In a cautiously optimistic outlook, the Central Bank of Sri Lanka (CBSL) has projected a 4.5% economic growth rate for the year 2025, signaling a steady recovery from the island nation’s recent financial crisis. The announcement was made in the August 2025 Monetary Policy Report, released earlier this week, and marks a pivotal moment in Sri Lanka’s journey toward macroeconomic stability and sustainable development.
A Turnaround Story in Motion
The 4.5% growth forecast comes on the heels of a 5% expansion in 2024, largely driven by a rebound in construction, tourism, and services. The CBSL attributes the continued momentum to improving domestic demand, easing inflationary pressures, and a more stable exchange rate environment.
The report highlights that deflationary trends—recorded since September 2024—are expected to taper off by Q3 2025. Headline inflation, which reached -4.2% in February 2025, is projected to normalize and hit the target of 5% by mid-2026. Core inflation is also expected to gradually rise and align with headline targets, reflecting a healthier demand landscape.
Central Bank’s Policy Stance
The CBSL has maintained a relaxed monetary policy stance, citing subdued demand-driven inflation and the need to support economic recovery. Under the Flexible Inflation Targeting (FIT) framework introduced in 2023, the bank continues to use the Overnight Policy Rate (OPR) as its primary tool for monetary communication and intervention.
The August report emphasizes transparency and accountability, detailing the rationale behind recent policy decisions and outlining risks to the economic outlook. Among the key concerns are evolving global uncertainties, including geopolitical tensions, commodity price volatility, and climate-related disruptions.
Sectoral Drivers of Growth
Several sectors are expected to contribute significantly to the 2025 growth trajectory:
-
Tourism: With international arrivals rebounding and new promotional campaigns underway, tourism is poised to be a major growth engine.
-
Construction & Infrastructure: Government-led infrastructure projects and private sector investments are reviving the construction sector.
-
Agriculture & Manufacturing: Targeted support and improved access to credit are helping these sectors recover from supply chain disruptions.
-
Digital Economy: The CBSL and Ministry of Finance are jointly exploring digital finance initiatives to boost financial inclusion and innovation.
Global Context and Challenges
While the domestic outlook is positive, Sri Lanka’s growth prospects remain vulnerable to external shocks. The global economic slowdown, rising interest rates in developed economies, and trade imbalances could pose headwinds. The CBSL has urged policymakers to remain vigilant and continue structural reforms to enhance resilience.
The August report also underscores the importance of fiscal discipline, debt sustainability, and improved governance. Sri Lanka’s recent IMF-backed reform program has laid the groundwork for macroeconomic stabilization, but continued commitment is essential.
Looking Ahead: A Roadmap for 2025–2030
Complementing the CBSL’s forecast, a separate report by ODI Global and the Centre for Poverty Analysis (CEPA) outlines a transformative growth roadmap for Sri Lanka through 2030. It calls for:
-
Deepening global trade integration
-
Boosting exports and foreign direct investment
-
Strengthening poverty reduction policies
-
Enhancing state capacity and political consensus
Together, these strategies aim to ensure that Sri Lanka’s recovery is inclusive, sustainable, and resilient.
Sources: Central Bank of Sri Lanka, CBSL Market Operations Report, ODI & CEPA Report
