Sri Lanka’s economy continued to recover through 2025, supported by rising household spending, stronger investment, and steady gains in tourism and remittances. Industrial activity picked up, with textiles, construction, and food manufacturing showing solid growth, while financial and tourism-related services expanded further. After months of deflation, prices began to rise again in August 2025 as food and energy costs increased. With inflation still below target, the Central Bank reduced the policy rate further to 7.75% in May 2025, making borrowing cheaper and helping private sector credit grow rapidly. Even though imports increased faster than exports—especially vehicles and consumer goods—the country managed to maintain a current account surplus in early 2025. Strong tourism earnings and remittances continued to offset weaker export growth. Foreign exchange reserves remained steady at around US$4.7 billion in 2025, and although the rupee depreciated slightly after two years of appreciation, overall external conditions are stable.

Government finances also improved, with a larger primary surplus recorded in the first half of 2025. Higher tax revenue, particularly from imports, and reduced capital spending supported this outcome. Public debt remains high but has fallen from its peak as debt restructuring nears completion. These improvements have helped strengthen macroeconomic stability, even though structural challenges continue.

However, many households are still struggling to recover from the crisis. Poverty and malnutrition remain above pre-crisis levels, and real wages are well below where they stood in 2019. Labor force participation is low, especially among women, and many families face rising food costs and limited job opportunities. Regional inequalities also persist, slowing the pace of social recovery.

Despite recent gains, Sri Lanka’s outlook remains cautious. Continued reforms, more dynamic job creation, and targeted support for vulnerable groups will be essential to sustain the recovery and ensure that growth benefits more people across the country.

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