Industry leads expansion while services lose momentum and farming output declines amid external pressures.

Sri Lanka’s economy expanded by 4.2 per cent in the second quarter of 2026, easing from the 5.1 per cent growth recorded in the first quarter and marking the lowest quarterly rate in one and a half years, according to the latest National Accounts Estimates released by the Department of Census and Statistics. Real GDP at constant 2015 prices rose to Rs. 3,029,816 million from Rs. 2,908,570 million in the corresponding quarter of 2025, while nominal GDP increased 11.3 per cent year-on-year to Rs. 8,254,176 million.

The slowdown reflected a sharp contraction in agriculture, softer services growth, and external headwinds including Middle East tensions that raised uncertainty over crude oil supplies. Tourism activity also moderated. Industry, however, continued to outperform and provided the main support to overall expansion. Taxes less subsidies on products accounted for 13 per cent of GDP in the quarter, up from 11 per cent in the first quarter. At current prices, agriculture contributed 8.4 per cent, industry 25.9 per cent and services 52.7 per cent of GDP.

Agriculture Swings into Contraction

Agricultural economic activity, which had grown 1.1 per cent in the first quarter of 2026 and 2.5 per cent in the second quarter of 2025, contracted by 2.3 per cent in the April-June period. The decline was driven by steep falls in several key sub-sectors. Freshwater fishing and aquaculture plunged 61.0 per cent, paddy cultivation dropped 15.1 per cent, sugarcane, tobacco and other non-permanent crops fell 14.7 per cent, and marine fishing and aquaculture declined 10.1 per cent. Additional contractions occurred in plant propagation (7.7 per cent), rubber (2.2 per cent), tea (1.9 per cent), other permanent crops (1.7 per cent) and agricultural support services (1.5 per cent).

Some areas recorded positive growth. Forestry and logging expanded 9.7 per cent, spice crops rose 7.0 per cent, oleaginous fruits including coconut grew 6.2 per cent, cereal crops increased 5.2 per cent, fruit crops edged up 1.9 per cent, animal production gained 1.6 per cent, coffee and cocoa rose 1.3 per cent and vegetable cultivation expanded 0.8 per cent. These gains were insufficient to offset the broader declines, particularly in rice and fishing, which remain central to rural livelihoods and food security.

Industry Maintains Strong Momentum

Industrial activity grew 7.3 per cent in the second quarter, virtually unchanged from 7.2 per cent in the first quarter and well above the 5.7 per cent recorded in the second quarter of 2025. Construction expanded 13.9 per cent and mining and quarrying surged 17.4 per cent. Manufacturing as a whole rose 3.2 per cent, led by wood and wood products (13.9 per cent), other non-metallic mineral products (13.1 per cent), furniture (12.8 per cent), machinery and equipment (12.4 per cent), basic and fabricated metal products (7.3 per cent), paper products (5.6 per cent), food, beverages and tobacco (3.7 per cent), other manufacturing (3.3 per cent) and chemical and pharmaceutical products (1.7 per cent).

Contractions appeared in refined petroleum products (15.2 per cent), rubber and plastic products (4.2 per cent) and textiles, wearing apparel, leather and related products (1.4 per cent). Electricity, gas, steam and air conditioning supply grew 6.8 per cent, while water collection, treatment and supply and sewerage and waste treatment activities expanded 4.6 per cent and 1.5 per cent respectively. Higher import volumes of raw materials and machinery supported domestic industry and boosted government revenue through import-related taxes. Increased availability of construction materials also aided the construction sector and, by extension, mining and quarrying.

Services Growth Nearly Halves

Services, the largest component of the economy, expanded only 2.7 per cent in the second quarter of 2026, down from 3.4 per cent in the preceding quarter and 4.0 per cent in the same period of 2025. Growth was led by IT programming and consultancy services (10.0 per cent), insurance services (8.0 per cent), financial services (7.7 per cent), telecommunications (4.8 per cent), real estate activities and ownership of dwellings (4.1 per cent), postal and courier services (4.0 per cent), transportation and warehousing (3.1 per cent), accommodation and food and beverage services (2.9 per cent), professional services (2.4 per cent), programming and broadcasting (1.5 per cent), wholesale and retail trade (1.4 per cent), health services (1.4 per cent), education (1.3 per cent) and other personal services (0.7 per cent). Public administration was the only services activity to contract, falling 2.4 per cent.

The Department of Census and Statistics noted that the quarter began with limited optimism. Uncertainty stemming from Middle East tensions and their potential impact on oil supplies, combined with slower tourism and weaker agricultural performance, weighed on several major activities including accommodation and food services, financial services and insurance.

Broader Economic Context

The 4.2 per cent reading follows a period of recovery in which the economy posted 5.0 per cent growth for the full year 2025, the second consecutive year of expansion after the 2023 contraction. Quarterly growth had reached 5.1 per cent in the first quarter of 2026 before moderating. Import volumes continued a multi-quarter uptrend, supporting industrial activity while also lifting tax revenues.

Separately, labour force data for 2025 showed that more than 8.6 million Sri Lankans aged 15 and above remained outside the labour force, representing 50.6 per cent of that age group. The overall labour-force participation rate stood at 49.4 per cent. Women accounted for 6.19 million of those outside the labour force, with female participation at 32.4 per cent compared with 69.1 per cent for men. The unemployment rate was 3.9 per cent overall (329,211 people), but higher among women at 6.1 per cent versus 2.8 per cent for men. These structural features continue to shape the economy’s medium-term growth potential even as quarterly output expands.

Outlook and Policy Implications

The second-quarter figures illustrate an uneven recovery. Industry has sustained solid momentum, helped by construction, mining and selected manufacturing segments, while agriculture has reversed into contraction and services have lost pace. External risks linked to energy prices and regional tensions remain relevant given Sri Lanka’s dependence on imported fuel. Continued growth in imports of intermediate goods has aided industry and fiscal revenues, yet the sharp falls in paddy and fishing highlight vulnerabilities in rural output that can affect both food supply and rural incomes.

Policymakers face the task of supporting agricultural recovery, sustaining industrial expansion and restoring broader services momentum, particularly in tourism-related activities. The rise in the share of taxes and less subsidies also points to the importance of fiscal measures in the overall national accounts. With real GDP still expanding, the economy remains on a growth path, albeit at a slower quarterly rate than earlier in 2026.