Recommends prudent policy choices and regional collaboration

The Asian Development Bank (ADB) has highlighted Sri Lanka’s economic recovery as exceeding initial expectations in its Asian Development Outlook April 2025 report, but cautioned that the rebound remains fragile, with significant risks posed by global trade tensions, fiscal pressures, and unresolved debt vulnerabilities.

The following are some key highlights from the report:

Sri Lanka’s economy is projected to grow at a moderate pace in 2025–2026, driven by broad-based improvements. However, domestic demand is expected to stay sluggish, reflecting lingering challenges from the country’s recent economic crisis. While fiscal consolidation efforts remain on track bolstered by stronger-than-anticipated revenue. With that said, however, the ADB warned that under-execution of capital spending or a loss of reform momentum could derail progress.

Takafumi Kadono, ADB Country Director for Sri Lanka, brings profound expertise in both macro and microeconomic dynamics, steering transformative development support tailored to Sri Lanka’s evolving needs

After a period of deflation, Sri Lanka’s inflation is forecast to rise in 2025 due to higher electricity tariffs, relaxed import restrictions, wage hikes, and exchange rate depreciation. The government’s commitment to fiscal discipline faces pressure from potential expenditure increases, even as external debt interest payments resume, pushing the current account into deficit.

The ADB’s analysis of new US tariffs, identifies Sri Lanka as vulnerable to trade disruptions. Key risks include:

Sri Lankan exporters, particularly in sectors with thin profit margins, face order cancellations and profit losses.

Competitors like India, Malaysia, and Mexico—benefiting from lower US tariffs—could attract investment away from Sri Lanka.

Full implementation of tariffs could slash GDP growth by depressing exports, manufacturing, and investor confidence, while raising unemployment and fiscal strains.

To mitigate risks, the ADB urges Sri Lanka to diversify export markets and products. Opportunities include expanding into niche EU markets and Asian regional partners, as well as boosting high-value sectors like electronics. Strengthening regional cooperation and accelerating structural reforms could enhance resilience.

Despite progress under its IMF program, Sri Lanka’s debt burden remains “high,” requiring sustained reforms to stabilise public finances. The ADB emphasised that fiscal reversals or delays in restructuring could undermine macroeconomic stability.

While South Asia remains the fastest growing subregion fueled by India’s robust domestic demand, Sri Lanka’s trajectory is distinct, marked by post-crisis recovery challenges. Developing Asia’s overall growth is moderating due to US-China trade tensions and China’s property sector woes, further complicating Sri Lanka’s external environment.

“Sri Lanka’s recovery is commendable but incomplete,” the report states. “Accelerating reforms, safeguarding fiscal discipline, and diversifying trade partnerships are critical to navigating global headwinds and ensuring long-term stability.”

As Sri Lanka balances optimism with fragility, the ADB’s outlook underscores the urgency of maintaining reform momentum while preparing for escalating external risks. The path to sustained recovery, concludes, hinges on prudent policy choices and regional collaboration.

By Sanath Nanayakkare