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Monday October 12th, 2026

Massive COVID-19 surge in China; Sri Lanka expert calls for strengthened surveillance

Prof Neelika Malavige

ECONOMYNEXT – A massive surge in COVID-19 cases in China after Beijing removed restrictions has led to uncertainty about the worldwide threat level and potential disruptions to global supply chains, but experts are cautiously optimistic that a sequel to 2020 is unlikely unless a new dangerous variant emerges, a possibility that they also hesitate to rule out.

“Many countries have many variants of COVID, so unless a very different variant emerges, we will not get another pandemic,” Prof Neelika Malavige at the Department of Immunology and Molecular Medicine, Faculty of Medicine, University of Sri Jayewardenepura, Sri Lanka, said.

“But there is always a possibility of a completely different variant emerging. This is why we need to strengthen our surveillance,” she said.

International media reported that China is now facing what is likely the world’s largest surge in cases, with public health officials warning that possibly 800 million people could be infected with the virus over the next few months. NPR reported that several models predict that half a million people could die, if not more.

Malavige told EconomyNext Wednesday December 21 morning that Sri Lanka needs to strengthen its gene sequencing efforts.

“We last sequenced three weeks ago. There are no samples for sequencing at present. This is the issue, which is really not an issue. We have an influenza problem but COVID cases are low at least for now,” she said.

Citing data from GISAID, the global science initiative that reports on sequencing, the expert said that China has the same variant that Sri Lanka has: Omicron and its offshoots. International reports attribute China’s ongoing surge to a few highly transmissible subvariants of omicron.

“The issue is that while the rest of the world is reporting low transmission, there is very high transmission in China,” said Malavige.

“It’s the perfect environment for the emergence of new variants,” she said.

However, a variant that causes havoc in one country may not cause as much damage in another country, the professor said, citing the XBB variant as an example.

“We have many XBB variant series in Sri Lanka, but they’re not causing much of an issue,” she said.

Sri Lanka, currently going through its worst currency crisis, is in the midst of a multipronged effort to revive its tourism sector, which was ravaged by the pandemic, worsening the country’s forex shortage. Tourism industry representatives say the island nation is not in a position to shut its doors to tourists from anywhere.

Prof Malavige does not believe there is a need to close Sri Lanka’s borders to anyone at present.

“We need to monitor what’s coming so we know. But if the Chinese tourists do have some variant the rest of the world doesn’t have, we can’t stop it by boarder control,” she said.

The expert pointed out that Sri Lanka had no surge in cases when the US and many other countries with a colder climate reported raging outbreaks due to XBB variants

“In China what is happening is very expected. If you have any of these variants with an R0 of 14 introduced to a relatively naive population, you obviously get what we are seeing.

“But with such intense transmission new variants can emerge. This is what other countries are trying to monitor. Otherwise it’s impossible to stop things coming in. By the time any country detects a variant, it will already be inside. Fortunately, in Sri Lanka, we have vaccinated all vulnerable and many people have taken boosters. On top of that quite a large proportion have had natural infection. So our population has hybrid immunity,” she said.

Asked if there’s no real risk of a massive surge in cases in Sri Lanka, Malavige said: “It is highly unlikely. Not with the current ones in China. If a completely new one emerges, then there is a risk, but it’s not going to be like delta, which hit us when we had very low immunisation levels.”

The Guardian reported quoting World Health Organisation (WHO)-affiliated experts that allowing the virus to spread domestically in China could also give it the chance to mutate, potentially creating a dangerous new variant.

China’s zero-Covid approach kept infections and deaths comparatively low among the population of 1.4 billion, but a relaxation in rules has changed the global picture, these experts have said.

“The question is whether you can call it post-pandemic when such a significant part of the world is actually just entering its second wave,” the Guardian quoted Dutch virologist Marion Koopmans as saying. Koopmans sits on a WHO committee tasked with advising on the status of the Covid emergency.

“It’s clear that we are in a very different phase [of the pandemic], but in my mind, that pending wave in China is a wild card.”

