a special correspondent
Sri Lanka’s fragile economic recovery dominated discussions at the 40th Annual Sessions of the Sri Lanka Economic Association (SLEA) this week, where leading economists warned that macroeconomic stabilisation, though impressive, remains vulnerable without decisive structural reform and policy continuity.
SLEA President Prof. Sirimevan Colombage described the economy as standing “at a defining crossroads,” noting that the 2022 collapse was the result of long-standing structural weaknesses rather than a single shock.
Since then, the IMF-supported reform programme has restored a degree of fiscal discipline and balance-of-payments stability. By early 2026, inflation had been contained at low single digits, the policy interest rate stood at 7.75%, and gross official foreign reserves hovered around $6.8–7.2 billion.
However speakers repeatedly stressed that stability does not equal recovery. GDP growth remains subdued, averaging around 3–4%, insufficient to absorb unemployment or reduce poverty that surged during the crisis. Prof. Colombage pointed to persistently high levels of unemployment, malnutrition, and income insecurity, arguing that growth foundations remain weak.
Balance-of-payments risks were a central concern. While tourism receipts and remittances have improved, the external account remains exposed due to import dependence and limited export diversification. Economists noted that reserve accumulation has relied partly on temporary inflows, including currency swaps with China and India. Although these swaps support headline reserves, they do not represent freely usable buffers, creating an inflow–outflow gap that could re-emerge under external stress.
The vulnerability of reserves was underscored by Cyclone Ditwah, which struck in late November, disrupting agriculture, logistics, and energy imports. Experts at SLEA warned that climate-related shocks increasingly threaten the balance of payments, especially when reserve buffers remain shallow.
The services sector was highlighted as the most realistic growth engine. Accounting for 57% of GDP and nearly half of employment, services generate about $7 billion annually, or 35% of total foreign exchange earnings. However, Prof. Colombage warned that the sector is overwhelmingly inward-oriented, with only 20% of output classified as tradable services. This limits its ability to ease external pressures or drive sustained growth.
Concerns were also raised over income taxes imposed on services exports, particularly affecting IT and business process outsourcing. Economists argued that such measures undermine foreign exchange generation at a time when foreign finance mobility remains constrained, with FDI inflows still below pre-crisis levels.
The SLEA consensus was clear:
Sri Lanka has achieved stabilisation, but without export-oriented services reform, durable reserve accumulation, and predictable policy, the economy risks stagnation rather than recovery in 2026.