Economic

Sri Lanka’s total gross public debt climbed to nearly Rs. 33 trillion by the end of June 2026, according to official figures released by the Public Debt Management Office.

The latest Statistical Debt Bulletin shows total public debt reached Rs. 32.977 trillion at the close of the second quarter, rising from Rs. 32.233 trillion recorded at the end of March.

The surge represents an increase of approximately Rs. 744 billion over the three-month period.

Dollar debt falls as rupee load expands

Despite the expansion in rupee terms, the overall debt burden contracted when calculated in US dollars, declining from US$102.27 billion in March to US$97.95 billion in June.

The figures reflect a quarter-end exchange rate of Rs. 336.66 per US dollar.

Central government obligations formed the vast majority of the total, rising to Rs. 31.999 trillion from Rs. 31.193 trillion in the previous quarter.

Within central government debt, domestic liabilities accounted for Rs. 19.203 trillion, while external debt stood at Rs. 12.796 trillion.

External liabilities and creditor breakdown

External government debt expanded by US$540 million over the quarter, moving from US$37.47 billion in March to US$38.01 billion by the end of June.

Multilateral lenders hold the largest share of this external debt at 38 per cent, followed by commercial creditors at 34 per cent and bilateral lenders at 28 per cent.

China remains the country's largest bilateral creditor, with US$5.01 billion outstanding. Japan holds the second largest share at US$2.27 billion, followed by India at US$853.9 million.

Additionally, government-guaranteed debt tied to state-owned enterprises stood at Rs. 971 billion, while liabilities held by provincial councils and local authorities totalled around Rs. 7 billion.

Official foreign exchange absorption by Sri Lanka's monetary authority surged during July following recent currency market stabilization efforts.

Official data reveals that the Central Bank of Sri Lanka (CBSL) bought a net USD 348.6 million from the domestic market in July after the local rupee recovered from hitting a four year low earlier in May.

THE CBSL completely refrained from selling greenbacks in July after having sold over USD 211 million on a net basis during May, which marked the first net outflow intervention in 22 months.

Net foreign currency purchases by the Central Bank have now accumulated to USD 905 million across the first seven months of 2026, building upon net purchases of USD 2 billion recorded during the previous year.

The sharp downward pressure on the rupee during May stemmed from an unusually high national fuel import bill linked to Middle Eastern geopolitical escalations, coupled with persistent dollar demand for vehicle imports.

Central Bank officials maintained an aggressive dollar purchasing strategy to bolster national foreign currency reserves in alignment with structural targets set under the country's USD 3 billion IMF Extended Fund Facility.

These accumulated foreign reserves are crucial for fulfilling debt service commitments on multilateral and bilateral loans while paving the way for foreign debt repayments owed to international sovereign bond holders in April 2028.

A meeting was held recently between the Sri Lanka Export Development Board (EDB) and consultants to the European Commission, Paul Baker and Talal Rafi, to exchange views and insights on the potential impact of the EU–India Free Trade Agreement (FTA) on Sri Lanka’s export sectors.

Baker and Rafi have been engaged by the European Commission to assess the implications of the landmark trade agreement for Sri Lanka. Yohan Lawrence, Secretary General of the Joint Apparel Association Forum (JAAF), also joined the discussion, highlighting the challenges that Sri Lanka’s apparel industry could face once the FTA becomes operational.

Negotiations on the EU–India FTA were concluded on 27 January 2026, and the agreement is expected to enter into force following the completion of the required legal review, signature, and ratification procedures.

The FTA is expected to significantly improve the competitiveness of Indian exports in the European market. Key labour-intensive export sectors, including apparel, marine products, leather and footwear, chemicals, plastics and rubber, sports goods, toys, and gems and jewellery, will benefit from substantial tariff liberalisation, with many products gaining duty-free access from the date the agreement enters into force.

Addressing the meeting, EDB Chairman Mangala Wijesinghe emphasised the importance of the European Union to Sri Lanka’s export economy, noting that the EU remains Sri Lanka’s second-largest export destination after the United States and accounts for approximately 24% of the country’s merchandise exports. He also provided a detailed assessment of the potential implications of the EU–India FTA for Sri Lanka’s export sector, highlighting both the emerging challenges and opportunities for local exporters.

Sri Lanka’s exports to EU markets recorded strong growth in 2025, with major destinations including Germany, Italy, the Netherlands, France and Belgium registering increases over the previous year.

Wijesinghe also stressed the importance of safeguarding Sri Lanka’s preferential access to the EU market through the GSP+ scheme, particularly as Indian products become increasingly price-competitive following implementation of the FTA. He noted the importance of Sri Lanka continuing to meet the requirements of the EU’s revised GSP framework and securing preferential access under the new regime.

