Top economists and market analysts from Standard Chartered Bank, one of the biggest and oldest global banks in Sri Lanka, recently shared their outlook for the economy, highlighting the progress, challenges and global headwinds that could impact the recovery. Sri Lanka’s economic trajectory shows signs of stabilization, but sustaining momentum will require policy discipline, investor confidence, and continued structural reforms. The IMF programme remains a crucial anchor, and the challenge ahead will be balancing growth with debt sustainability amid global uncertainties.
Sri Lanka’s Debt Reduction Timeline
Sri Lanka is on track to reduce its debt-to-GDP ratio to 100% by 2026-27, two years ahead of the IMF’s 2029 target. The debt trajectory reflects improved economic growth, currency stabilization, and adherence to the IMF programme, according to Saurav Anand, Economist for South Asia at Standard Chartered Bank. The bank expects fiscal consolidation and external sector stability to support the country’s debt sustainability over the medium term.
“Sri Lanka performed remarkably well in the last month, meeting nearly all its structural benchmarks according to the third IMF review. Our growth forecast for Sri Lanka is around 3.5% for this year and the next two years. There is potential for growth to exceed this, especially given the significant catch-up needed after recent setbacks,” Anand said.
“To provide context, Sri Lanka’s GDP contracted by approximately 10% in real terms over 2022 and 2023. For 2024, the forecast is a growth of around 5%, which would still be below pre-crisis levels. If we grow by 3.5% next year, we will return to 2021 levels, still below the trend growth rate of around 3%. There’s room to catch up,” he added.
Investment will be a key driver of growth, supported by a rebound following sharp declines in industrial investment over the past two years. Despite this, Sri Lanka’s real GDP remains 35% below 2019. The IMF estimates long-term growth of around 3% through 2029-30, but Standard Chartered projects a slightly higher trajectory over the next four to five years.
Fiscal Performance and Revenue Targets
According to Anand, although revenue collection risks persist, Sri Lanka’s fiscal deficit target remains within reach. The government has exceeded fiscal expectations in the past two years, and achieving the current target may require adjustments to capital expenditure. He expects fiscal consolidation to continue, supporting the reduction of public debt.
“Sri Lanka’s debt-to-GDP ratio should be below the IMF’s target by 2029, with improvements continuing after 2027. However, we are still far from the debt levels seen in 2019, and any gains made over the next few years will need to be secured going forward. Sticking to the IMF programme will be crucial,” Anand said.
External Sector and Foreign Reserves
Anand opines that the external sector has stabilized following debt restructuring. Repayment obligations are manageable through 2027, with approximately $600 million in annual payments. Payments will rise to around $1 billion in 2028 and 2029 before peaking above $3 billion in 2036. He projects that foreign exchange reserves will reach the IMF’s $7 billion target for 2025. If the IMF completes the remaining reviews and multilateral inflows of approximately $1.7 billion are secured, Sri Lanka can meet its external obligations through most of 2025, Anand said.
Exchange Rate and Trade Deficit Risks
According to Divya Devesh, Head of ASA FX Research of Standard Chartered Bank, the Sri Lankan rupee will remain stable, with only a mild depreciation projected. Anand notes that tourism and remittances provide crucial support to the current account. However, the trade deficit will widen as the government eases import restrictions.
With global tensions mounting, energy and commodity prices will remain closely watched.
Kaushik Rudra, Global Head of Fixed-Income Research and Head of Asia Research at Standard Chartered Bank, forecasts global oil prices at $77 per barrel in 2025. Supply constraints will be a key determinant, while demand will remain stable. U.S. policy changes could pressure significant oil producers to increase supply, but structural constraints may limit expansion.
Rudra also expects global inflation to moderate, though central banks will likely face challenges managing price levels. Trade policies, including potential tariff measures under a second Trump administration, could introduce inflationary pressures in the U.S. while having deflationary effects in parts of Asia.
Interest Rates, Inflation and Monetary Policy Outlook
Interest rates in Sri Lanka are expected to remain stable, with the Central Bank likely holding its policy rate at 8% in the year’s second half. However, Devesh highlighted risks associated with external factors, including oil prices and global trade tensions, remaining key risks. However, Sri Lanka’s continued adherence to the IMF programme should provide macroeconomic stability.