Koopmans and other WHO advisory committee members are due to make a recommendation on the global alert level in late January, the report said, but the final decision rests with WHO chief Tedros Adhanom Ghebreyesus, in September said “the end is in sight” for the pandemic. (Colombo/Dec21/2022)

 

Sri Lanka’s foreign reserves Fall in Sept 2026; CB buys dollars

ECONOMYNEXT – Sri Lanka’s foreign reserves fell 1.1 percent to US$ 6,851 million by the end of September 2026, down from 6,929 million dollars a month earlier amid central bank purchasing US$64.2  million on a net basis in the month.

The Central Bank has been aggressively buying dollars to boost the reserves. 

Analysts say the Central Bank’s year end reserve target of US$8 billion is achievable with the dollar inflows from the IMF and other multilateral institutions in the final quarter of 2026. 

The Central Bank sold dollars in May amid sharp depreciation of the rupee currency that month

The Bank sold over US$211 million net in May, marking the first net selling in 22 months.

The Central Bank has net bought US$1,548.8 million in the first nine months of 2026 following a net purchase of US$2 billion last year.

The rupee was under high downward pressure in May as the imports bill for fuel rose unusually high following the Middle Eastern escalation amid continued demand for dollars to buy new vehicles.

However, it reversed course and gained in the next two months before falling in September.

The Central Bank has been buying dollars aggressively from the market to boost foreign currency reserves to meet the targets the country agreed with the IMF under the US$3 billion external fund facility and to repay the island nation’s multilateral and bilateral loans.

The Central Bank in May raised its Overnight Policy Rate amid heavy depreciation of the currency.

The Central Bank’s aggressive reserve building comes ahead of the repayment of foreign debts to sovereign bond holders. This repayment is scheduled to start from April 2028.

After successfully exiting sovereign default through a debt restructuring agreement and securing an IMF Extended Fund Facility (EFF) programme, Sri Lanka has been rebuilding its reserves to meet key targets for macroeconomic stability.

For debt repayment, adequate reserves are essential to meet upcoming external obligations without resorting to new borrowing or accumulating arrears.

While Sri Lanka has made significant progress in restructuring bilateral and commercial debts, any sustained erosion of reserves raises concerns about its ability to sustain the recovery trajectory and fully normalize relations with international markets.

Analysts say policymakers will likely need to focus on boosting export earnings, attracting foreign investment, and prudent fiscal management to reverse the decline and safeguard the hard-won gains from the IMF-supported programme. (Colombo/October 11/2026)

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Sri Lanka spends less than 30-pct of 2026 capital spending through Sept: sources

ECONOMYNEXT – Sri Lanka has spent less than 30 percent of 2026 capital spending, two government sources said, with the government expects to fully utilize it before the end of this year.

Sri Lanka has allocated Rs.1,380 billion for 2026 capital spending, but has spent only around Rs.385 billion through the first nine months of the year, two government sources familiar with the details told EconomyNext.

Sri Lanka’s chronic failure to utilize its full budgetary allocations for capital investment reflects deep-rooted structural inefficiencies in public financial management and project execution, analysts and economists say.

They warn of lower economic growth in the future if the government fails to implement its planned capital investment projects.

The government has repeatedly said most of the spending occurs in the last quarter of the year.

Cabinet Spokesman and Media Minister Nalinda Jayatissa said on Tuesday (06) that 70 percent of the spending is finalized in November and the government is unable to give an update on the total spending as of that day.

Year after year, bureaucratic delays, protracted procurement disputes, politicized project selection, and a lack of technical expertise within line ministries leave a significant portion of capital expenditure unspent on the Treasury books.

This capital under-utilization carries severe long-term repercussions for the island’s economic trajectory.

By failing to deploy allocated funds into critical infrastructure such as transport networks, modernized power grids, and digital public systems, Sri Lanka suffers from lower productivity growth and worsening structural bottlenecks as well as a decline in overall gross domestic product (GDP) potential.

In a fragile post-default macroeconomic climate, this persistent shortfall also sends a negative signal to international development partners and private investors.

It demonstrates an institutional inability to absorb capital effectively, thereby stalling the very structural transformation required to safely out-grow a historic debt burden.