“We intend to position Sri Lanka as a reliable, sustainable and high-quality supplier to the global market, while encouraging local enterprises to move towards higher-value, differentiated products and strengthen compliance with EU standards,” Wijesinghe said, outlining some of the strategies the EDB intends to pursue to mitigate the potential adverse effects of the FTA.

Joining the discussion, European Commission consultant and international trade economist Paul Baker observed that economic projections and long-term modelling indicate that the EU–India FTA could substantially increase India’s exports to the European bloc while also strengthening foreign direct investment flows into India.

He noted that while Indian products are expected to become more price-competitive in the EU market following tariff liberalisation, the European Union’s increasing emphasis on sustainability, environmental performance, traceability and regulatory compliance would continue to create opportunities for exporters capable of meeting these requirements.

Baker therefore encouraged Sri Lankan exporters to reassess their product and market strategies, improve value addition and strengthen compliance with evolving EU sustainability and regulatory standards in order to remain competitive.

Yohan Lawrence, representatives of the apparel industry, meanwhile, raised concerns over the potential impact of the FTA on Sri Lanka’s apparel exports to the EU. Particular attention was drawn to the rules of origin and regional cumulation arrangements applicable to fabrics and other inputs sourced from India and subsequently used in garments manufactured in Sri Lanka for export to the EU under GSP+.

Industry representatives cautioned that any restriction on Sri Lankan apparel manufacturers’ ability to benefit from cumulation arrangements involving Indian-origin inputs could further weaken the competitiveness of the local garment sector at a time when Indian apparel exports are gaining improved tariff access to the European market.

The EDB emphasised that the Government of Sri Lanka would take the necessary steps to engage with the European Union on appropriate cumulation arrangements with India, with a view to safeguarding Sri Lanka’s export competitiveness and supporting greater integration of regional supply chains.

At the conclusion of the meeting, the European Commission consultants thanked the EDB and representatives of the apparel industry for their observations and industry insights. They indicated that the issues raised during the discussion would be taken into consideration in preparing the final study to be submitted to the European Commission.

Foreign exchange earned through remittances sent home by Sri Lankan migrant workers has surpassed the US$5 billion threshold for the first seven months of 2026, according to the latest Central Bank data. Cumulative inflows between January and July reached US$5,382.4 million, marking a rise of 21.4 percent compared with US$4,435.2 million recorded over the same period last year.

Rupee Terms Show Even Sharper Growth

In rupee terms, the increase was even more pronounced, with inflows climbing 30.3 percent to Rs. 1,724.2 billion from Rs. 1,323.2 billion during the corresponding seven months of 2025. The gap between the dollar and rupee growth rates reflects currency movements over the period, underlining the scale of the boost to domestic liquidity brought about by these inflows.

July Alone Records Strong Gains

For July 2026 alone, remittances totalled US$777.6 million, equivalent to Rs. 261.3 billion, rising from US$697.3 million, or Rs. 210.0 billion, recorded in July of the previous year. The steady month-on-month growth suggests that the upward trend seen across the first half of the year has carried through into the third quarter.

Remittances Remain Sri Lanka's Top Foreign Exchange Source

With both export earnings and tourism continuing to face external headwinds, remittances have once again cemented their position as the country's single largest source of foreign exchange.

These inflows continue to provide crucial support to Sri Lanka's external reserves and to the stability of the macroeconomic environment, at a time when other foreign exchange channels remain under pressure.

Sri Lanka will be capable of containing domestic inflationary pressures if crude oil prices remain near USD 80 a barrel through the end of this year, Central Bank of Sri Lanka Governor Dr. Nandalal Weerasinghe said.

Speaking during an official visit to Sydney, Australia, where a Sri Lankan delegation is seeking to attract foreign investment to the Colombo Stock Exchange, the Central Bank chief outlined the nation's macroeconomic outlook amidst volatile global energy markets.

He explained that while elevated energy costs continue to exert upward pressure on local prices and weigh on the local currency, existing policy measures should allow policymakers to manage the situation provided no major external shocks occur.

Inflation expected to move towards 5%

The Central Bank expects headline inflation to cool back towards its target of 5 percent during the second half of this year and persist into next year.

The Governor credited this ongoing stabilization to decisive monetary policy interventions alongside state level import controls.

To curb credit demand following rising energy costs, the Central Bank raised its benchmark interest rate by one percentage point in May before opting to hold the overnight policy rate steady in July to balance price stability with economic recovery.

