Sri Lanka 2025 – 2030: Navigating a New Economic Paradigm

Sri Lanka is moving into a decisive half-decade that will determine whether the hard-won gains made since the 2022 foreign-exchange crisis translate into lasting prosperity or relapse into another boom-and-bust cycle. Drawing on insights shared during the inaugural session of Sector 360 with the topic: Macroeconomic Outlook of Sri Lanka and the 2030 Economic Agenda, led by Mr. Navinda Meepe, this article distils the conversation into a structured analysis of where the economy stands, the forces shaping its trajectory, and the practical pathways that can deliver resilient, inclusive growth by 2030.

Sri Lanka’s macroeconomic narrative from 2022 to 2025 is best described as a transition from survival mode to structural transformation. With fiscal rules, monetary independence, and an IMF programme in place, the policy space has narrowed but credibility has risen sharply. Externally, strong remittances, recovering tourism, and healthy port services have been significant contributors to rebuild reserves, while the restructuring of external debt has smoothed repayment profiles through 2030.

Nevertheless, success is far from guaranteed. Global trade tensions, volatile oil prices, election-cycle risks, and the need to mobilise private investment will test the country’s newfound discipline.

Courtesy: Ceylon Today

Economic Recovery and Stabilisation Framework

Sri Lanka's macroeconomic transformation from 2022 to 2025 embodies a remarkable economic recovery seen in recent history. Having suffered in the depths of a sovereign default and a foreign exchange crisis, the country has been able to successfully remerge and transition to achieve structure in its current account surpluses and restoring macroeconomic credibility. It is worth noting that this recovery has been anchored by three critical institutional reforms: the IMF Extended Fund Facility program, the Public Financial Management Act, and the enhanced Central Bank of Sri Lanka Act, which have fundamentally revamped the policy landscape.

The fiscal consolidation achieved during this period appears to be nothing short of extraordinary. Government revenue increased from 8.2% of GDP in 2022 to 13.5% of GDP in 2024, while the primary balance shifted from a deficit of 5.6% of GDP in 2021 to a surplus of 1.0% in 2024. This fiscal discipline, recognised as such, has been institutionalised through the Public Financial Management Act of 2024, which establishes binding expenditure ceilings, debt reduction targets, and medium-term fiscal frameworks, applicable to public entities and their officers. By virtue of this, the law presently, mandates that primary government expenditure cannot exceed 13% of estimated nominal GDP and requires the publication of comprehensive fiscal strategy statements and risk assessments, with the approval of the Cabinet.

Monetary policy has also undergone a profound transformation. This positive transformation is primarily attributable to the enactment of the Central Bank of Sri Lanka Act No. 16 of 2023. This new legal framework seeks to eliminate monetary financing of government deficits, establish operational independence for the central bank, and mandate inflation targeting at 5%, over the medium term. This institutional reform has ended decades of fiscal dominance, while also creating conditions for sustainable price stability. The immediate impact can be seen in what seems to be the elimination of money printing, as direct Treasury bill purchases by the central bank have been reduced from LKR 1.4 trillion to zero.

External Sector Revival and Foreign Exchange Resilience

The external sector has proven to be remarkably resilient. Sri Lanka posted current account surpluses successively through most of 2024 and 2025. This was a structural change, indicating the elimination of chronic twin deficits that were the hallmarks of pre-crisis times. It is worker remittances that have been the driver for such change, recording USD 6.57 billion in 2024 as a six-year high; this itself is an increase of 10.1% compared with the previous year. Remittances were up due to increased migration—312,836 people left for foreign employment in a single year—and because no more parallel exchange rates existed which earlier channeled flows through informal channels.

Courtesy: CNN

The bounce-back of the Tourism sector has surprised many. Typifying the strong growth of this sector, tourist arrivals reached 2.05 million in 2024, generating USD 3.17 billion in tourism earnings, which signifies a 38% increase compared to 2023, and approaching pre-pandemic and pre-Easter attack levels of 2.3 million tourists recorded in 2018. Alongisde this, monthly performance has been consistently strong, with December 2024 recording 248,592 visitors and setting arrival records of over 10,000 tourists per day.

The port sector has benefited substantially from global shipping disruptions, particularly the Red Sea crisis, which has diverted container traffic through Colombo Port. The Sri Lanka Ports Authority recorded a 75% increase in profits to LKR 34.93 billion in 2024, with container throughput rising 13% to 7.8 million TEUs despite a 33.5% reduction in total ship arrivals. This demonstrates Colombo's strategic value as a transshipment hub and its ability to capitalize on global supply chain disruptions.

Debt Restructuring and Credit Rating Recovery

Sri Lanka's debt restructuring process has reached substantial completion. This has provided the foundation for renewed access to international capital markets. Having successfully concluded comprehensive debt treatment agreements with bilateral creditors worth USD 10 billion in June 2024, covering major lenders including China, Japan, India, and France, Sri Lanka has been able to secure a five-year grace period on debt repayments and extend the repayment period until 2042, with significantly reduced interest rates averaging at 2.1%.