President Anura Kumara Dissanayake’s government has promised to change the process to fast-track the spending, but the move is yet to materialise, analysts say. (Colombo/October 11/2026)

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Foreign investors buy Sri Lanka rupee bonds for second week

ECONOMYNEXT – Foreign investors bought Sri Lanka rupee bonds for a second straight week in the week ended on October 9, Central Bank data showed, amid a stable rupee.

With the latest inflows, the island nation has witnessed net foreign buying in 15 of the last 17 weeks.
Offshore investors bought a net Rs. Rs. Rs. 3,242 million (US$9.8 million) worth of Sri Lanka rupee bonds. The net buying extended the net foreign inflows into the rupee bonds to Rs. 5.1 billion in the last two weeks following a Rs. 16.5 billion outflow in the previous two weeks.
The inflows helped boost foreign holdings in government securities to 202 billion rupees.
Analysts said a less volatile local currency helped foreign buying last week.
The rupee had been steady for more than three years before the sharp depreciation in May with the Central Bank citing higher oil and vehicle imports amid a lingering conflict in the Middle East.
The rupee has fallen 6.3 percent through October 9 this year.Globally, investors are cautious about economic growth due to the impact of the latest Middle East escalation.
The island nation has enjoyed a total inflow of around 60.7 billion rupees into local currency bonds so far this year, following a net inflow of 71.5 billion rupees last year.
The island nation has seen an uptick in inflation in the last six months following a nearly 50 percent hike in fuel prices.
The government raised fuel prices in the last week of September after reducing it in June and August.
The Central Bank raised its key monetary policy rate by 100 basis points in May to curb inflationary pressure stemming from higher demand.
Before the May rate hike, the Central Bank kept its key policy rates steady since May 2025 after reducing them by 825 basis points over 24 months since June 2023 and foreign investors have been buying rupee bonds despite slight depreciation in the local currency (Colombo/October 11/2026)
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Sri Lanka Central Bank stubbornly defends 5% inflation target

ECONOMYNEXT – Sri Lanka Central Bank stubbornly defended the 5% inflation target it recommended and signed with the government for the next three years citing that it was the only “optimal solution” and rubbished claims that the target is high and erodes the purchasing power of the general public.

Economists and monetary policy critics have strongly advocated that the Central Bank lower its official inflation target from 5% to 2%, emphasizing that a lower target is essential to break the country’s historical cycle of currency instability.

Proponents of the 2% target argue that a 5% baseline implicitly embeds a continuous, compounding erosion of domestic purchasing power, increasing price levels by over 15% across a three-year window.

In a country recovering from hyperinflation, critics contend that a targeted 5% annual inflation creates an environment where nominal prices and living costs permanently outpace real wage growth, continually straining lower- and middle-income households.

However, the Central Bank recommended to the government and signed a three-year agreement to maintain the 5% inflation target for the three years through October 2029.

Central Bank Governor Nandalal Weerasinghe explained at a panel discussion with his junior officers that countries choose inflation targets depending on their growth potential and ability to grow.

“So, this is where one can argue, why 2% inflation, is it better? Looking at the purchase power, it looks better, but it’s not better,” he told the gathering in response to a question.

“It is worse, because it will create a country that can grow, much lower below its potential…. It’s not welfare optimization. It will make a lot of people worse off than it will make a lot of people better off.”

A primary structural argument for adopting a 2% inflation target centers on external stability and protecting the Sri Lankan rupee.

When Sri Lanka maintains a 5% inflation target while its key international trading partners such as the United States, Eurozone, and major Asian economies  aim for 2%, a structural inflation differential of around 3% is built directly into the economy.

According to economic theory and historical precedent, this persistent inflation gap exerts steady downward pressure on the domestic currency, forcing nominal exchange rate depreciation.

Advocates argue that lowering the target to 2% would align Sri Lanka with global standards, anchor long-term exchange rate expectations, and prevent recurring balance-of-payments vulnerabilities.

