Capital markets are at a pivotal moment. Two years of record equity returns have given way to a more complex and uncertain environment, with rising interest rates, a volatile rupee, and global geopolitical pressures testing investor confidence. For those looking to navigate what comes next, the question has expanded from whether to invest to include where and how. Dilshan Wirasekara, Managing Director/Chief Executive Officer at First Capital Holdings PLC, shares his assessment of where Sri Lanka’s economy stands, the risks that remain, and where he sees the most compelling opportunities for investors over the next three to five years. The views expressed in this conversation reflect conditions prevailing as at 25 May 2026 and were recorded prior to the Monetary Policy Announcement, at which the Overnight Policy Rate (OPR) was increased by 100 basis points.
Over the past two years, Sri Lanka has moved from a period of severe economic instability into one of cautious recovery. Where does the country truly stand today?
We are probably in a transition. From the crisis, we have come a long way: debt restructuring has been completed, inflation has been brought under control, interest rates have come down, the exchange rate has stabilised, and reserves have been rebuilt. The fundamental behind all of that has been the IMF programme and our commitment to it.
However, I don’t think that is good enough. If you look at where we are today, we find ourselves in a position similar to where we were in 2018. We have simply come back to the main road, roughly eight years late. That alone is not going to ensure that stability continues or that a crisis does not repeat itself.
It is quite important for Sri Lanka to now pivot towards a growth story: reliable, resilient, permanent growth that adds to GDP productivity and ensures the country is not at risk from external developments. We have come a long distance, and we are in a better place than we were three years ago. That much is proven by the fact that we have been able to withstand some of the headwinds, first from cyclone ‘Ditwah’ and then from the Middle East crisis. But we are in a transition, and it is very important that we get it right from here and that the reform agenda continues.
Many investors still question where Sri Lanka can convert short-term recovery into long-term economic credibility. What structural shifts must happen now if the country is to reposition itself as a serious investment destination again?
We have much to do. The two main drivers that have brought us to stabilisation have been appropriate monetary policy on one side and appropriate fiscal discipline on the other. The governments in charge post-crisis have handled this reasonably well.
Our present macroeconomy is based on a current account surplus that we have run for three consecutive years. That has underpinned everything else. We have also strengthened the fiscal side, particularly through revenue collection, and have managed to bring a budget deficit from around 110–112% of GDP to approximately 95–100% by the end of 2025. But this alone will not get us to our goal.
The current account surplus position could change significantly now that we are dealing with oil at over $100 a barrel, compared to around $65 before this crisis. There are also secondary impacts from supply-side disruptions, tourism disruptions, and potential pressure on worker remittances. We received about $8 billion in remittances last year, and while there has been a significant jump this year, the question is whether that jump is permanent or a product of the Middle East crisis causing people to remit savings as a precaution.
Tourism, meanwhile, has suffered. Numbers are encouraging, but earnings are not, which means there is a problem with the model in terms of revenue generation. Assuming a continuation of the current account surplus is probably going to be challenged, particularly with an oil bill that could be 30–40% higher than last year. Add to that the IMF programme coming to an end in 2028, with capital repayments on the debt restructure then coming into play, and there will be considerable pressure.
What can ensure stability going forward is a meaningful increase in Foreign Direct Investment (FDI). The answer to our problem is growth. Over the last three years, we have received perhaps $1 billion of FDI each year, which is roughly 1% of GDP. That will not take us anywhere. I consider 3–4% of GDP in FDI a more meaningful figure. Projects like Port City are one part of that, but we need to go further.
The government needs to pursue reforms that go beyond the IMF programme to attract foreign direct investment, and we need to focus seriously on growth strategies to ensure the mistakes of the past are not repeated.
With global conflicts and geopolitical tensions continuing to disrupt markets, currencies, and capital flows, how vulnerable is Sri Lanka and the rupee to these external shocks, and how should investors assess these risks going forward?
We cannot change outcomes that arise from overseas developments. Every country has to find ways to deal with them, and we are no different. But we can see how vulnerable we are from what has taken place in just two months.
The stock market fell approximately 12% from its peak of over 24,000 on the ASPI, coming down to around 20,300 before partially rebounding. Sentiment remains shaky. Interest rates have risen 150 basis points from their floor, and with inflation climbing, we believe there is potential for a further 100 basis points from current levels.