The domestic debt optimization operation and external debt restructuring radically improved Sri Lanka's debt service profile. The restructuring measures are projected to save USD 5 billion over the program period, providing substantial fiscal space for priority spending and economic development. Consequently, a major milestone in the debt restructuring process was successfully completed in December 2024 with a USD 12.55 billion international sovereign bond exchange.

Fitch Ratings and Moody’s Investor Service have taken Sri Lanka out of default. More particularly, the latest rating action by Moody’s saw its long-term issuer ratings on the government of Sri Lanka upgraded by two notches to Caa1 from Ca with a stable outlook, while FitchRatings assigned CCC+ as compared to RD or Restricted Default.

Sectoral Performance and Export Diversification

The apparel industry, which is the largest manufactured export sector of the country, faces significant headwinds from U.S. tariff policies. President Trump's administration initially imposed a 30% tariff on Sri Lankan exports, which was later brought down to 20% effective from August 7, 2025. While the impact on the sector, given the circumstances that approximately 40% of apparel exports are directed to the United States, is yet to be seen, it is important to consider that this sector employs approximately 300,000 people directly and accounts for over 70% of Sri Lanka's USD 3 billion in exports to the United States.

The Information and Communication Technology sector showcases strong growth potential, with the industry expected to generate USD 3 billion by 2024 and targeting USD 5 billion by 2030. The government has established ambitious targets for ICT exports to reach USD 1.7 billion in 2025 as part of a broader USD 18.2 billion export revenue goal. Hence, the sector leverages Sri Lanka’s ambitious role in the global digital economy and continuous investments in digital infrastructure facilitated under the National Digital Economy Strategy 2030, targeting to open up USD 15 billion worth of value in the digital economy.

Furthermore, there has been a substantial drop in the cost of oil imports due to favorable movements in global prices, with Brent crude prices retreating below USD 70 per barrel, nearly 30% lower than 2023 peaks. This trend, coupled with electric vehicle uptake and general renewable energy usage increasing around the world, has dropped the country's oil import bill to less than 20% of total goods imports from a high figure of 27% in 2018. The import costs for the Ceylon Petroleum Corporation fell to only USD 1.235 billion during just the first six months of 2024, thus improving external sector performance. Therefore, it must be stressed that the fall in usage of oil within Sri Lanka, is an advantage to the economy.

Trade Architecture and Investment Climate

Courtesy: Wikipedia

Sri Lanka is also pursuing an ambitious agenda to diversify its trade architecture and reduce dependency on traditional Western markets. Through the Economic and Technology Cooperation Agreement (ETCA), Sri Lanka is attempting to significantly expand the existing India-Sri Lanka Free Trade Agreement to include services trade and technology cooperation. This agreement has the potential to generate USD 1 billion in additional annual exports and provide access to India's massive domestic market.

Six rounds of negotiations have been completed, with China, over the bilateral Free Trade Agreement, proposing liberalization of 90% of tariff lines, which raises concerns about the pace and extent of market opening. Sri Lankan economists emphasize the need for a gradual approach that allows domestic industries to adjust while maximizing export opportunities, particularly in rubber-related products, minerals, tea, spices, and gems.

The prospect of joining the Regional Comprehensive Economic Partnership (RCEP) represents Sri Lanka's most significant trade integration opportunity. RCEP covers markets worth USD 25 trillion in combined GDP and includes 30% of global economic output. While Sri Lanka has submitted its Letter of Intention to join the agreement, which would provide access to reduced tariffs across the Asia-Pacific region, the looming question of whether government policies have changed following the new administration is yet to be answered.

The investment climate has shown gradual improvement despite ongoing credit rating constraints. While two major rating agencies have upgraded Sri Lanka out of default status, the absence of an S&P rating continues to restrict access for many institutional investors. The successful completion of debt restructuring negotiations and demonstration of fiscal discipline are expected to support sequential rating upgrades, potentially reaching 'B-' status by 2027.

Infrastructure development continues through targeted project financing arrangements despite limited access to commercial markets. Major ongoing projects include the Central Expressway Phase III financed by AIIB and JICA for USD 0.9 billion, the Colombo Port East Container Terminal development by APM Terminals and development finance institutions for USD 0.6 billion, and a 700 MW Solar Park with private sector and ADB financing of USD 0.5 billion. These projects demonstrate continued confidence from multilateral lenders and development partners.

Foreign Exchange Management and Import Dynamics

The resumption of vehicle imports from February 1, 2025, serves as both an economic signal and a test of foreign exchange management capabilities. The lifting of the import ban, which had been in place since 2020, triggered USD 700 million in letters of credit within the first five months, representing approximately 6% of total imports compared to a pre-crisis average of 3%. The Central Bank has indicated its capacity to accommodate up to USD 1 billion in vehicle imports without destabilizing reserves, reflecting improved foreign exchange buffers.

