In a forward-looking policy agenda released today (08), the Central Bank of Sri Lanka (CBSL) projected that the nation's economy will grow by around 4-5% in 2026, building on the momentum from the past two years despite recent challenges like Cyclone Ditwah. The announcement underscores a commitment to macroeconomic stability as the foundation for sustained prosperity, even as global uncertainties and climate vulnerabilities loom.

The policy document, titled "Central Bank’s Policy Agenda for 2026 and Beyond," highlights Sri Lanka's notable progress in 2025, where real economic activity maintained its upward trajectory amid trade policy uncertainties, financial market volatilities, and geopolitical tensions. "Building on the stability regained, real economic activity sustained its momentum during this year," the agenda states, attributing the resilience to broad-based credit expansion to the private sector and a contraction in public sector borrowing.

Private sector credit grew significantly, supporting key industries and households as demand conditions strengthened. This expansion helped sustain growth despite external pressures, including a surge in vehicle imports driven by pent-up demand and speculative fears of reinstated restrictions. The external current account recorded a surplus for the third consecutive year, contributing to a stable exchange rate with gradual depreciation and bolstering gross official reserves to over US$6.8 billion by the end of 2025—the highest since the recent crisis.

However, the late-2025 Cyclone Ditwah, which caused severe devastation including loss of lives and property damage, poses both risks and opportunities. The Central Bank noted that while supply chain disruptions could hinder short-term growth, reconstruction efforts and related spending are expected to provide a positive boost. "Continuing the growth momentum reported during the last two years, the economy is expected to grow by around 4-5 per cent in 2026," the document affirms, emphasizing that built-up buffers in fiscal, external, and monetary sectors will enable a faster recovery than in previous disasters.

Governor of the Central Bank Dr. P. Nandalal Weerasinghe, in the agenda's address, stressed that resilience is "not a choice, but a necessity." The bank remains vigilant against supply-side shocks from extreme weather events, which have increased in frequency. It calls for national-level measures to mitigate such impacts, including enhanced disaster preparedness and long-term resilience building, while acknowledging central banks' limited tools for addressing supply-driven inflation.

Looking ahead, the CBSL's priorities include data-driven monetary policy enhancements, such as improved modeling to capture post-crisis dynamics and high-frequency data collection for agile responses. Inflation is projected to rise gradually in 2026, reaching the 5% target by the second half, with ongoing reviews of the inflation targeting framework to incorporate stakeholder views and absorb potential shocks.

The agenda also ties economic growth to financial system stability, noting improvements in asset quality, profitability, and capital buffers in the banking and finance sectors. Initiatives like the Countercyclical Capital Buffer framework and the expansion of the Sustainable Finance Roadmap 2.0 aim to fortify the system against cyclical and climate-related risks, supporting inclusive growth.

Fiscal consolidation by the government was commended for aligning with the bank's goals, fostering a platform for higher investments and sustainable development. The Central Bank reiterated its role in promoting financial inclusion through Phase II of the National Financial Inclusion Strategy, set for formulation in 2026, focusing on underserved populations and green finance.

As Sri Lanka transitions from recovery to enhanced growth, the policy agenda warns that preserving hard-earned gains requires continued reforms. "The period ahead calls for a decisive shift from recovery to resilience by strengthening policy credibility, reinforcing economic buffers, and enhancing the economy's capacity to absorb shocks," it concludes.