By:Staff Writer
January 27, Colombo (LNW): Sri Lanka’s post-crisis economic recovery has drawn international praise, but new warnings from the International Finance Corporation (IFC) suggest that complacency poses a growing risk to the country’s IMF-supported stabilisation programme. While macroeconomic indicators in 2025 show clear improvement over 2024, the underlying foundations remain fragile and vulnerable to policy slippage.
Speaking at an investor forum last week, IFC South Asia Manager for Country Advisory and Economics Gregory Smith cautioned that Sri Lanka’s “remarkable” turnaround since the 2022 sovereign default could unravel quickly if reform momentum weakens. He warned that as economic pain fades from public memory, difficult but necessary policy choices are increasingly being pushed to the backburner.
The contrast between early 2024 and 2025 highlights the scale of recovery. In January 2024, inflation had only recently fallen from crisis peaks of 60–70%, debt restructuring was incomplete, and investor sentiment remained clouded by political uncertainty. By comparison, 2025 has delivered 10 consecutive quarters of positive growth, largely between 4-5%, with GDP per capita rebounding from roughly $3,800 at end-2023 to around $4,800.
Tourism and worker remittances have been the primary drivers of this stabilisation. Tourist arrivals surged from about 500,000 in 2021 to approximately 2.3 million in 2025, while remittances rose from $6 billion in 2023 to around $8 billion last year. These inflows helped Sri Lanka record its first current account surplus in 2023, though renewed deficits since then reflect rising demand rather than renewed weakness.
Yet Smith flagged areas where IMF-linked discipline risks softening. Foreign Direct Investment remains below 1% of GDP unchanged from 2024 underscoring lingering investor concerns around policy credibility and ratings recovery. Fiscal consolidation has improved revenues from a crisis low of 8% of GDP to about 15.6%, but capital expenditure has been squeezed to just 2.1% of GDP, raising concerns about long-term growth capacity.
External buffers have strengthened, with reserves rising from $3.5 billion at end-2023 to $6.8 billion in 2025, while central bank net foreign assets have turned positive. However, debt servicing remains a structural weakness: interest payments still absorb around 7.5% of GDP, nearly half of government revenue.
Smith warned that any deviation from the IMF programme would be immediately punished through higher short-term borrowing costs, reversing hard-won gains. He stressed that Sri Lanka needs at least a decade of uninterrupted macroeconomic stability to escape its crisis legacy.
As memories of fuel queues and income losses fade, the IFC’s message is blunt: without sustained public and political commitment to reform, today’s recovery could become tomorrow’s relapse.
