Sri Lanka is set to stage a powerful economic comeback by 2026, surpassing its pre-pandemic output thanks to falling inflation, tourism growth, and IMF support. But looming US tariff hikes threaten to derail momentum, potentially slashing exports and employment. Bloomberg Economics outlines the stakes and the strategy ahead.
Sri Lanka’s Economic Output to Surpass Pre-Pandemic Levels by 2026, But US Tariffs Pose Major Risk – Bloomberg Economics
Sri Lanka’s economy is on track for a major rebound, with projections indicating that national output will finally surpass pre-pandemic levels from 2018 by next year, according to Bloomberg Economics.
The recent report forecasts continued economic recovery through 2025 and 2026, driven by strong domestic momentum, even as trade-related risks loom large. According to Bloomberg, Sri Lanka’s gross domestic product (GDP) is expected to grow 5 percent in 2024, followed by 3.5 percent in 2025 and 2.9 percent in 2026. This recovery trend is anticipated to propel the economy beyond its 2018 peak, signaling a robust turnaround from recent financial turmoil.
Domestic Tailwinds Boosting Recovery
This upbeat forecast stems from a combination of favorable domestic developments. The Central Bank of Sri Lanka’s (CBSL) aggressive 825-basis-point rate cuts have lowered borrowing costs, stimulating credit demand. At the same time, consumer spending is set to rise amid higher wages, reduced income taxes, and a near-zero inflation forecast for 2025.
One of the key drivers is tourism. The sector, which was among the hardest-hit during the pandemic, is roaring back. The first half of 2025 saw a 16 percent increase in tourist arrivals year-on-year, reaching 1.2 million surpassing the pre-pandemic highs of 2018. The rebound is credited to a global tourism promotion campaign and visa-free entry for several countries, according to government officials.
IMF Support, Debt Restructuring Fuel Investor Optimism
Investor confidence is also rebounding, bolstered by Sri Lanka’s successful debt restructuring efforts and compliance with International Monetary Fund (IMF) conditions. The recent approval of the fifth IMF bailout tranche worth $350 million has further solidified investor trust in Sri Lanka’s economic reforms and fiscal discipline.
Trade Threat: US Tariffs on the Horizon
Despite the optimism, the Bloomberg Economics report cautions against overconfidence. The most pressing concern is the uncertainty surrounding US reciprocal tariffs. An assumed increase in tariffs on Sri Lankan exports from the current 10 percent to 30 percent beginning August 1, 2025, has been factored into the GDP outlook.
The government is currently in negotiations to lower these tariffs. However, a prolonged period of higher duties could severely impact Sri Lanka’s key exports, particularly textiles, and may result in rising unemployment. Bloomberg’s internal trade model warns that a 30 percent reciprocal tariff could reduce US-bound exports by 36 percent and put 0.6 percent of GDP at risk over a three-year horizon.
Limited Monetary Policy Room as Inflation Resurfaces
On the monetary policy front, room for further rate cuts is shrinking. With inflation expected to rise again from July following a deflationary spell, the CBSL’s easing cycle may be nearing its end. Bloomberg suggests a possible 25-basis-point cut in September to 7.5 percent, potentially serving as the final adjustment to cushion the economy against trade-related shocks.
Inflation is projected to average just 0.2 percent for 2024 a sharp decline from 20.5 percent in 2023. However, it is expected to rise again to 5.6 percent by 2026, in line with global inflation trends and domestic recovery.
Fragile Gains Amid Foreign Pressures
While Sri Lanka’s projected return to pre-pandemic output levels by 2026 is a significant milestone, the road ahead is lined with external risks. The outcome of US trade negotiations, the durability of inflation control, and the sustainability of current fiscal policies will all play key roles in determining whether this recovery holds or falters under pressure.