Growth expected to moderate

Addressing concerns over the wider economy, the Governor said that tighter monetary conditions and elevated prices are not anticipated to inflict severe damage on domestic economic output.

He projected that overall economic expansion would moderate to between 4 percent and 5 percent during the latter half of the year.

As Sri lanka works to recover from its historic 2022 sovereign default, the Governor reiterated that Sri Lanka remains on track to complete its four year IMF loan programme by the second half of 2027, with the next review scheduled for November or December.

S&P Global Ratings has affirmed Sri Lanka's sovereign rating at 'CCC+/C' with a stable outlook, offering the country a measure of relief as it continues to recover from its 2022 debt default.

However, the agency's own report makes clear that this stability rests on fragile ground, one that could easily be disturbed by events unfolding well beyond Sri Lanka's shores.

The economy has shown genuine signs of improvement. Real GDP grew by 4.8 percent in the final quarter of 2025 and picked up further to 5.1 percent in the first quarter of 2026, surprising many observers.

Tax reforms have boosted government revenue, helping authorities narrow the fiscal deficit and strengthen the country's ability to service its debts.

These gains, however, have not come without cost.

Higher taxes and stricter fiscal discipline have squeezed households and businesses, even as they reassured international lenders.

Sustaining public patience while continuing reforms required under the IMF programme remains one of the government's toughest balancing acts.

S&P has flagged several risks that could unsettle this fragile progress.

Chief among them is the country's weakening external position. Rising imports, driven by stronger domestic activity, have increased demand for foreign currency, while uncertainty over tourism earnings and worker remittances raises questions about how those imports will be financed.

The ongoing Middle East conflict poses a threat as large numbers of Sri Lankan migrant workers are employed across the Gulf, and tourists from the region form a significant share of visitor arrivals.

Should the conflict drag on, rising global oil prices would push up fuel import costs, adding pressure to inflation and reserves alike.

Climate risks add another layer of concern. A stronger El Niño pattern expected through 2026 and 2027 could hurt agricultural output, reduce hydropower generation and slow economic growth, potentially undoing recent fiscal improvements and forcing higher public spending.

S&P has tied Sri Lanka's future rating path firmly to policy execution.

Continued progress on IMF backed reforms, including stronger revenue collection, cost recovery in utilities and better public financial management, will be essential for any future upgrade. Should reform momentum slip, funding pressures return, or external conditions worsen, a downgrade could follow.

Sri Lanka's economic growth is projected to moderate to between four and five per cent in the second half of the year as elevated consumer prices and restrictive monetary measures take effect.

Governor of the Central Bank of Sri Lanka (CBSL) Dr. Nandalal Weerasinghe confirmed the forecast during a broadcast interview with Bloomberg, explaining that despite the anticipated deceleration, the overall expansion would remain manageable as conditions normalize across the island nation.

Headline inflation climbed to 7.3 per cent in July, marking its highest point since June 2023 after accelerating from near two per cent earlier in the year.

Official data and central bank assessments attributed this surge largely to the implementation of cost-reflective energy pricing under an International Monetary Fund agreement, which drove domestic fuel prices up by more than 50 per cent over a two-month period.

In response to the initial price build-up, monetary authorities raised the key policy rate by 100 basis points in May, though rates were held steady during the subsequent policy review on the grounds that existing settings were sufficient to curb demand pressures.

Governor Weerasinghe noted that provided global crude oil prices anchor near USD 80 per barrel through the remainder of the year, domestic inflation should stabilize and return to the target rate of five per cent by late this year or early next year.

Sri Lanka’s foreign reserves have risen to USD 6.8 billion as of December 31, 2025, Deputy Minister of Economic Development Nishantha Jayaweera announced in Parliament today. The statement came during a session where the Deputy Minister was responding to a query raised by MP Dayasiri Jayasekara regarding the country’s foreign currency holdings.

MP Jayasekara highlighted concerns over the nation’s reserves, noting that when the National People’s Power (NPP) government assumed office, the foreign reserves were around USD 6 billion and suggesting that the figure had since declined below that level.

Deputy Minister Jayaweera firmly rejected the claim, emphasizing that the reserves had, in fact, grown. “As of December 31, 2025, the foreign reserves of Sri Lanka have increased to USD 6.8 billion,” he stated, underscoring the government’s efforts to stabilize and strengthen the country’s economic position.

Economic analysts say that foreign reserves play a crucial role in maintaining a country’s financial stability, as they are used to support imports, manage external debt, and stabilize the national currency. An increase in reserves often reflects improved fiscal management, higher export revenues, or effective foreign investment inflows.