Inflation will remain subdued due to adjustments in fuel and electricity prices and remain negative through the first quarter before rising in the second half, potentially exceeding 5% by the fourth quarter. While short-term inflation fluctuations could breach the Central Bank’s target, annual inflation could stabilize between 5-6% over a one-year horizon, with an average closer to 4%. According to Standard Chartered, the Central Bank will likely maintain its policy rate at 8% through the year’s second half.
However, Bingumal Thewarathanthri, Chief Executive of Standard Chartered Bank Sri Lanka, struck a cautious chord regarding monetary policy.
“If there are further drastic rate cuts without stimulating the economy, it could lead to more private sector credit, which might trigger more imports—something we’ve seen in the past,” he said.
“While asset import demand isn’t a major concern at the moment, it’s important to note that it’s not necessarily inflationary. The key is balancing demand, imports, and external factors. Also, Sri Lanka is in the top 40 of the U.S. trade deficit basket—ranked 34th. Although Sri Lanka’s trade with the U.S. is small, it has a larger trade deficit, which is something to keep an eye on,” he said.
Foreign Direct Investment and Policy Stability
Foreign direct investment (FDI) in Sri Lanka remains low, with most inflows comprising small-scale transactions averaging $4 million per project. Thewarathanthri noted that Sri Lanka has struggled to attract large-scale investments, with the last significant private-sector-led inflows occurring in 2012 and 2017-18. Policy consistency and regulatory stability remain critical to improving investor confidence and increasing FDI inflows.
“Looking at Sri Lanka’s FDI history over the last 40 years, we’ve accumulated around $20 billion. The highest private-sector-led investment we’ve seen was in 2012 with the Shangri-La investment, and in 2017-2018, the Hambantota Port investment was another notable large project. However, these big-ticket investments have been rare. While we continue to debate the improvement of the software business, we’re currently ranked 100th in this sector. Stable policies and consistency are key to growth in this area. Look at the top 50 countries in the software business. You’ll see that consistency is a significant factor, and countries like Vietnam, which is ranked 17th, have benefited from this stability.
We must focus on policy stability for Sri Lanka to attract significant FDI. This includes having a single window for trade and investments, reducing turnaround times, and addressing challenges like land access and capital availability. But above all, policy consistency is the foundation. We can’t afford sudden policy changes, as we’ve seen in the past with political shifts. A continuation of policy is crucial. The Port City project is a good example—we mustn’t alter its laws and regulations midway. In Sri Lanka, we’ve experienced drastic policy changes every five years,” Thewarathanthri said.
Tariff Structure and Trade Competitiveness
Sri Lanka’s high para-tariff rates continue to hinder trade competitiveness. Anand highlights that the country has one of the highest para-tariff structures in South Asia, making intermediate exports less competitive.
“A lot will depend on how Sri Lanka capitalizes on the opportunity. As at the end of 2024, Sri Lanka and China had similar tariff levels, but recently, Sri Lanka has been hit with an additional 20% tariff, making the rates higher. However, the key is how Sri Lanka positions itself forward,” Anand said.
He noted that countries like Vietnam and Mexico benefited in the past, and now Sri Lanka will need to reconsider its tariff structure to do the same. This has garnered attention in the current IMF programme and the recent World Bank report, highlighting that Sri Lanka has one of the highest para-tariff rates in South Asia. Efforts are underway to address this, as Sri Lanka’s intermediate exports are currently lower compared to other countries due to these tariffs. Tariffs on imports make it challenging to re-export and add value, as the 20% tariff increases the cost of producing goods for export. Ongoing work is to review and adjust the tariff structure with an established tariff commission. Over the next two to three years, we may see significant changes in this area. Additionally, Sri Lanka has the infrastructure, particularly ports, to handle increased capacity, which could support its efforts to leverage these tariff changes,” Anand noted.
Efforts are underway to address this through a tariff commission. While Sri Lanka’s ports and infrastructure provide a logistical advantage, capitalizing on these assets requires a stable policy environment.
