COLOMBO, October 19, 2026: Sri Lanka is open to trade talks with China and India as its government seeks to strengthen the country’s economy following the recovery from the 2022 economic crisis. The prospects for a broader economic transformation, however, remain a puzzle.
Sri Lanka’s Department of Commerce lists the proposed China–Sri Lanka Free Trade Agreement and the Economic and Technology Cooperation Agreement with India among the agreements under negotiation. The government has also moved to establish a National Trade Negotiation Committee following a review of its free trade agreements, with the stated aim of adopting a more focused, sequenced and evidence based approach to future negotiations. The Cabinet’s decision also provides for a consultative committee involving trade experts, researchers, businesses, trade unions, civil society and government officials.
These trade efforts form part of a wider economic challenge. The World Bank’s Sri Lanka Development Update reported that the economy had returned to its pre-crisis level in the first half of 2026. Yet the extent of the recovery cannot be measured by economic output alone. Poverty, household incomes, investment, export performance and the capacity to sustain growth will also matter in assessing whether Sri Lanka can move from recovery towards a broader economic transformation.
The Economy Has Recovered, but Household Pressures Remain
Sri Lanka’s economy contracted sharply during the crisis. Official national accounts recorded a 7.3% contraction in 2022 and a further 2.0% decline in 2023. Growth returned in 2024 and continued in 2025, with the economy expanding by 5.0% in each year, according to the Department of Census and Statistics.
The World Bank reported that real gross domestic product grew by 4.7% year on year in the first half of 2026. It projects growth of 4.4% for 2026 and 4.2% in 2027. These figures describe the pace of economic activity, but they do not by themselves establish how far households have recovered from the loss of income and purchasing power experienced during the crisis.
Sri Lanka’s GDP growth
Annual real GDP growth, with the first half of 2026 shown separately
Source: Sri Lanka Department of Census and Statistics and the World Bank. First half of 2026 is a year on year comparison, not a full year result - TradeTrend Graphics
Household data show a different side of the recovery. The Department of Census and Statistics’ survey on the impact of the economic crisis, based on 6,440 households, found that 60.5% reported lower monthly income, 91.1% reported higher expenditure and 54.9% reported being in debt. Food costs were the most commonly reported expenditure pressure.
The World Bank estimates that the share of the population living below the $4.20 a day poverty line, measured at 2021 purchasing power parity, rose from 11.5% in 2019 to 20.7% in 2023. It estimated the rate at 18.4% in 2024 and 16.9% in 2025. These estimates indicate that the improvement in economic output has not erased the rise in poverty during the crisis.
What Drove Growth in 2025?
The national accounts show that household consumption and investment both contributed to the expansion in 2025. At constant 2015 prices, household consumption increased by 6.3%, while gross fixed capital formation, a measure of investment in fixed assets, rose by 13.7%. Exports increased by 5.1%. Government consumption declined by 0.8%, while imports grew by 10.8%, according to the Department of Census and Statistics.
The figures show growth across several components of demand, with investment recording the largest increase among the listed categories. However, an increase in investment in one year does not establish whether the economy has achieved a sustained rise in productive capacity. The composition of investment, the productivity of new assets and the ability of businesses to expand output for domestic and overseas markets remain relevant to that assessment.
Components of economic activity in 2025
Percentage change at constant 2015 prices
Source: Department of Census and Statistics, national accounts. Bars show the magnitude of the percentage change; the negative government consumption figure is marked in red. - TradeTrend Graphics
The Central Bank of Sri Lanka’s Annual Economic Review provides further detail on economic performance, including public finances and external conditions. The figures need to be read alongside the cost of financing, the level of public debt and the resources available for infrastructure and other investment.
Export Earnings Rise as Import Costs Increase
Sri Lanka’s Export Development Board reported that total exports of goods and services reached US$12.01 billion in the first eight months of 2026, an increase of 4.26% from the corresponding period of 2025. Merchandise exports rose by 3.63% to US$9.41 billion, while services exports increased by 6.59% to US$2.60 billion.
The export figures include both goods and services, which have different market conditions and cost structures. The Export Development Board’s figures show that services grew faster than merchandise exports during the period. The contribution of services therefore forms part of the wider picture of how Sri Lanka earns foreign exchange.
Sri Lanka’s exports, January to August 2026
US dollars, billions
The Central Bank’s external sector performance figures show that the merchandise trade deficit widened to about US$7.2 billion during the first eight months of 2026, compared with US$4.3 billion in the corresponding period a year earlier. Fuel imports were about US$4 billion, rising by 61.6%.
Export performance varied across sectors. Apparel and textile export earnings fell by 6.76% to US$3.34 billion in the period, while earnings from tea exports declined by 7.56% to US$948.45 million. Electronic components exports rose by 57.49% to US$440.31 million, and food and beverage exports increased by 19.99% to US$462.52 million, according to the Central Bank’s external sector data.
Foreign exchange earnings also include receipts from services and workers’ remittances. The Central Bank reported that workers’ remittances increased by 19.8% to US$6.1 billion in the first eight months of 2026. Tourism earnings, however, declined by 10% to US$2.1 billion, while the services surplus fell by 21.4% to US$2.1 billion.
