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Global economy
2025
The global economy remained more resilient than expected in 2025, continuing to expand despite major shifts in the global trading system, heightened policy uncertainty, tighter financial conditions, and ongoing geopolitical tensions. Disinflation across advanced economies allowed several central banks to pause or begin easing monetary policy, supporting consumption and investment, while global trade volumes recovered modestly amid supply chain normalization and resilient demand for technology-intensive goods and services.
China’s growth in 2025 reached 5.0% y-o-y, supported by expansion in industrial production particularly in equipment and high-tech manufacturing and strengthening export demand. In India, GDP growth accelerated to 7.8% y-o-y by Q3 FY2025/26, driven by robust private consumption, strong performance in financial and digital services, and improved investment activity. Japan’s growth is estimated at 1.1% in 2025, reflecting a recovery in household consumption and capital spending, as well as front-loading of exports. After two subdued years, euro area growth rebounded to an estimated 1.4% in 2025, supported by front-loaded exports ahead of postponed U.S. tariffs and resilient domestic demand.
Despite challenges including front-loaded imports, weak consumption early in the year, a government shutdown, and persistent inflationary pressures, the U.S. economy demonstrated notable resilience in the first nine months in 2025. However, growth in Q4 slowed down due to impacts to spending and investments from the government shutdown.
Global economy outlook
2026
Global growth is projected at around 3.3% in 2026. Growth in advanced economies is expected to moderate, reflecting slower momentum compared to recent years, while emerging market and developing economies are forecastto expand at a relatively faster pace. The outlook remains subject to downside risks, including lingering trade tensions, elevated policy uncertainty, geopolitical pressures, and a potential slowdown in global demand.
U.S. economic growth is projected at 2.4% in 2026, supported by extended tax incentives and the reopening of the federal government. However, elevated tariff levels are expected to dampen consumer spending and private investment, partially offsetting these supportive factors.
In the Euro Area, the effects of trade front-loading is expected to dissipate and higher U.S. tariffs will increasingly weigh on export performance, growth is expected to slow to 1.3% in 2026. Export competitiveness is likely to be further constrained by higher energy costs and the appreciation of the euro.
China’s growth is projected to moderate to 4.5% in 2026, reflecting weak consumer confidence, a prolonged downturn in the property sector, and softening labor market conditions. Nevertheless, stronger fiscal support, resilient export performance, and improving investor sentiment will be mitigating factors.
Sri Lankan economy
Politics: Local government elections in May 2025, were the first major polls following the 2024 national elections. National People’s Power continued to consolidate its power securing 43% of votes and 3,927 council seats across 339 local authorities.
Fiscal performance: The IRD, Customs, and Excise departments significantly outperformed expectations in 2025, boosting tax revenues. IRD recorded a historic high of Rs. 2,203 Bn., while Customs collected Rs. 2,558 Bn., exceeding targets mainly due to strong vehicle import demand. Lower capital expenditure also improved the primary surplus and reduced the budget deficit. Tax revenue is expected to strengthen through enhanced VAT and improved compliance measures. The Government has also introduced a supplementary budget of Rs. 500 Bn. to meet the additional expenditure requirements arising from damages caused by Cyclone Ditwah in 2025. As a result, key fiscal parameters, including the primary balance and expenditure targets, are expected to be breached in order to accommodate these spending needs. However, overall fiscal stability and the reform momentum is expected to be maintained throughout 2026 due to existing fiscal buffers.
IMF – EFF: The third review by IMF under the EFF was completed in March 2025. Sri Lanka was able to draw USD 334 Mn. in financial support as part of this review. The Fourth Review was completed by the IMF Executive Board in July 2025 and cleared access to USD 350 Mn. disbursement. In December 2025, Sri Lanka secured emergency financing of around USD 206 Mn. from the IMF under the Rapid Financing Instrument to help meet urgent balance of payments needs following the Cyclone.
U.S Tariff: In April 2025, the United States announced a new reciprocal tariff framework that included a tariff of 44% on Sri Lanka. Following diplomatic negotiations in August
2025 the tariff was officially set at 20%, placing Sri Lanka on par with competitors, which also faced similar tariff levels. The garment and rubber sectors, which are heavily dependent on the US market, faced the greatest risk of reduced competitiveness and potential export declines.
