Economic growth slows as Sri Lanka faces mid-year dip

Economic expansion within Sri Lanka shows a slowdown during the initial half of 2026, with growth likely moderating to between 3% and 4% for the year as elevated energy costs and external pressures impact the economy.

While the nation recorded 5.1% year-on-year GDP growth during the first quarter, the outlook remains difficult due to sluggish reform progress and tighter monetary policy.

The Central Bank of Sri Lanka raised the overnight policy rate by 100 basis points in May 2026 to control inflation, which First Capital Research anticipates will average 6% throughout 2026 before easing in 2027.

This decision seeks to ensure medium-term stability, although it creates a challenging environment for near-term economic growth.

The outlook for other primary indicators remains cautious.

The bond market favours short-term tenures while yields remain high, with a potential rate reduction anticipated during the first half of 2027 to bolster liquidity and economic activity.

The average weighted prime lending rate likely stays between 10-11% throughout the second half of 2026, with a decline expected in the first half of 2027.

The Rupee is expected to trade between Rs.325-335 per dollar during the second half of 2026, weakening further to between Rs.335-345 in the first half of 2027 as credit and import demands exert pressure.

The All Share Price Index is projected to trade sideways between 20,500 and 22,500 for the rest of the year, with a more upward trend expected for 2027 as inflation cools and earnings recover, acording to economic forcast.

Cash allocation rose to 50% to manage near-term volatility.

The political landscape remains at low risk, and the government expects to retain majority support.

Nevertheless, sustaining growth demands accelerated reforms, particularly as debt repayment obligations for 2028 approach.