Outlook report released yesterday.
As the uncertainties from the elections and debt restructuring fade, improved investor confidence will support private investment, although consumer demand will remain sluggish amid the expected rising inflation. The downside risks to the growth outlook include trade uncertainty, including the recently announced US tariffs on imports from Sri Lanka, loss of reform momentum and macroeconomic policy slippages.
The growth forecasts were finalised prior to the April 2 announcement of the new tariffs by the US administration and therefore, the baseline projections only reflect the tariffs that were in place previously.
While acknowledging Sri Lanka’s progress in fiscal discipline and debt restructuring, the Manila-based lender said the island nation must sustain efforts to build external and fiscal buffers and implement structural reforms to support trade and investment through private sector-led growth and other flows that do not add to the debt burden.
Debt vulnerability remains high and reducing debt to a sustainable level would take time, the ADB said. The public debt-to-gross domestic product ratio is projected to fall below 95 percent only by 2032.
“Difficult policy reforms are yielding significant improvements in the economy, following the recent severe crisis.
We are pleased to observe that Sri Lanka’s economy has stabilised and is progressing toward debt sustainability. It is essential to sustain the reform efforts to mitigate the debt vulnerability in the medium term and to establish a foundation for sustainable recovery, resilience building and growth revival,” said ADB Country Director for Sri Lanka Takafumi Kadono.
Meanwhile, inflation is projected to pick up as demand strengthens but will remain below the Central Bank’s target. It is expected to accelerate to 3.1 percent in 2025.
Inflation is to remain negative in the first quarter of 2025 and probably the second but rise in the second half of the year, on demand recovery, improved credit conditions, an expected hike of electricity tariffs, relaxation of import restrictions, wage increases and exchange rate pass-through as the rupee depreciates, as expected, the ADB said.
The trend is expected to continue into 2026, with inflation rising to 4.5 percent but still remaining below the Central Bank’s target of 5.0 percent.
Meanwhile, the current account will fall into deficit in 2025 and 2026, as imports accelerate and interest payments resume.