The Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA) organised a Monday Morning Meeting on 22 June 2026, featuring a presentation by Dr. Gulbin Sultana, Associate Fellow, MP-IDSA on “The Sri Lankan Economy: Recent Challenges.” The Session was moderated by Dr. Smruti S Pattnaik, Research Fellow, MP-IDSA. Ambassador Sujan R. Chinoy, Director-General, MP-IDSA and scholars of the Institute participated in the discussion.

Executive Summary

The Session examined the ongoing recovery of the Sri Lankan economy following the 2022 economic crisis and the measures undertaken by the governments of President Ranil Wickremesinghe and President Anura Kumara Dissanayake to facilitate this recovery. The Speaker discussed the short-term and medium-to-long-term measures employed, along with the policy reforms that helped the economy recover from a negative GDP growth rate of -7.3 percent to a positive 5 percent between 2022 and 2025. The Speaker assessed the monetary and policy reforms implemented by the Sri Lankan Government during this period, as well as their impact on the country’s working class. She concluded with an assessment of the impact of the West Asian conflict and Cyclone Ditwah on the country, while providing projections for monitoring Sri Lanka’s contemporary vulnerabilities.

Detailed Discussion

In her Opening Remarks, Dr. Smruti S. Pattanaik, introduced the topic by providing a brief overview of Sri Lanka’s recovery following the economic crisis of 2022 amid the adverse effects of Cyclone Ditwah and the West Asian conflict on the economy. Referring to the country’s economic growth, she explained how Sri Lanka exceeded the projections made by the International Monetary Fund (IMF) and the Asian Development Bank (ADB). The tourism industry, however, continued to show a bearish trend compared to the previous year.

Dr. Gulbin Sultana began with an overview of Sri Lanka’s economic trajectory from 2022 to 2025. She highlighted the improvement in GDP growth, which transitioned from a negative -7.3 percent to a positive 5 percent. Additionally, she pointed to a decline in public debt, and increase in gross official reserves to US$6.8 billion during this period. She provided the context for the 2022 economic crisis, emphasising how government corruption and mismanagement, alongside widespread public discontent, ultimately led to a regime change. The newly formed administration of President Dissanayake prioritised economic stability, restoration, and recovery as its primary objectives.

To address its economic vulnerabilities, Sri Lanka adopted a combination of policy shifts and monetary adjustments categorised into short-term measures (implemented primarily in 2022 to address immediate challenges) and medium-to-long-term strategies, as detailed by Dr. Gulbin Sultana. Sri Lanka initially suspended debt servicing and imposed trade restrictions on the import of non-essential items. The debt moratorium discouraged multilateral organisations from aiding Sri Lanka. Consequently, the country relied on bilateral support, including a US$400 million currency swap facility from India and an arrangement with Iran under which US$5 million worth of Ceylon tea per month over a multi-year period was used to settle the US$251 million legacy oil debt. Sri Lanka also completed a debt restructuring that suspended repayments on official bilateral loans and restructured international sovereign bonds until 2028.

According to the Speaker, for medium-to-long-term stability, Sri Lanka engaged with the IMF, securing financing through its Extended Fund Facility (EFF) Programme. This engagement proved pivotal in encouraging other multilateral institutions to provide financial assistance to the country.

Dr. Sultana talked about several policy reforms that were introduced under the IMF’s EFF, including the Public Debt Management Act and the Public Financial Management Act. Tax reforms, such as the IMF-backed expansion of the Value Added Tax (VAT), were also introduced. Although the implementation of the IMF-backed VAT expansion has been postponed, it continues to face public opposition because of its inherently regressive nature. Furthermore, structural reforms were proposed to make State-Owned Enterprises (SOEs) more cost-effective, alongside the introduction of the Aswesuma Programme for targeted low-income communities. However, SOE restructuring remains in its nascent stages, and the Aswesuma Programme continues to face implementation bottlenecks and systemic corruption. These challenges are further compounded by the IMF’s expenditure ceiling, which restricts investment in these programmes, thereby limiting their effectiveness.