Vehicle imports in April 2025 alone reached USD 107 million, with total motor vehicle imports through May reaching USD 134 million. The government has implemented structured regulations to manage the import process, including limits of one vehicle per 12 months for non-registered importers and strict requirements for Letters of Credit as the only acceptable payment method. These measures aim to balance consumer demand with foreign exchange conservation while generating substantial government revenue through import duties.

Digital Economy and Services Export Growth

Sri Lanka's digital transformation agenda represents a critical pillar of the country's economic diversification strategy. The National Digital Economy Strategy 2030 targets USD 15 billion in digital economic value by 2030, supported by comprehensive policy reforms and public-private partnerships. The Information and Communication Technology Agency (ICTA) has developed integrated programs to promote digital adoption among micro, small, and medium enterprises while partnering with industry to develop sector-specific digitalization roadmaps.

The ICT industry currently represents 20% of service exports, significantly lower than regional peers such as India (50%), Pakistan (22%), and Bangladesh (16%). This gap represents substantial growth potential with government targets of USD 3 billion in ICT exports by 2027, high internet penetration rates, and favorable policy frameworks. The spillover effects from the sector's growth include frictionless tourism payments, enhanced e-government platforms, and increased automation in manufacturing sectors.

Services exports have on the whole performed very well, growing by an estimated 13.2% in the first five months of 2025 to total USD 1.59 billion over what they were for the same period in 2024. This places services as one of the major thrusts to pave more ways for export diversification and foreign exchange earnings towards making up the overall exports target of USD 6.93 billion set for the first five months in 2025.

Strategic Opportunities and Competitive Advantages

Sri Lanka's strategic location in the Indian Ocean, combined with improved macroeconomic fundamentals, positions the country to capture several significant opportunities over the next five years. Deepening integration with India through the ETCA agreement and participation in India's digital public infrastructure could unlock substantial trade and investment flows. Joint tourism marketing initiatives and infrastructure connectivity projects could further strengthen these economic linkages.

The development of Colombo as a green logistics hub represents a major opportunity to capitalize on the port sector's strong performance and strategic location advantages. Investment in carbon-efficient transshipment facilities and bunker services could position Sri Lanka as a preferred shipping hub for environmentally conscious global supply chains.

Moving up the fashion value chain through investment in design capabilities, research and development, and end-to-end traceability systems offers the potential to capture premium margins and reduce vulnerability to tariff uncertainties. The industry's established reputation for quality and compliance provides a foundation for this transition, supported by preferential access arrangements and potential renewal of GSP-Plus status in 2026.

The digital skills pipeline development through enhanced STEM education, coding bootcamps, and diaspora mentorship programs is essential for reaching the USD 3 billion ICT export target by 2027. These initiatives would support broader economic digitalization while creating high-value employment opportunities for Sri Lanka's educated workforce.

Long-term Vision and Sustainability Framework

By 2030, Sri Lanka has the potential to emerge as a high-trust, middle-income services hub if it maintains fiscal discipline, attracts diversified investment, and entrenches rule-based governance. The foundations for this transformation are stronger than at any point in recent memory, with monetization eliminated, primary surpluses achieved, and the external account restored to structural surplus.

The task ahead involves translating macroeconomic stability into productivity gains, innovation capacity, and equitable prosperity. This requires sustained commitment to the reform agenda, continued institutional strengthening, and strategic investments in human capital and infrastructure. The foreign exchange shock absorbers built through reserve accumulation above five months of import cover and lengthened external debt maturities beyond 2032 provide important buffers against future volatility.

The insights captured in this analysis demonstrate both the progress achieved since the 2022 crisis and the significant opportunities ahead. Staying the course on reforms while adapting to evolving global economic conditions could position Sri Lanka's post-crisis recovery as a regional benchmark for resilience and sustainable growth. The country's journey from economic collapse to structural transformation offers valuable lessons for other emerging economies facing similar challenges, while its strategic location and institutional reforms provide competitive advantages for capturing growth opportunities in the dynamic Asia-Pacific region.

The successful navigation of the 2025-2030 period will ultimately depend on maintaining the delicate balance between fiscal discipline and growth-supportive policies, managing external sector vulnerabilities while pursuing export diversification, and preserving institutional reforms while adapting to changing global economic conditions. The foundations are in place for Sri Lanka to achieve its vision of becoming a prosperous, resilient economy by 2030, but success will require continued commitment to the reform agenda and strategic positioning to capture emerging opportunities in the global economy.

Conclusion

By 2030, Sri Lanka can emerge as a high-trust, mid-income services hub if it preserves fiscal discipline, attracts diversified investment, and entrenches rule-based governance. The foundations are sturdier than at any point in recent memory: monetization has ceased, primary surpluses are visible, and the external account is back in the black. The task now is to translate this macro-stability into productivity, innovation, and equitable prosperity. The insights captured here, rooted in the findings of the inaugural Sector 360 session, sketch both the cautionary tales of the past and the promise of the future. Staying the course could turn Sri Lanka's post-crisis recovery into a regional benchmark for resilience and reform-driven growth.