Port City Colombo
On attracting big-ticket investments to the Port City, Thewarathanthri noted that Sri Lanka needs to be patient. “The key is continuous improvement,” he said. “Generally, International Financial Centers (IFCs) take at least 10 years to develop fully. We’ve spent considerable time refining the framework, and now the framework and commission are in place. Even Singapore’s Marina Bay Sands took time to gain momentum. Each year, we must enhance what we offer to investors, and with time, these investments will undoubtedly gain traction”.
Vehicle Imports and Market Demand
Demand for vehicle imports has been lower than expected due to high taxation and rising global prices. Thewarathanthri notes that while pent-up demand could drive imports, the overall impact on the trade deficit has been more muted than initially projected.
The Global Economy
Global economic growth is expected to remain subdued, with a slight moderation from last year, according to Kaushik Rudra, Global Head of Fixed-Income Research and Head of Asia Research at Standard Chartered Bank. While global growth is projected at around 3.1%, Asia remains the primary driver, with strong performances from ASEAN and India. Other emerging markets are struggling, with the Middle East being a notable exception.
“The U.S. has been a standout performer, outpacing Europe and China in relative terms. This has reinforced the ‘U.S. exceptionalism’ narrative, where higher growth, inflation, and interest rates have strengthened the U.S. dollar,” Rudra said. “The interest rate differential between the U.S. and other economies has kept the dollar strong, forming the foundation of our global outlook.”
Europe, meanwhile, remains a weak spot. Several major economies, including Germany and France, have struggled with low growth, while the manufacturing sector—particularly the auto industry—has faced structural challenges. Fiscal constraints and the ongoing Russia-Ukraine war have further limited Europe’s ability to stimulate growth. The region’s export sector remains bright, but potential U.S. tariffs could pose additional risks.
“Europe has been on the brink of recession for several years,” Rudra noted. “If fiscal policies shift in response to geopolitical pressures or trade risks, it could alter the economic trajectory. Relaxing fiscal rules in countries like Germany could increase spending, impacting debt levels and European bond markets.”
China’s economy, he added, has struggled to regain momentum, with real estate and business sentiment weighing on growth. While exports have been a lifeline, the prospect of further U.S. tariffs adds to the uncertainty.
“China’s fiscal policy remains its most effective tool in the near term,” Rudra said. “Authorities underspent last year, but increased spending could help offset trade pressures.”
U.S. Policy and Market Implications
The U.S. economy has remained resilient, with strong consumer spending and a robust services sector. However, policy decisions—particularly trade measures—could introduce new risks.
“U.S. tariffs could have inflationary effects, which in turn could impact domestic growth,” Rudra said. “Labour policy is another concern. Reductions in immigrant labour could push wages up and disrupt sectors like retail and logistics, adding pressure to inflation.”
Markets have already begun pricing in potential risks, with signs of stress in equity markets and falling bond yields reflecting concerns over a slowdown.
“For the Federal Reserve, the outlook remains uncertain,” he said. “While U.S. growth remains stable and the labour market strong, inflation is moderating but still above target. The market has gone from expecting a December rate cut to pricing in multiple cuts this year, which we believe is excessive. Growth concerns may be overstated, and we anticipate the market will revise its expectations accordingly.”
The broader debate on inflation and growth will continue, Rudra added, with volatility persisting as economic data fluctuates.
“Emerging markets remain price takers rather than price setters,” he said. “What happens in the U.S., Europe, or China will dictate the global outlook, making emerging markets more vulnerable to external shocks.”
Sri Lanka’s Economic Recovery
Sri Lanka’s economic recovery remains dependent on policy stability. However, achieving sustained growth and securing long-term gains will require consistent execution of economic reforms, fiscal adjustments, and trade policy modifications to attract investment and improve competitiveness.
“The overall signal is positive. The country is stable, with an ongoing IMF programme, and we are continuing economic policies with some flexibility,” Thewarathanthri said. “This sends a strong signal to investors. Additionally, it’s essential to recognize that after emerging from a default situation, FDI isn’t the first thing to come. First, stability is needed, followed by attention to vulnerable communities and boosting growth. As these elements fall into place, FDIs will follow”.