One example is energy pricing. A key principle of the reform programme is ensuring that energy is procured and priced on a sustainable, cost-reflective basis. However, we are currently subsidising around Rs. 20 billion per month by keeping diesel and petrol prices below their true cost.
While governments may need to provide temporary relief during periods of volatility, such measures cannot be sustained indefinitely. Energy must be purchased and priced in a manner that reflects underlying market realities and avoids excessive fiscal burdens. Failing to do so risks adding further pressure to public finances at a time when broader macroeconomic challenges remain, while also distorting the market signals needed for efficient resource allocation.
State-Owned Enterprise (SOE) reforms are another area where we have fallen short. Across most macro variables, such as reserves, government revenue, or the budget deficit, we have ticked the boxes. But on SOE reforms we have not delivered, and that needs to change so there is no ongoing burden from these entities on the national balance sheet.
On the exchange rate specifically, the currency depreciated approximately 7.5% and almost touched Rs. 350 before partially recovering. We should not sell down reserves to defend the currency. That lesson has been learned too many times.
Smoothing out volatility and providing direction is reasonable, but the depreciation we saw was exaggerated by artificial demand, with importers locking in exchange rates months ahead out of fear of further falls. When that normalises, the currency should stabilise at current levels.
A depreciation of around 5–6% annually is desirable and broadly in line with what regional currencies have experienced.
Where interest rates are concerned, the likely rise of 200 to 250 basis points above last year’s levels will cause some pain for corporates, institutions, and SMEs. But it may also serve a useful purpose in preventing credit from overheating.
Private sector credit growth last year was substantial, which was understandable after two to three years of negative growth, but 30% credit growth cannot be sustained annually. The monetary target is something like 14–15% credit expansion annually, and measures such as reduced Loan-to-Value (LTV) ratios for vehicle financing and newly introduced LTV ratios for gold pawning should help bring that under control.
First Capital expects higher interest rates this year, with around another 100 basis points from current levels, alongside a weaker rupee that can be kept to around 5% depreciation. Capital markets will feel some near-term pressure, but we still believe the market is broadly undervalued.
The banking sector, for instance, is trading below book at around 5–6 times earnings, which offers real potential. Investors should be selective: shorter-term fixed income now, and value stocks for the longer term.
While optimism is returning, significant vulnerabilities still remain. What are the biggest risks that could derail Sri Lanka’s recovery story, and where should businesses and investors remain cautious?
The single biggest factor is policy consistency.
We have never had a sustained period of policy consistency in this country. Whenever there has been a change of government, and sometimes even before that, policy has been reversed. Investors want to be able to take a 5–10 year investment horizon and make decisions within a stable framework. Constant course changes every one to two years make that impossible.
The loosening of energy pricing during the Middle East crisis is one live example. Energy pricing is no longer reflective of current market conditions, and the government is losing money as a result.
Investors want to see a government say something, commit to it, and remain on that trajectory for a meaningful period without shifting direction.
There is still some doubt as to whether that level of policy consistency will follow through for the duration of this government’s term. The SOE reforms remain an area where we have fallen short relative to the rest of the IMF programme, and that needs to be addressed.
With taxation, constant adjustments to Value Added Tax (VAT) and the Social Security Contribution Levy (SSCL) are an absolute deterrent for investors looking to enter the country.
Our request to the government is straightforward: be consistent through economic cycles. A great deal of what has been done so far has been right. The task now is simply to continue it.
“Energy must be purchased and priced in a manner that reflects underlying market realities and avoids excessive fiscal burdens. Failing to do so risks adding further pressure to public finances at a time when broader macroeconomic challenges remain, while also distorting the market signals needed for efficient resource allocation.”
From an investment perspective, where do you see the strongest opportunities emerging in Sri Lanka over the next 3–5 years? Which sectors or trends do you believe could shape the country’s next growth cycle?
From a capital markets perspective, I remain bullish on several sectors for the long term.
The first is tourism, hospitality, and leisure. This sector has immense potential that we are not harnessing properly. We had a record number of tourists, close to 2.5 million, which was one of the best years on record. But earnings were down 20%.
Having more tourists while making less money means the revenue model needs attention. Despite that, I believe Sri Lanka offers something that no other country can match within such a small landmass, and if we get that offering right, it is very difficult to compete with.
The second is construction and real estate. These markets have been fairly stagnant throughout the crisis, across roughly six to seven years. We are now seeing significant new developments, including three large apartment projects at Port City, and growing demand for condominiums in and around Colombo, with prices rising accordingly.
