Amid rising global trade uncertainties and shifting geopolitical dynamics, Sri Lanka’s economic recovery appears to be on firm footing, supported by improved credit flow, rising tourism earnings, and stronger remittance inflows.
The Central Bank of Sri Lanka (CBSL) emphasized this encouraging economic outlook on Tuesday, downplaying the urgency for further monetary easing for now, despite growing external pressures such as the potential U.S. tariff hikes.
While the CBSL announced no change to its key policy interest rates—holding steady at 7.75%—the monetary authority placed greater focus on the ongoing growth momentum and economic stabilisation that followed months of painful reforms.
Governor Dr. Nandalal Weerasinghe, addressing the media after the latest Monetary Policy Review, said the decision was based on current economic indicators aligning well with CBSL’s forecasts. “As of now, we are moving in the right direction,” he said.
He reiterated that there is still room for future rate adjustments if required, especially depending on the outcome of negotiations with the United States over proposed tariff changes that could affect Sri Lankan exports.
“If expectations shift, we do have space to act,” he noted, adding that the CBSL is ready to implement both short-term and long-term strategies to manage any adverse impact from external shocks.
The CBSL noted that inflation remains on track to reach the 5% target, with signs of deflation easing and core inflation set to rise gradually, in line with recovering domestic demand. Recent trends in the Colombo Consumer Price Index (CCPI) have confirmed a positive direction, supported by growing credit flows and business activity.
Sri Lanka’s economy grew by 4.8% in the first quarter of 2025, and leading indicators suggest that this momentum will likely continue into the second half of the year. Broad-based credit expansion to the private sector—up 16.1% year-on-year—has been key to this rebound, helped by declining market interest rates following earlier rate cuts.
Dr. Weerasinghe assured that this growth is sustainable and not a sign of overheating, highlighting a notable shift in credit allocation away from State-Owned Enterprises (SOEs) toward the private sector.
Meanwhile, the external sector has shown resilience, despite a widening trade deficit. Foreign reserves remain stable, thanks to improved remittances and tourism receipts, as well as ongoing foreign exchange purchases by CBSL.
The recent disbursement of the fifth tranche of the IMF’s Extended Fund Facility in July further strengthens confidence.
CBSL concluded that while global policy uncertainty and trade disruptions pose future risks, it remains prepared to take necessary policy actions to anchor inflation expectations and sustain Sri Lanka’s economic recovery trajectory.
