Key Takeaways
- Sri Lanka's economy grew 4.2% year-on-year in Q2, matching market expectations.
- The agriculture sector grew 2.3%, industries 7.3%, and services 2.7%.
- Inflation hit 8% in August, up from 2.2% in March, due to soaring energy costs.
Sri Lanka's economy grew by 4.2% year-on-year from April to June, according to the statistics department. This growth, despite three-year-high inflation, has been exacerbated by the impact of the Iran war, which has increased energy costs.
The agriculture sector saw a growth of 2.3%, while industries expanded by 7.3% and services by 2.7% in the second quarter. Analysts expect growth to moderate to 3%-4% in the second half of 2026.
Ranjan Ranatunga, vice president of research at First Capital Holdings, stated, 'Although oil prices have gone up, we are expecting them to moderate at about $80-$90 per barrel. But higher fuel prices will hit consumption and lead to growth moderating in the second half of 2026.'
Sri Lanka is supported by a $2.9 billion programme from the International Monetary Fund (IMF) as it recovers from a severe financial crisis caused by low foreign exchange reserves. The IMF expects the country to grow by 3% this year, after posting 5% growth in 2025.
The global lender expects Sri Lanka to grow by 3% this year, despite the ongoing challenges. The country, which imports all its fuel, is battling soaring energy costs from the Iran war, which has had a spillover effect on inflation. Inflation hit 8% in August, up from 2.2% in March.
To combat inflation, the Central Bank of Sri Lanka increased its key policy rate by 100 basis points in May. The rupee has depreciated by 5.7% against the dollar this year, further complicating the economic situation.
The government has implemented measures such as fuel rationing and declaring Wednesdays as public holidays to manage the situation. However, authorities have warned that more price hikes may be in the offing at the end of this month as global prices continue to increase.
Despite these challenges, the economy's growth in Q2 has matched market expectations, providing some relief to the government and the people of Sri Lanka.
Although oil prices have gone up, we are expecting them to moderate at about $80-$90 per barrel. But higher fuel prices will hit consumption and lead to growth moderating in the second half of 2026.
Ranjan Ranatunga, Vice president of research at First Capital Holdings
