ECONOMYNEXT – Sri Lanka still hopes to achieve 5 percent economic growth this year despite monetary policy tightening and falling consumption amid rising prices, Deputy Finance Minister Anil Jayantha Fernando said.
The island nation originally aimed for 5 percent economic growth, steady from the last year. The US$109 billion economy achieved 5.1 percent expansion in March quarter.
The Central Bank raised its key monetary policy rate by 100 basis points in May to curb excess demand and overheating in the economy with private sector credit growth reaching around 27 percent.
Deputy Minister Anil Jayantha said the government discussed last week with its development partners and other stakeholders how best Sri Lanka could reach its medium term growth target of 7%.
“We will stick to the same growth target,” Fernando told reporters at a media briefing on Wednesday (17).
“Of course, when the rate goes up, there would be a temporary drop in demand. So we will take appropriate measures once the situation is back to normal and determine how best we can energize the economy.”
He said the government’s capital expenditure will be spent as much as possible.
“But we will make a request to the private sector be confident and come out with your investments and all. This increase in the interest rate will not have a drastic drawback in the demand, but temporarily, yes.
The IMF has already reduced its growth projection on Sri Lanka to 3 percent, while the Central Bank has said the growth could be at the lower range of its expected 4-5 percent.
The convergence of the Central Bank of Sri Lanka’s abrupt 100 basis point policy rate hike to 8.75% and soaring domestic fuel prices, which surged nearly 48% following the intensification of the Middle East conflict, presents a severe headwind to Sri Lanka’s economic growth trajectory in the latter half of 2026.
While the island nation registered a robust 5.1% GDP expansion in the first quarter of 2026 driven by post-crisis industrial and construction recoveries, this momentum is being actively reined in by aggressive monetary and cost pressures.
The central bank’s rate increase, implemented to defend a depreciating rupee and counter a 27-month high inflation spike of 5.5%, has instantly raised the cost of domestic borrowing.
This tightening environment acts as a structural brake on credit-driven expansion, directly squeezing the profit margins of local Small and Medium-sized Enterprises (SMEs) and stifling private sector investment in key manufacturing sectors.
Simultaneously, the massive energy price shock, including retail petrol hitting Rs. 434 and diesel climbing to Rs. 407 per liter—has drastically increased production, transport, and operational logistics overheads across all supply chains.
As the IMF-mandated cost-recovery pricing protocol forces the government to phase out fuel subsidies by September 2026, the compounding effect of imported inflation and aggressive monetary tightening is heavily suppressing domestic consumer demand and purchasing power.
Consequently, international analysts warn that these twin stabilization pressures threaten to cool down the real economy, with GDP growth projected to flatten significantly during the final quarters of 2026 as the country balances IMF-driven structural compliance against a worsening global energy crisis. (Colombo/June 17/2026)