The January 2026 edition of our monthly, ‘The Lion Defiant’ focuses on how the Sri Lankan economy despite having faced two massive shocks in 2025 remained quite strong. We think this strength is likely to continue ahead and even be enough to buffer against further shocks if they arise.
Cyclone Ditwah has undoubtedly resulted in a humanitarian crisis from which the nation still continues to recover. However, while there is a lot more to do to cover the actual damage on the ground and the spending required to alleviate the impact of this shock, we think that these early indications show that it will be possible without dramatic economic consequences. During this same period, more significant to us was the “hidden shock” of 2025 - the large amount of missing multilateral money in the middle of the year which led to Sri Lanka recording massive net outflows. In the second and third quarter, we probably saw some of the biggest net outflows in two consecutive quarters in modern Sri Lankan history – around USD 1.5 bn flowing out on net basis. Sri Lanka only experienced around 5.5% depreciation in 2025 despite such massive outflows.
We think these shocks were handled by extremely strong fiscal performance, exceedingly resilient external performance, low inflation pressures, and a robust private-sector driven growth engine is what we see as driving Sri Lanka’s story.
Going forward beyond 2026 we see these as structural and fundamental changes in the Sri Lankan economy as opposed to being driven by temporary factors. As a result, we think these continue to be major drivers of the underlying economic story for the next few years as well which could result in a very strong macroeconomic foundation, but where both local and especially global volatilities still act as interruptions that prevent the full materialization of this story.
For those interested in the key data points on Sri Lanka’s macroeconomic developments, the final section provides the latest on the trade balance, current account balance, reserves, exchange rate, interest rates, and inflation – including our forecast on CCPI inflation up to end-2027.
Our clients would have received the report to their emails and is accessible on our Athena reports platform since the 26th of January, 2026. If you still haven’t had a chance to read through click here! If not, please get in touch with us for a trial subscription to our reports (clientconnect@frontiergroup.info).