In Focus - Headwinds and tailwinds for 2026 and 2027
January 2026
Sri Lanka’s economic story for the next two years seems firmly set in the direction of continued strength and steadfastness. Notwithstanding these solid economic fundamentals, the likelihood for both upside and downside risks to materialize warrants attention. Some of these risks are familiar, but some are quite distinct to what Sri Lanka has seen in the past, linked closely to the structural transformation that has taken place. In this month’s Focus, we look at the balance of headwinds and tailwinds on the horizon.
Below are some of the points we discuss;
Geopolitical and global trade risks
Continuous geopolitical conflict and trade tensions are likely to be a feature of the global economy in 2026 and 2027. The possibility of continued friction between US - China, Russia - Ukraine, Iran - Israel, and even India - Pakistan is plausible, and continued bilateral disagreements globally can further delay the current state of disorder from settling at a new equilibrium. Looking back, domestic impacts of global disorder have not been very linear and have tended to be countercyclical on occasion. In that, global tensions have the potential to be either headwinds or tailwinds for Sri Lanka.
Dislocations in the economy
As with any case of changing paradigms, Sri Lanka’s macroeconomic transition has likely not been evenly absorbed across the economy. As the fiscal position moved from deficits to surpluses, the allocation of government spending, cash flows, and credit changed materially. Such shifts in economic firepower can cause certain parts of the economy to be misaligned with the new structure. Sectors that were previously supported, directly or indirectly, by deficit-driven spending find themselves displaced as the economy becomes increasingly driven by private sector investments.
Global conviction in Sri Lanka’s story
One crucial element of Sri Lanka’s medium-term economic future is the response of global investors to Sri Lanka’s post-crisis growth momentum. Historically, FDI inflows to Sri Lanka have not been very consequential to the broader economic story that unfolded. While portfolio inflows have been substantial at points in the past, especially when considering international market capital raising, we have not seen this in any significant level for many years. However, the total quantum of inflows across varied channels (equity markets, government securities markets…etc.) has room for improvement given the strength in the economy.
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