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IPS urges growth shift beyond debt-funded spending

Private investment, productivity and competitive exports must drive next growth phase
Faster expansion must preserve fiscal and external stability
Recovery needs to deliver broader improvements in household living standards

Sri Lanka must move beyond debt-financed spending, tax concessions and import-intensive consumption to sustain its economic recovery, the Institute of Policy Studies of Sri Lanka (IPS) said, calling for a growth strategy built on private investment, productivity and competitive exports.In its newly released Sri Lanka: State of the Economy 2026 report, the IPS said the country’s next challenge is to accelerate growth without reopening the fiscal and external vulnerabilities that contributed to the 2022 economic crisis.

Limited fiscal and external space means the next phase of expansion must rely on stronger investment, a more competitive and diversified export sector and better-quality jobs, according to the IPS.“Sri Lanka can no longer rely on debt-financed spending, tax concessions or import-intensive consumption as drivers of growth,” the IPS said in a release announcing the report.

The assessment comes as the economy continues to recover from the crisis. According to the release, real GDP expanded by 5 percent in both 2024 and 2025 and by 4.7 percent in the first half of 2026.Inflation has moderated substantially from its 2022 peak, external debt restructuring has advanced and foreign reserves have been rebuilt to more comfortable levels, the IPS said.

However, sustaining that progress requires a growth process capable of withstanding future shocks and delivering broad-based improvements in living standards.The report, titled Policy Choices for Durable Growth, calls for macroeconomic stability to be maintained alongside the measures to raise productivity and make more effective use of scarce public resources.

“The challenge then is to accelerate growth without reopening the fiscal and external vulnerabilities that contributed to the crisis,” the release said.The IPS also placed human capital and labour market reforms at the centre of the next growth phase, highlighting the need to address the skills gaps, create better-quality jobs and strengthen protection for vulnerable groups.

With two-thirds of workers employed informally, the report identifies improvements in labour market outcomes and social protection as priorities in ensuring the benefits of growth being more widely shared.Building resilience to the climate, energy and external shocks is another central requirement for sustaining economic progress.

The IPS said the recent climate-related disruptions and global energy shocks demonstrated the importance of placing resilience at the centre of Sri Lanka’s development strategy.Investments in renewable energy, food systems, infrastructure and disaster preparedness could help safeguard future growth while reducing the vulnerability to shocks, it said.

The report also examines how infrastructure investment, regional development and responses to changing population dynamics can support more inclusive growth.Its policy recommendations span trade, fiscal management, labour markets, urbanisation, energy, agriculture, social protection and human capital development.

The IPS said Sri Lanka could achieve its long-term development ambitions through reforms that strengthen competitiveness and resilience while ensuring the gains from growth are broadly shared