Only 5%

However, Weerasinghe said the 5% target has the “right balance” and the Central Bank had conducted extensive research before arriving at the decision.

“I think, we don’t see any other counterfactual to say, it’s not 5%, it’s 4%, or 2%, or 3%, or 6%, or 7%,” he said.

“A lower inflation target can make the solution worse than what we think…. It won’t be better because everyone can be benefited out of higher growth.”

“If you are coming to a solution, where inflation can drag down the growth below potential, that won’t be the optimal solution.”

“We are all convinced and that’s why we have made the recommendation, government also agreed.”

He said the central bank will reassess and come up with the right level that could be lower in the future and that decision will be data-driven and evidence-based.

Analysts have stressed that a 2% inflation target is critical for lowering long-term interest rates and encouraging capital investment.

Under a 5% target, which carries an allowed accountability band of 2 percentage points, permitting inflation to fluctuate between 3% and 7%, lenders and foreign bondholders demand a higher inflation risk premium to compensate for potential price volatility.

This inflates domestic borrowing costs for both private enterprises and the government. By committing to a tighter 2% anchor, the central bank would provide greater policy credibility, reduce nominal interest rates across the yield curve, and foster a far more predictable environment for long-term private sector investment and debt sustainability.

The data showed, the Central Bank missed the inflation targets for most quarters in the three-year period through end September 2026.

The Bank has blamed lower energy prices for disinflation and missing the target below the lower band of 3% and higher energy prices for breaching the target above upper limit of 7%. (Colombo/October 09/2026)

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Sri Lanka rupee closes at 330.85/95 to US dollar spot, bond yields edge up

ECONOMYNEXT – Sri Lanka’s rupee closed at 330.85/95 to the US dollar in the spot market on Friday, from 330.95/331.00 the previous day, while bond yields closed slightly higher, dealers said.

A bond maturing on 01.08.2030 closed at 11.30/35 percent, up from 11.25/35 percent.

A bond maturing on 15.10.2030 closed at 11.37/40 percent, up from 11.30/40 percent.

A bond maturing on 01.02.2031 closed at 11.42/47 percent, up from 11.35/45 percent.

A bond maturing on 15.12.2032 closed at 11.75/85 percent, up from 11.75/80 percent.

A bond maturing on 15.10.2034 closed at 12.10/15 percent, from 12.05/15 percent. (Colombo/Oct9/2026)

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Sri Lanka stocks close up, ASPI gains 0.41-pct

ECONOMYNEXT – Sri Lanka’s Colombo Stock Exchange closed higher on Friday, CSE data showed, with the benchmark All Share Price Index moving up 0.41 percent.

The ASPI was up 82.57 points at 20,316.91, while the more liquid S&P SL20 was up 0.45 percent, or 26.19 points, at 5,788.75.

The ASPI ended the week down 496 points from last Friday, amidst a mixed week of trading.

Positive contributors to the ASPI were Dialog Axiata (up 0.91 percent at 44.50 rupees), Hatton National Bank (up 0.93 percent at 379.00 rupees), Commercial Bank of Ceylon (up 0.38 percent at 200.00 rupees), Richard Pieris and Company (up 4.30 percent at 26.70 rupees), and Laugfs Gas (up 7.35 percent at 40.90 rupees).

SMB Finance (down 9.09 percent at 1.00 rupee), LOLC Holdings (down 1.25 percent at 415.25 rupees), Haycarb (down 1.37 percent at 198.50 rupees), and Industrial Asphalts (Ceylon) (down 16.67 percent at 0.50 rupees) were top negative contributors.

Market turnover was 1.05 billion rupees. Diversified financials led turnover with 233.69 million rupees, followed by capital goods with 200.09 million rupees.

During the session, crossings in Lanka Milk Foods (LMF) in the first half of the trading day drew market interest, Raynal Wickremeratne, Head of Research and Strategy at NDB Securities, said.

“Usually 20,000 is also a psychological limit,” Wickremeratne said. “When it comes back closer to that, people also might feel like it’s worth buying, so that’s why sometimes coming close to that you might have a bit of a move.” (Colombo/Oct09/2026)

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