Sri Lanka Faces Slower Growth Amid Global Headwinds, Warns World Bank

COLOMBO (News 1st); Sri Lanka’s economy is bracing for a sharp slowdown in 2026 as global trade tensions, tariff shocks, and fragile domestic conditions weigh on growth prospects, according to the World Bank’s latest Global Economic Prospects report.

After a strong rebound in 2025 with GDP expanding by 4.6%, Sri Lanka’s growth is forecast to decelerate to 3.5% in 2026, before easing further to 3.1% in 2027. 

The report paints a sobering picture: while South Asia remains one of the fastest-growing regions globally, averaging 6.2% growth in 2026, Sri Lanka lags behind its regional peers such as India (6.5%) and Bangladesh (4.6%).

The report warns that Sri Lanka faces a daunting jobs challenge as youth unemployment persists amid structural bottlenecks. With 1.2 billion young people entering the labor force across emerging markets by 2035, Sri Lanka must accelerate reforms to attract private investment, improve digital infrastructure, and boost productivity.

Despite these challenges, strong revenue performance is forecast to help reduce fiscal deficits and public debt, signaling progress toward fiscal stability. The report also projects current account surpluses, supported by lower global oil prices and robust remittance inflows from Gulf Cooperation Council countries, where economic activity remains strong.

Risks to the outlook remain significant. A further rise in tariffs or removal of exemptions—especially in electronics and services—could dampen export demand and weaken economic activity. Sri Lanka’s relatively high exposure to U.S. markets makes it more vulnerable than many regional peers.

On the upside, a resolution of trade disputes and partial reversal of U.S. tariffs could boost exports and revive investor confidence, offering a much-needed lift to the economy.

Globally, growth is forecast to edge down to 2.6% in 2026, with trade expansion slowing to 2.2% from 3.4% last year. 

Commodity prices are expected to decline by 7%, while oil prices could fall to $60 per barrel, offering some relief to energy importers like Sri Lanka. However, risks remain tilted to the downside, including escalating trade frictions, tighter financial conditions, and climate-related shocks.