First Capital Research (FCH) in tier “A Tale of Two Curves: Firm Belly, Fragile Long End” report expects Sri Lanka's economic growth to ease from 5% in 2025 to between 3% and 4% by the end of 2026.

Although GDP growth accelerated to 5.1% in the first quarter of 2026, the expansion was driven largely by a significant contribution from tax revenues and subsidies rather than a broad-based strengthening of underlying economic fundamentals.

The research firm said Gross Domestic Product (GDP) growth is likely to moderate to 3% to 4% by the end of 2026.

On the fiscal side, slower than expected government capital expenditure also poses a constraint to growth, with only Rs. 100 billion spent out of the allocated Rs. 1.8 trillion as of the end of the first quarter of 2026.

In addition, the external position is expected to come under renewed pressure, with a widening trade deficit driven by a higher import bill, particularly fuel imports, and softer export growth.

FCH also believes the recent 100 basis point policy rate hike may have been somewhat excessive, particularly in light of the recent moderation in economic activity.

Household consumption is expected to come under pressure from elevated borrowing costs, reinforced by the recent OPR hike. In addition, the increase in credit card interest rates from 26% to 28% is likely to dampen credit demand and consumer spending.

At the same time, persistent inflationary pressures are expected to further erode real incomes, placing additional pressure on consumption. (Shirajiv S.)