The Deputy Minister’s announcement is likely to reassure both international investors and the general public, as higher reserves indicate a buffer against external shocks and economic volatility.

It also reflects the government’s focus on enhancing foreign exchange stability and ensuring that essential imports, such as fuel, medicine, and food, are not disrupted.

Jayaweera called on Parliament to view the growth in reserves as a positive outcome of ongoing economic policies, which he said include boosting exports, attracting foreign investment, and managing government spending prudently.

With foreign reserves now at USD 6.8 billion, Sri Lanka is in a stronger position to navigate global economic challenges in 2026, analysts note, while maintaining confidence in the national currency and financial system.

Foreign investors purchased a net Rs. 1.35 billion in Sri Lankan government bonds during the week ending 14 August, marking nine consecutive weeks of overseas capital inflows into the local debt market.

Official Central Bank data confirms that the latest purchases pushed cumulative foreign investment in government securities to Rs. 72.9 billion since mid-June, bringing total foreign holdings in Treasury bonds to Rs. 194.2 billion.

Currency stability and debt inflows

The sustained interest from international buyers follows a period of stabilization for the domestic currency, which had previously experienced heightened volatility.

In May, the Sri Lankan rupee hit a near three year low against the United States dollar due to increased expenditure on oil and vehicle imports alongside heightened Middle Eastern geopolitical tension.

The Central Bank intervened by raising key interest rates by 100 basis points in May to curb demand-driven inflationary pressures, which helped steady the exchange rate and restore investor confidence despite a net currency depreciation of 7.1 percent over the course of the year.

Macroeconomic performance

Market analysts attribute the steady capital inflows to past deflationary policies that successfully curtailed non-essential imports, allowing total foreign bond purchases to reach Rs. 52.9 billion so far this year.

Although recent energy price adjustments contributed to an uptick in inflation over the past three months, local fuel prices stabilized following reductions made in late June.

Monetary authorities noted that while total foreign holdings reached record levels in the latest weekly economic indicator report, overall debt figures remain subject to daily market fluctuations.

The World Bank’s Global Economic Outlook 2026 notes Sri Lanka’s improving macroeconomic indicators but warns that recovery is driven more by fiscal tightening and favourable external conditions than by deep structural reform. While the country is expected to maintain fiscal and current account surpluses, growth is projected to slow to just above 3% by 2027, constrained by long-standing inefficiencies in labour and product markets, crisis-related scarring, and fragile global demand.

Key concerns include high emigration of skilled workers, leaving long-term gaps in productivity and innovation, and vulnerability to global trade shocks due to reliance on limited export markets. Risk preparedness also remains weak, with potential losses from disasters like Ditwah not yet factored into projections.

The report emphasizes that fiscal discipline alone is insufficient; sustainable growth requires targeted reforms, strategic labour policies, and resilient export strategies. Sri Lanka has stabilised its economy, but turning stability into inclusive, long-term growth remains the critical challenge.

Sri Lanka’s post-restructuring debt profile has experienced a significant shift, transferring the country's primary economic vulnerability from foreign creditors to the domestic market.

According to inaugural figures released by the Public Debt Management Office, nearly a quarter of domestic debt was scheduled to mature within a single year at the end of 2025, compared to just 1.5 per cent of foreign obligations.

Overall, 15.8 per cent of the total state debt required repayment within twelve months, highlighting a heavy concentration of short-term local maturities that now poses a key refinancing challenge for fiscal authorities.

While average overall maturity lengths improved from six years in 2024 to 6.8 years in 2025, the disparity between domestic and external obligations remains extreme.

Foreign debt carried an average repayment horizon of 9.6 years, whereas local currency debt stood at a much shorter 4.7 years. In response, public debt managers noted that this high concentration of short-term domestic commitments represents a principal risk that demands rigorous monitoring and strategic intervention.

Authorities have already made progress by paring back reliance on short-term paper, reducing Treasury bills from 22.04 per cent of domestic debt to 16.15 per cent, which brought their share of total state debt down from 14.06 per cent to 10.11 per cent.

Nevertheless, fixed-rate instruments covered 88 per cent of total debt with a local currency re-fixing timeframe of 4.5 years, offering a buffer against immediate interest rate shocks.

Concurrently, foreign debt servicing demands expanded following the end of repayment moratoria, rising to 17.4 per cent of exports and 34.5 per cent of official reserves, though these metrics remain drastically better than the peak crisis figures recorded between 2021 and 2022.

Managing this compressed domestic rollover cycle in a thin local market now forms the primary test for the island nation as it seeks to transform temporary external relief into permanent economic stability.