The same data put gross official reserves, including the People’s Bank of China swap, at US$6.9 billion at the end of August. The rupee had depreciated by 6.3% through the end of September. These indicators describe different parts of the external position and should be considered alongside export receipts, import costs and foreign exchange outflows.
Investment and Productivity Beyond the Recovery
The Board of Investment of Sri Lanka reported foreign direct investment of approximately US$1.057 billion in 2025, an increase of 72% from the previous year. Its figures included 24 new projects worth US$134 million, while investment in expansions and existing operations accounted for US$923 million.
Manufacturing accounted for 46% of the reported investment, ports for 26% and tourism for 11%. The figures indicate where the Board of Investment recorded inflows, but sector shares alone do not establish how many lasting jobs were created, how much additional export capacity became operational or how much new technology and productivity the projects introduced.
Reported foreign investment by sector
Share of reported FDI in 2025
Source: Board of Investment of Sri Lanka, 2025 investment figures. The chart shows the three sectors identified in the source, not the complete sector distribution - TradeTrend Graphics
Investment conditions also depend on the costs and practicalities of doing business. The Overseas Development Institute’s study of 953 exporters and importers examined e-commerce and international trade in Sri Lanka. Its research considered how firms use digital tools and the constraints they face in cross border transactions, including international payments and trade infrastructure.
The government’s National Export Development Plan for 2026 to 2030 sets an export target of US$36 billion, comprising US$28 billion in merchandise exports and more than US$8 billion in services. The target places export expansion alongside questions about market access, production capacity, logistics, investment and the ability of firms to compete in international markets.
The World Bank has identified private investment, exports and productivity growth as areas relevant to Sri Lanka’s next stage of economic development. Its report also highlights agribusiness, including food processing, logistics and trade, as a potential source of employment and export earnings. The World Bank estimates that the broader agrifood system contributes about one sixth of GDP and more than 40% of employment.
Household Incomes and Economic Resilience
Household recovery remains another measure of the economy’s performance. The 2023 household survey by the Department of Census and Statistics recorded the share of households reporting lower income, higher expenditure and debt during the economic crisis. These categories overlap because a household could report more than one type of pressure.
Household pressures during the economic crisis
Percentage of surveyed households reporting each condition
Source: Department of Census and Statistics, Household Survey on the Impact of the Economic Crisis. The responses are not mutually exclusive - TradeTrend Graphics
The World Bank estimates that poverty fell from 20.7% in 2023 to 18.4% in 2024 and 16.9% in 2025, after standing at 11.5% in 2019. The decline since the crisis peak represents an improvement, while the rate remains above its pre-crisis level.
Estimated poverty rate
Share of the population below the World Bank’s $4.20 a day line at 2021 purchasing power parity
Source: World Bank. The 2025 figure is an estimate - TradeTrend Graphics
Labour market indicators provide another part of the picture. The Department of Census and Statistics reported a labour force participation rate of 49.4% and unemployment of 3.9% for 2025. Its second quarter 2026 labour force report recorded participation of 50% and unemployment of 4.0%. These rates do not measure wages or job quality on their own.
The World Bank has also reported that real labour incomes fell by more than 40% between 2019 and 2023 and had not fully recovered. The Department of Census and Statistics’ labour force reports provide the official labour market series for examining employment and participation over time.
The economic effects of Cyclone Ditwah added pressure to employment and livelihoods. The International Labour Organization’s assessment of employment and livelihoods recovery estimated that 149,400 workers experienced temporary stoppages, with five million workdays lost and income losses of about US$18 million. The assessment identified effects across affected sectors, including informal services and plantations.
The Competing Paths for Sri Lanka’s Next Stage
The government’s trade and export plans set out one part of its stated economic direction. The National Export Development Plan targets US$36 billion in exports by 2030, including US$28 billion in merchandise exports and more than US$8 billion in services. The Department of Commerce lists trade agreements with China and India among the negotiations under way, while the Cabinet has provided for a national committee and broader consultation on trade negotiations.
The World Bank’s projections put growth at 4.4% in 2026 and 4.2% in 2027. Its report calls for stronger private investment, export growth and productivity, and identifies agribusiness as an area with potential to support jobs and poverty reduction. The Bank has also pointed to risks from global energy market volatility and the possible effects of El Niño on productivity and food security.
Growth projections and the government’s ambition
Annual real GDP growth; the government’s stated ambition refers to a target of more than 7% within a few years
Sources: World Bank growth projections and the government’s stated growth ambition. The ambition is not a forecast for either of the two years shown - TradeTrend Graphics
The IMF said it had reached a staff level agreement with Sri Lanka on the seventh review of its reform programme, potentially releasing about US$345 million after approval by the IMF Executive Board. The IMF statement links the review to continued economic reforms and fiscal sustainability. The funding remains subject to the required approval process.
Business groups have also identified practical measures relevant to export and investment performance. The Ceylon Chamber of Commerce has advocated measures including a National Single Window for trade, modernised customs procedures, improved investment facilitation and digital infrastructure. These proposals address administrative and operational conditions that can affect firms trading across borders.
The government’s trade negotiations, export target and growth ambition sit alongside the World Bank’s projections, the IMF programme and the performance recorded in official economic statistics. Household income, poverty, investment, trade balances and export composition provide separate measures of how the economy is changing. Their respective records will show how far recovery develops into a broader transformation.
