Sri Lanka’s latest business survey reveals a recovery that is progressing, but remains vulnerable to external shocks, rising costs and persistent structural constraints. While firms reported stronger activity and investment during the second quarter of 2026, the decline in business confidence highlights the fragile foundation beneath the country’s improving economic indicators.
The Central Bank of Sri Lanka’s Business Condition Index fell from 104 in the first quarter to 101 in the second quarter, reflecting heightened uncertainty linked to the conflict in the Middle East. The Index, based on the opinions of around 100 firms representing the composition of GDP, remained above the neutral level of 100, but the decline indicates that optimism is weakening even as activity improves.
The central concern is not an outright collapse in business conditions, but the widening gap between current performance and future confidence. Firms reported that Industry and Services continued to drive sales and demand volumes, while Agriculture remained broadly around the neutral threshold. This uneven performance suggests that the recovery is not being shared equally across the economy.
The second-quarter results also show that businesses are operating in a more expensive environment. Input and output prices recorded notable year-on-year increases across Agriculture, Industry and Services. Rising input prices can increase production costs, while higher output prices may weaken consumer purchasing power and limit the ability of firms to expand sales.
The pressure is particularly relevant to a country attempting to sustain growth after a severe economic crisis. If businesses respond to rising costs by reducing production, postponing investment or passing increases on to consumers, the recovery could face renewed pressure from both the supply and demand sides.
Credit demand increased across all three sectors, indicating that firms require additional financing for operations and expansion. Hitherto the survey also identified higher-than-expected market lending rates and balance-sheet constraints among the main reasons some firms considered credit conditions tight.
Although credit accessibility was described as broadly normal, the distinction between access and affordability is important. A business may be able to obtain financing while still finding the cost of borrowing too high to justify investment. Similarly, firms with weakened balance sheets may remain unable to borrow sufficiently, even when banks are willing to lend.
Labour availability represents another unresolved obstacle. Both skilled and unskilled labour availability are expected to remain below the neutral threshold in the third quarter. This could restrict production, raise operating costs and delay expansion plans, particularly in sectors where firms are already reporting stronger demand.
The outlook is more positive for the third quarter. Firms expect the Business Condition Index to rise to 107 as global tensions ease. Demand and sales volumes are projected to expand year-on-year, led by Industry and Services, while capacity utilisation and investment sentiment are expected to improve.
Most firms in Industry and Services reportedly plan to invest for expansion. However, the ability to convert this intention into actual investment will depend on borrowing costs, labour availability, input prices and the stability of the external environment.
The survey therefore presents a recovery with clear momentum, but also exposes the risks that could prevent that momentum from becoming sustained growth. Sri Lanka’s challenge is no longer simply to restore business activity, but to ensure that improving confidence is supported by affordable finance, adequate labour, manageable costs and greater resilience to global disruptions.