Cyclone Ditwah: In November 2025, Cyclone Ditwah made landfall in Sri Lanka, triggering torrential rainfall, widespread flooding, and severe landslides across large parts of the island. Approximately 2 million people were affected, with over 600 fatalities reported, making it one of the most destructive climate-related disasters in recent years.
The direct physical damages are estimated at around USD 4.1 Bn. equivalent to nearly 4% of GDP with critical infrastructure such as roads, bridges, railways, housing, and agricultural assets among the hardest hit. The disaster caused significant disruptions to transport and logistics networks, curtailed agricultural production, and displaced a large number of households, exacerbating food security and livelihood challenges. In addition, reconstruction and relief needs have placed considerable pressure on public finances, necessitating higher government spending and the reallocation of budgetary resources. The event has further underscored Sri Lanka’s vulnerability to climate-related shocks and the importance of strengthening disaster preparedness, climate-resilient infrastructure, and risk-financing mechanisms.
Rupee depreciation: The Sri Lankan rupee depreciated by 5.9% against the US dollar in 2025, driven by a rebound in foreign exchange demand from rising imports, particularly vehicles after restrictions were eased. Dollar demand also increased as the CBSL purchased dollars to meet higher foreign debt servicing needs and strengthen reserves.
Inflation: Early 2025 saw continued deflation with headline inflation in negative territory. However, inflation returned to positive territory since mid-2025 driven by Non-food inflation. The year ended with inflation at 2.1% y-o-y with average inflation recorded at -0.5% for 2025.
Economic variables comparison
Gross Domestic Product (GDP)
2025
GDP grew by 5.0% between January – September 2025 driven by contributions from industrial and services segments. The rebound in construction activities along with higher contributions from financial services and insurance was underpinned by strong credit growth during 2025. Central Bank of Sri Lanka projects around 4.5% growth for 2025, indicating a continuation of the post-crisis recovery despite external challenges like trade tariffs and global headwinds. However, this growth momentum was impacted slightly in the final quarter due to disruptions caused by Cyclone Ditwah in late November.
2026
The CBSL expects Sri Lanka economy to grow around 4-5% in 2026. This reflects expectations of stronger activity driven by increased government capital expenditure in reconstruction following Cyclone Ditwah.
Inflation
2025
Inflation remained subdued in 2025, with price levels largely below the Central Bank’s target throughout the year. Headline inflation was negative in the early months before gradually moving toward positive territory as the year progressed.
2026
Inflation in Sri Lanka is expected to gradually rise toward the CBSL’s 5% target by 3rd quarter 2026.
Interest rates
2025
The CBSL continued to maintain an easing monetary policy stance by reducing the overnight policy rate by 25 basis points in May 2025. The CBSL has since maintained its policy stance, as credit expansion remained robust during 2025. The CBSL continues to closely monitor inflation dynamics and developments in the external sector while navigating evolving domestic and global conditions. Meanwhile, interest rates remained broadly stable during the year, supported by a strong Treasury cash buffer. Nevertheless, yields on government securities showed an upward movement toward the latter part of 2025, reflecting the impact of Cyclone Ditwah and the substantial fiscal resources required for reconstruction efforts.
2026
Policy interest rates are expected to remain relatively stable in 2026, as the CBSL adopts a cautious approach, closely monitoring developments in inflation, private sector credit, and the external sector.
Credit to private sector
2025
Credit to the private sector accelerated markedly in 2025 compared to 2024, with y-o-y growth rising steadily throughout the year, reflecting strong loan demand amid lower interest rates and improved economic conditions. Net credit disbursed to the
private sector for the year was Rs. 2.056 Tn.
2026
Private sector credit is expected to continue growing in 2026, building on strong momentum from 2025 as economic activity and borrower confidence improves. Private sector credit to GDP continues to remain below pre-crisis levels.
External sector
2025
In 2025, Sri Lanka’s external sector remained resilient recording consecutive current account surpluses, supported by robust foreign exchange inflows. Workers’ remittances reached record levels, surpassing USD 8 Bn. in 2025. Tourist arrivals also hit historic highs, despite only a marginal improvement in earnings to USD 3.2 Bn. in 2025. Merchandise exports grew robustly driven by increased contribution from Food Beverage & Tobacco, Tea and Apparel segments. Imports also grew sharply with the easing of import restrictions, particularly on vehicles. Gross official foreign reserves stood at USD 6.8 Bn. at end-2025, supported by forex purchases of the CBSL and other inflows from multilateral agencies reflecting strengthened external buffers.
