Sri Lanka's Central Bank has forecasted economic expansion of 4-5% in 2026, though it cautioned that geopolitical tensions, global market shifts and climate risks pose significant threats to the outlook.

The Central Bank of Sri Lanka released its August 2026 Monetary Policy Report projecting moderate economic growth underpinned by strengthening domestic demand and sustained macroeconomic stability. The forecast assumes real GDP growth will remain steady in the second quarter, supported by continued performance in industry and services sectors, though the Bank acknowledged that recovery momentum depends heavily on structural reforms and growth-enhancing policy implementation.

The central banking authority noted that initial fears of severe economic spillovers from Middle East geopolitical tensions have not fully materialised, creating more favourable near-term conditions. However, the Bank identified multiple downside risks that could undermine growth, including renewed regional instability affecting global energy and trade, weaker external demand from Sri Lanka's primary trading partners, and recurring adverse weather events that could disrupt economic activity.

On external balances, the Central Bank expects the current account to shift from three consecutive years of surplus into a moderate deficit during 2026. This reversal reflects anticipated increases in fuel and vehicle imports alongside reduced services income from lower tourism earnings, though the Bank expects remittances to remain healthy. The projection assumes Brent crude will average approximately $80 per barrel in 2026 before moderating to $70 in 2027, while global food prices—currently near three-year highs—are expected to decline gradually.

The Bank's baseline scenario acknowledges both upside and downside possibilities. Stronger private-sector credit expansion and robust domestic demand could push growth above projections, while weaker tourism activity and subdued international demand represent significant downside risks to the forecast.