Sri Lanka Targets 6% Growth in 2026, But 2025 Outlook Dulls Amid Spending Delays

Sri Lanka's Economic Recovery and Growth Targets

Sri Lanka is setting its sights on achieving economic growth of up to 6% in 2026, with the government planning to increase capital expenditure significantly. However, delays in passing the budget are expected to impact the country’s performance this year, according to a minister who spoke about the nation's economic outlook.

Anil Jayantha Fernando, the Labour Minister and Deputy Minister of Economic Development, expressed optimism that Sri Lankans and investors should remain hopeful as the island nation recovers from the economic crisis that began in 2022. This crisis was one of the worst since the country gained independence.

In 2024, Sri Lanka achieved a 5% economic growth rate. However, this is projected to slow down to between 4% and 4.5% this year due to delays in the budget approval process, which has slowed government spending. Fernando emphasized that next year, the country aims for a growth rate of 5 to 6%. In the long term, the government targets maintaining an average GDP growth of around 6 to 7%, similar to what other emerging countries achieve.

The government plans to increase its capital expenditure by 8% in 2026, reaching a record 1.4 trillion rupees (approximately $4.64 billion). The International Monetary Fund (IMF), which provided financial assistance to Sri Lanka in March 2023, forecasts a 3.3% growth this year and 5.2% for 2026. Official data showed that the economy grew by 4.9% year-on-year in the second quarter of 2025.

Fernando cautioned against overestimating the improvements expected next year, stating that while the future looks promising, it is important not to exaggerate the changes in livelihoods. He encouraged people and investors to remain hopeful, noting that the government's projections will be included in the upcoming budget, which have not been previously reported.

Budget Delays and Their Impact

Sri Lanka allocated 1.315 trillion rupees for capital expenditure in 2025, but the spending was delayed due to the budget being approved later than usual in March by the new government under President Anura Kumara Dissanayake. Typically, the country presents its budget to parliament in November, with approval in December, a process the government plans to resume this year.

Fernando explained that government ministries hesitated to start procurement without formal approval this year. Although spending picked up in the second quarter, it remains below target, making it difficult to achieve the 5% GDP growth unless the informal economy compensates. By the end of July, only a fifth of the budgeted money had been spent.

Next year, Fernando said, will be better because the government will adhere to the normal budget cycle. He noted that the country has learned from its experience, as it has never been in government before.

Foreign Investment and Debt Management

The minister also mentioned that Sri Lanka could more than double foreign direct investment to over $2 billion in 2026, driven by investments from China, India, and the UAE. Sri Lanka is focusing on strategic foreign loans tied to large-scale projects and technology transfer rather than market-based borrowing to boost reserves or fund existing initiatives.

Given the country's high debt levels, Sri Lanka is working within an IMF framework to reduce its debt to 95% of GDP by 2032, with a target of 80–85% to preserve borrowing space. This year's target is 109.6%.

Fernando stated that borrowing will be reserved for critical investments, while the government focuses on boosting reserves through export diversification and tourism. Crucial remittances from expatriates have already exceeded $5.2 billion in the first eight months of the year and could reach a record $8 billion, compared to $6.57 billion last year. The previous high was $7.24 billion in 2016.