2026
Looking ahead, the external sector may face pressure from increased imports driven by demand for construction materials required for the reconstruction of infrastructure damaged by the Cyclone Ditwah. Exports could also encounter headwinds due to evolving global demand conditions and tariff-related pressures in key markets.
Exchange rate
2025
In 2025, the Sri Lankan rupee weakened against the US dollar, reversing the strong appreciation recorded in the previous year. Over the course of the year, the currency depreciated by 5.9 percent against the USD. This depreciation was driven by higher demand for foreign exchange to meet increased foreign debt repayments and active reserve accumulation by the CBSL, which reached USD 6.8 Bn. at end – 2025. Downward pressure was further fuelled by robust credit growth and a rebound in import demand following the easing of vehicle restrictions.
2026
Moving into 2026, import demand is expected to increase in line with the overall economic recovery, alongside
higher demand for intermediate and investment goods required for reconstruction efforts. External debt repayments are projected to remain elevated, albeit at lower levels than in 2025.
The Bank’s performance compared to the Banking sector
Table 03
| Banking Sector (*) (End September 2025) |
Commercial Bank (End December 2025) |
Market Share % Commercial Bank (2025) |
Banking Sector (*) (End December 2024) |
Commercial Bank (End December 2024) |
Market Share % Commercial Bank (2024) |
|
| Assets and liabilities (Rs. Tn.) | ||||||
| Gross loans and advances to other customers | 13.152 | 2.028 | 15.42 | 11.477 | 1.487 | 12.96 |
| Deposits | 19.669 | 2.609 | 13.26 | 17.969 | 2.237 | 12.45 |
| Total assets | 24.501 | 3.258 | 13.30 | 22.147 | 2.790 | 12.60 |
| Profitability (%) | ||||||
| Return on Assets (ROA) – before tax (***) | 2.51 | 2.96 | 2.59 | 3.56 | ||
| Return on Equity (ROE) (***) | 17.49 | 19.51 | 17.39 | 22.06 | ||
| Net Interest Margin (NIM) | 4.34 | 4.51 | 4.35 | 4.27 | ||
| Cost to income ratio (excluding taxes on financial services) (**) |
37.30 | 29.66 | 45.32 | 33.94 | ||
| CASA ratio | 31.57 | 39.65 | 31.23 | 38.07 | ||
| Asset quality (%) | ||||||
| Stage 3 loans (a) to total loans and advances (b) | 11.00 | 6.34 | 12.69 | 8.59 | ||
| Net Stage 3 loans (c) to total loans and advances (b) |
4.97 | 1.54 | 5.64 | 2.76 | ||
| Stage 3 impairment coverage ratio (d) | 55.46 | 73.50 | 54.13 | 64.61 | ||
| Total impairment coverage ratio (e) | 7.74 | 6.13 | 8.46 | 6.89 | ||
| Capital adequacy (%) | ||||||
| Core capital (Tier 1 capital) adequacy ratio | 15.255 | 13.035 | 16.744 | 14.227 | ||
| Total capital adequacy ratio | 18.576 | 16.698 | 20.268 | 18.142 | ||
| Liquidity (%) | ||||||
| Liquidity Cover Ratio – all currencies | 259.99 | 288.58 | 313.84 | 454.36 | ||
| Gross loans and advances to total deposits | 66.87 | 77.73 | 63.87 | 66.48 |
Update to the Operating Context
The U.S. attack on Iran in late February 2026 triggered an immediate reaction in global energy markets, with Brent crude prices rising by roughly 10–13% within days as investors priced in the risk of supply disruptions, particularly through the Strait of Hormuz, a critical route for global oil shipments. This type of price response is consistent with historical patterns observed during major geopolitical crises in the Middle East, such as the 1990–1991 Gulf War and the 2003 Iraq War, where oil markets reacted rapidly to perceived risks to supply. While it remains too early to assess the full economic implications for Sri Lanka, higher global oil prices are likely to generate inflationary and balance of payment pressures through increased fuel and transportation costs. Additionally, prolonged regional instability could indirectly affect key external income sources, including tourism and worker remittances, although the magnitude of such effects will depend on the duration of the conflict and broader global economic conditions.