By: Staff Writer
September 17, Colombo (LNW): Sri Lanka’s economic recovery is losing momentum, with second-quarter growth slowing to 4.2% from 5.1% in the first quarter, raising questions about the strength and sustainability of the expansion. The latest National Accounts Estimates released by the Department of Census and Statistics (DCS) show that the economy is growing, but at a progressively weaker pace, with agriculture contracting and services losing speed.
The 4.2% expansion in the second quarter of 2026 was the lowest quarterly growth rate since 2024. Real GDP at constant 2015 prices increased to Rs. 3,029,816 million from Rs. 2,908,570 million a year earlier. Nominal GDP rose 11.3% year-on-year to Rs. 8,254,176 million. However, the nominal increase, partly reflecting price changes, does not conceal the slowdown in real economic activity.
The composition of growth is particularly revealing. Services, which account for 52.7% of GDP at current prices, expanded only 2.7%, compared with 3.4% in the first quarter and 4.0% in the corresponding quarter of 2025. Industry, representing 25.9% of GDP, grew 7.3%, while agriculture, accounting for 8.4%, contracted 2.3%.
This uneven performance suggests that the recovery remains heavily dependent on selected industrial activities rather than broad-based demand. Construction expanded 13.9%, mining and quarrying grew 17.4%, and electricity, gas, steam and air-conditioning supply increased 6.8%. Manufacturing also expanded 3.2%, supported by higher activity in machinery, furniture, wood products, metals and non-metallic mineral products.
Hitherto several important manufacturing sectors contracted. Refined petroleum products declined 15.2%, rubber and plastic products fell 4.2%, while textiles, wearing apparel, leather and related products contracted 1.4%. These weaknesses are significant for an economy seeking stronger exports, industrial employment and foreign-exchange earnings.
The DCS attributed part of the slowdown to uncertainty arising from Middle Eastern tensions and their impact on crude oil supply. Tourism activity was also weaker, while accommodation and food services, financial services and insurance recorded lower growth than in the second quarter of 2025.
Agriculture delivered the sharpest warning. Freshwater fishing and aquaculture plunged 61%, paddy cultivation fell 15.1%, and sugarcane, tobacco and other non-permanent crops declined 14.7%. Marine fishing and aquaculture contracted 10.1%, while tea and rubber also recorded declines. These figures expose the vulnerability of rural incomes and food production to sector-specific disruptions.
The services slowdown is equally important. Although IT programming and consultancy grew 10%, insurance expanded 8% and financial services 7.7%, wholesale and retail trade grew only 1.4%, transportation and warehousing 3.1%, and accommodation and food services 2.9%. Public administration was the only services activity to contract, declining 2.4%.
The central concern is whether the recovery is being supported by sufficient investment. Lower capital expenditure can weaken growth by reducing construction activity, infrastructure development, machinery purchases, productivity improvements and future private-sector confidence. Even where current construction expanded, a sustained reduction in public capital spending could limit the pipeline of projects and reduce the economy’s productive capacity.
Import volumes continued their multi-quarter uptrend, helping industry obtain raw materials and machinery while increasing import-related tax revenue. But imports alone do not establish that the economy is undergoing a durable investment revival. The critical question is whether machinery and capital goods are being deployed into productive capacity, or whether growth is being driven mainly by the reopening of existing activities and short-term demand.
Sri Lanka’s second-quarter figures therefore point to an economy recovering unevenly, with industrial expansion masking weakness in agriculture and services. Without stronger capital formation, infrastructure investment and broad-based productivity growth, the current recovery risks remaining a limited rebound rather than becoming a sustained economic transformation.
