Sri Lanka’s economy has rebounded almost to pre-crisis levels after the 2022 default, driven by stronger public finances, fiscal discipline, debt progress and restored macroeconomic stability, according to the country’s Central Bank Governor.

Sri Lanka’s national economy has recovered to nearly its pre-crisis level following a sharp turnaround from the country’s worst economic meltdown in decades, Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe said this week. Speaking at a briefing organised by the Ministry of Foreign Affairs and attended by senior government officials and members of the diplomatic community, the Governor highlighted stronger public finances, improved fiscal balances and progress towards debt sustainability as the key pillars supporting the rebound.

The speed of the recovery stands out given the depth of the economic and balance-of-payments crisis that pushed Sri Lanka into its first sovereign default in 2022. “The economy has now recovered to almost the level seen before the crisis. This represents a strong recovery over a relatively short period,” Weerasinghe said. He noted that Sri Lanka could be recognised as one of the countries that experienced a severe economic and balance-of-payments crisis and subsequently achieved one of the fastest recoveries.

Crisis Depth and the Path to Stabilisation

During the crisis, acute foreign exchange shortages disrupted imports, fuel and energy supplies. Soaring inflation, higher interest rates and steep currency depreciation squeezed households and businesses, while the economy contracted sharply. The subsequent stabilisation programme focused on rebuilding foreign exchange reserves, bringing inflation under control, restoring fiscal balances, restructuring public debt and strengthening the external position.

Official data underline the scale of the rebound. Real GDP growth reached an estimated 5 per cent in both 2024 and 2025, marking two consecutive years of expansion after contractions of around seven per cent in 2022 and two per cent in 2023. In US dollar terms, GDP rose to approximately USD 108.8 billion in 2025 from USD 99.6 billion the previous year, with per capita GDP climbing to about USD 5,003. Growth was broad-based, with industry expanding strongly (around 7.8 per cent in 2025) supported by manufacturing and construction, while services and agriculture also contributed positively.

Fiscal Turnaround as a Central Pillar

A sharp improvement in government finances has been central to the turnaround. According to the Governor, the Government’s revenue-to-GDP ratio increased by almost 100 per cent within three years, reversing a period in which state revenue had fallen to exceptionally low levels and contributed to widening fiscal imbalances. Weerasinghe described the increase as a “remarkable achievement,” achieved through a combination of increased revenue mobilisation, expenditure control and improvements in fiscal balances, alongside measures aimed at ensuring debt sustainability.

Fiscal performance remained strong into 2025. The primary balance recorded a surplus for the third consecutive year, the budget deficit narrowed significantly, and outstanding central government debt declined as a share of GDP (to around 91.6 per cent by end-2025 from higher levels earlier). These outcomes formed a critical part of the post-2022 reform programme, when weak revenue, large deficits, depleted reserves and an unsustainable debt burden had left the country unable to meet external obligations.

External Sector Strength and Reserves Build-Up

The external sector has also strengthened. The current account recorded a surplus for the third consecutive year in 2025, supported by historically high workers’ remittances and improved services exports (including tourism), even as the trade deficit widened with the relaxation of import restrictions such as those on vehicles. Foreign exchange inflows enabled continued reserve accumulation amid external debt service payments. By end-2025, reserves had been built up to around USD 6.8 billion despite elevated debt-service obligations.

Private sector credit expanded notably, rising by around Rs. 2.1 trillion in 2025 with year-on-year growth reaching about 25 per cent by year-end, the highest annual expansion on record. Lower interest rates under an accommodative monetary policy stance supported this expansion, while fiscal consolidation helped reduce public-sector crowding out of private credit. However, private credit as a share of GDP remained below pre-crisis levels.

Inflation Trajectory and Monetary Policy

After a period of deflation that lasted into mid-2025, inflation turned positive from August 2025, driven largely by easing energy-price declines and higher food prices amid firm demand. Headline inflation has since moved higher in 2026 but is expected to converge back towards the Central Bank’s five per cent target. The CBSL has maintained a vigilant stance, tightening policy earlier in 2026 when needed to contain pressures while supporting the recovery.

Credit Ratings and Investor Confidence

Sri Lanka is seeking to translate its improved macroeconomic position into stronger sovereign creditworthiness. The country had been placed in the restricted-default category following the suspension of external debt repayments. It has since moved into speculative-grade territory after progress on debt restructuring. Weerasinghe said authorities are holding discussions with all three major international credit-rating agencies and remain hopeful of a further upgrade that would reflect the progress achieved. A higher rating would provide an external validation of the improvement and help rebuild international investor confidence as Sri Lanka gradually normalises access to global capital markets.

Lessosns Beyond Borders

Despite the strong rebound, challenges remain. The benefits of recovery have not been evenly distributed across the population, and purchasing power has recovered only gradually. Private credit and certain other indicators are still below pre-crisis peaks. External risks – including geopolitical tensions, trade policy shifts and weather-related shocks – continue to pose uncertainties. Maintaining the gains will depend on continued fiscal discipline, the durability of structural reforms, and translating macroeconomic stability into sustained growth, investment and greater resilience.

Weerasinghe has emphasised that Sri Lanka’s experience offers lessons beyond its borders, particularly for international financial institutions and businesses assessing how economies can emerge from severe balance-of-payments crises. The country is increasingly viewed as an example of how rapid recovery from a deep crisis can lay foundations for a more stable, resilient and sustainable economy – provided reforms remain on track.

As of mid-2026, the recovery continues to gather momentum, with growth projected in the 4-5 per cent range amid ongoing policy vigilance. The focus now shifts from stabilisation to embedding higher and more inclusive growth while safeguarding the hard-won macroeconomic gains.

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