Dr. Sultana explained that the public remained largely dissatisfied with the nature of the reforms undertaken by the Government. This resentment was reflected in the Local Council Election results. The Government, however, remained optimistic, with former President Wickremesinghe describing the period as one of “short-term pain for long-term gain.” The IMF and ADB nevertheless continue to identify key vulnerabilities, including natural disasters, susceptibility to external shocks due to import dependence, and US tariffs on Sri Lanka. In addition, Sri Lanka’s preferential access to the European Union (EU) market under the GSP+ scheme remains under scrutiny. Its continuation depends on compliance with 27 international conventions, with the EU specifically requiring that counter-terrorism legislation be brought fully in line with international human rights standards.

Dr. Sultana focused on the impact of Cyclone Ditwah and the West Asian conflict on Sri Lanka. Striking Sri Lanka in late 2025, Cyclone Ditwah triggered the island nation’s worst weather disaster in recent history. It caused over 600 deaths, affected 2.3 million people, and inflicted an estimated US$4.1 billion in direct physical damage. The IMF subsequently approved US$206 million in emergency financial assistance for Sri Lanka under the Rapid Financing Instrument (RFI) to help the country address immediate balance-of-payments and fiscal pressures resulting from the cyclone. Meanwhile, the ongoing West Asian conflict has adversely affected the country’s tourism, energy, and apparel sectors. Fertiliser prices also increased, while inflation reached 5.5 percent, exceeding the IMF’s projection of 5 percent.

Dr. Gulbin Sultana concluded by outlining the priorities that the island nation should focus on in the coming years. Diversifying exports, strengthening climate resilience, and attracting greater foreign investment should remain Sri Lanka’s primary priorities. Given the country’s heavy reliance on exports and its vulnerability to adverse climatic conditions, these measures would help mitigate current economic challenges while strengthening resilience against future shocks. Despite the end of the immediate crisis, structural vulnerabilities persist. While economic growth has resumed, greater emphasis must now be placed on sustaining the growth momentum.

Q&A Session

The discussion began with Director General, Ambassador Sujan R. Chinoy’s remarks on the presentation. He emphasised India’s role in promoting the growth and development of the neighbourhood. About Sri Lanka, he noted that India should expand investment initiatives and absorb a larger share of Sri Lankan exports. Referring to India’s multi-pronged financial and humanitarian assistance package worth over US$4 billion, he also enquired about the conditions India places on Sri Lanka while extending such significant assistance. In response, Dr. Gulbin Sultana explained that the US$400 million currency swap facility would be repaid to India, while agreements in the oil and energy sectors would prove mutually beneficial for both countries. However, she also noted that legacy issues, Rajapaksa-era geopolitics, and the high cost of investment have historically discouraged Indian investment in Sri Lanka.

Gp. Capt. (Dr.) R.K. Narang, Dr. Mayuri Banerjee, Dr. Ashish Shukla and Dr. Deepika Saraswat raised questions and made observations. They focused on Sri Lankan public perceptions of India, the nature of current Chinese investments in Sri Lanka, India’s defence ties with Sri Lanka, and the limited presence of Indian private-sector investment in the country.

Dr. Gulbin Sultana noted that Sri Lankan public opinion towards India remains largely favourable, particularly considering India’s timely nationwide economic assistance and humanitarian support since the 2022 economic crisis. She observed that China’s investment sin large infrastructure projects have declined since the crisis. However, China’s proactive engagements in the northern province were noted by the Speaker. On defence cooperation, she highlighted India’s investments in the maritime sector. For instance, at the Port of Colombo, India’s warship and submarine builder, Mazagon Dock Shipbuilders Limited (MDL), acquired a controlling 51 percent stake in Colombo Dockyard. In addition, India continues to provide technical cooperation and capacity building to Sri Lanka. Private investment, however, has remained limited. Some of the Indian companies including Adani Group and the real estate firm Krrish Group have faced significant corruption and financial controversies related to their operations in the country. Indian companies continue to remain cautious because of these challenges. However, this reluctance is not unique to Indian firms, as the overall investment environment in Sri Lanka remains challenging.

The Report has been prepared by Mr. Cyrus Ghosh, Intern, South Asia Centre, MP-IDSA.