Middle East conflict clouds Sri Lanka growth outlook

Sri Lanka’s economic growth is expected to moderate to 4.0% in 2026 and rise to 4.2% in 2027, following two consecutive years of strong 5.0% growth.

This forecast is based on an early stabilisation scenario for the Middle East conflict, according to the Asian Development Outlook (ADO) April 2026, the Asian Development Bank (ADB)’s flagship economic publication.

Sri Lanka’s recovery held firm in 2025 despite the late-year disruption caused by Cyclone Ditwah. Private consumption surged amid low inflation and easing interest rates, while remittances reached a record high, as did the primary budget surplus. The current account recorded a third consecutive surplus, and official reserves climbed to their strongest level in years.

The outlook for 2026 is increasingly shaped by the conflict in the Middle East, even as post-Ditwah reconstruction spending provides some support for growth. Private consumption will remain the main growth driver; however, higher inflation will temper household spending power, and private investment is expected to recover only gradually amid heightened uncertainty.

Higher energy costs, potentially weaker remittance inflows, and disruptions to trade and tourism will weigh on household incomes and external buffers, and drag on economic growth. Inflation is projected to accelerate sharply to 5.2% in 2026, driven largely by the Middle East conflict. “Sri Lanka has come a long way since the recent economic crisis, and its economic performance over the past two years is a major achievement,” said ADB Country Director for Sri Lanka Shannon Cowlin. “However, the risks ahead are real and significant. This is not the moment to ease up on reforms. Fiscal discipline must be maintained, and resilience must be strengthened against external shocks that will continue to test this economy. At the same time, scaling up and executing public investment will be essential to sustaining the recovery.”

Source: Sunday Observer