In a typical economic cycle, declining interest rates drive a stock market recovery first, followed by a real estate boom. We appear to be entering that phase.
Notably, around 40–50% of real estate purchases are reportedly coming from expatriates and foreign buyers, which is a meaningful and positive shift.
The third area is anything related to exports: manufacturing, digital industries, IT and BPO, and renewable energy.
We have a fundamental imbalance in our trade account, with imports running at roughly twice the level of exports, and that needs to be corrected.
Renewable energy is particularly interesting because if generation exceeds domestic requirements, surplus energy could itself become an export.
The fourth, and my personal favourite, is the banking sector. Even though credit growth will be more constrained this year and balance sheet expansion will be slower than last year, the banks are well positioned.
Non-performing loans (NPLs) are low, net interest margins (NIMs) are high, and as an asset class the sector remains underpriced. It offers investors a genuine opportunity to ride that cycle.
Looking ahead, what trajectory do you believe Sri Lanka is currently on? Are we positioning ourselves for sustainable long-term growth, or is this still a narrow window that could easily be lost without the right decisions and reforms?
We are at an inflection point. Having moved from crisis to recovery, we need to commit to a genuine growth story or slip back to where we were.
I firmly believe we can do this. I believe the government currently in power, and those that follow, will broadly stick to the right formula. What I see lacking in that formula is a sufficient commitment to driving growth.
We are not investing enough to fuel it. Over the last three years, the budget has allocated anywhere between Rs. 1.2 trillion and Rs. 1.5 trillion for capital expenditure, yet in practice we have probably spent fewer than Rs. 500 billion of that in each of those years.
While that helped keep the budget deficit in check, the consequences will be felt two to three years from now in the absence of roads, bridges, infrastructure, and renewable power investment.
There is also some confusion about who owns the responsibility for driving growth. The central bank’s mandate is price stability and financial system stability, not growth.
Growth is the responsibility of Sri Lanka as a whole: the private sector, the public sector, and the government working within the right policy framework.
We need to find ways to achieve 6–7% growth. At that rate, we would double the size of this economy in under 10 years.
That is the only sustainable path forward, and it requires deliberate investment, not simply a conducive environment.
We’ve seen capital return across sectors, from equities and tourism to real estate and private investment. What do you believe is driving this shift in sentiment?
The equity market was undervalued coming out of the crisis, trading at around 7x price-to-earnings (P/E) and below book value. That was an obvious opportunity, and much of that undervaluation has since been priced in.
We are now just over 10x earnings, against a historical average of around 12x and a peak of 14x. The straightforward gains have been made.
At the same time, fixed-income yields have grown more attractive. A 12% return on a fixed-income instrument nets around 7.5% after tax, which is a meaningful, lower-risk alternative for investors unwilling to take equity risk in an uncertain global environment.
So we are seeing reallocation towards fixed income and real estate. Real estate is traditionally an emotional asset class for Sri Lankans; diaspora buying has picked up significantly, and new developments are coming through.
During uncertain times, investors move towards what they are comfortable holding. If the global situation resolves and oil stabilizes, equities will be attractive again.
Are you seeing a psychological shift taking place with the economy today, and how important is sentiment in shaping the country’s next phase of growth?
Financial literacy, which in Sri Lanka remains quite low, is one reason why our markets are more sentiment-driven than fundamentals-driven.
But I am seeing a shift for the better. There is more independent research available now, and the information is accessible to anyone who wants it.
At First Capital, we publish all our research free of charge, not only for our clients but for every Sri Lankan. High-quality, impartial research is available, and that will help investors make better decisions over time.
There are also voices on social media making claims about individual stocks that require caution. The quality of the source matters enormously.
Sentiment is short-term, while fundamentals always outperform over the long run. I would always advise investors to take at least a medium-term view, investing with a 3–5 year horizon rather than looking for a return in three to six months.
Long-term choices, grounded in fundamentals, are what deliver results.
Foreign investors do not come to Sri Lanka for a three-month play. Businesses come here for five years or longer. Matching that mindset domestically is important.
The fundamentals of Sri Lanka remain strong, and I genuinely believe in the story of where this country can get to. We have been an unlucky nation in many respects, and a great deal has happened beyond our control.
But we have also proven to be exceptionally resilient, and I have no doubt we will overcome the current pressures as well.