The Asian Development Bank (ADB) has upgraded its economic growth forecasts for Sri Lanka in its December 2025 Asian Development Outlook (ADO), highlighting a robust recovery driven by strong private sector credit expansion, buoyant consumption, and improved investor confidence. However, the report cautions that Sri Lanka’s growth prospects may be dampened by the impact of Cyclone Ditwah, which struck on 28 November 2025, with economic costs of the disaster yet to be determined.

According to the ADO, Sri Lanka's GDP growth forecast for 2025 has been revised upward, supported by robust performance in the first half of the year. The economy expanded robustly during this period, with strong gains in industry and services sectors. Private sector credit growth has been a key driver, alongside increased investment and steady consumer spending. This momentum is expected to continue into 2026, with the forecast for that year also upgraded, underpinned by planned infrastructure investments and favorable business sentiment.

The report notes that external demand remains subdued amid ongoing global trade policy uncertainties, particularly following recent U.S. tariff adjustments. Despite these headwinds, Sri Lanka's services sector showed improvement, with October readings indicating continued gains in wholesale and retail trade-related activities. Manufacturing and services Purchasing Managers' Indexes (PMIs) suggest resilient economic activity, though mixed across the region.

On the inflation front, the ADB has revised its projections downward for both years. Prolonged deflation through much of 2025 in Sri Lanka, with inflation turning positive only late in the year, has led to a downward revision of the forecast. Inflation was held back by lower-than-expected fuel costs, declines in transport fares, and better supply conditions from improved domestic production. For 2026, inflation is expected to recover gradually, driven by energy tariff adjustments and fading base effects, while food prices remain contained due to stronger agricultural output.

This optimistic revision for Sri Lanka aligns with broader trends in South Asia, where growth is now forecast at 6.5% for 2025, up from previous estimates, largely driven by India's strong performance. The ADO emphasizes that while regional growth remains resilient, downside risks from tariff tensions, geopolitical strains, and property market weaknesses in major economies like China could affect the outlook.

Sri Lanka's economy has been on a path to recovery following challenges in previous years, including debt restructuring and external shocks. The ADB's upgraded forecasts reflect progress in stabilizing the economy, but underscore the need for continued reforms to build resilience against global uncertainties.