Sri Lanka’s economic and political landscape has undergone dramatic transformations following the severe economic crisis of 2022–23. The election of the National People’s Power (NPP) government led by President Anura Kumara Dissanayake in late 2024 positioned the country at a crucial turning point as it strives to navigate through complex economic recovery while maintaining debt sustainability. The new administration is tasked with addressing immediate and longer-term issues to steer the nation on a path towards sustainable growth despite facing numerous obstacles and uncertainties.
Economic Outlook and Stabilization Efforts
Sri Lanka’s economic outlook, while cautiously optimistic, suggests that the nation is still deeply mired in the aftermath of the crisis. Stabilization efforts have been robustly supported by a combination of factors, including prudent monetary policies implemented by the Central Bank of Sri Lanka, comprehensive fiscal policy reforms, and an essential International Monetary Fund (IMF) assistance package amounting to US$3 billion. Furthermore, a substantial aid package from India valued at US$4 billion has been a significant pillar supporting the recovery efforts.
Vital to these stabilization measures was a critical debt restructuring deal, which saw US$17.5 billion of debt restructured with private bondholders and China, providing the much-needed relief. Tourism, an essential aspect of Sri Lanka’s economic framework, has also seen a promising resurgence. The recovery in tourism has been instrumental in bolstering the country’s foreign exchange reserves, which had been critically depleted during the economic crisis. However, despite these positive developments, the road ahead remains challenging, with the World Bank forecasting a slowdown in growth from 4.4% in 2024 to 3.5% in 2025.
In addition to the predicted economic deceleration, over half of the population faces severe multidimensional vulnerabilities in living standards, further highlighting deep-rooted issues that necessitate urgent attention. The exodus of skilled professionals seeking foreign employment opportunities has posed another significant concern, with approximately 300,000 people leaving the country in 2024 alone. This ‘brain drain’ exacerbates Sri Lanka’s talent shortages, making it increasingly difficult to drive economic growth and innovation needed for achieving sustainable progress.
Challenges and Risks
The challenges facing Sri Lanka are multifaceted and extend beyond merely economic factors. A significant concern is the competency and experience of the newly elected parliament, where more than half of the 225 members are first-term representatives. This lack of experience raises critical questions about their ability to enact the essential reforms necessary for stabilizing and reviving the economy. The NPP government is charged with enhancing service delivery, retaining key talent within the state sector, and developing expertise in governance – all of which are crucial steps toward ensuring sustainable progress and addressing the longstanding vulnerabilities afflicting the population.
Enhancing service delivery remains paramount as it impacts the broader public trust and the efficient functioning of various governmental departments. Retaining key talent within the state sector is equally important because it ensures that critical areas like healthcare, education, and public services are not undermined. Developing governance expertise is crucial, especially given the precarious macroeconomic environment; experienced leadership is essential to navigate complex policy decisions and strategic initiatives that drive substantive economic changes.
Additionally, the outflow of skilled professionals, commonly referred to as ‘brain drain,’ continues to be a pressing issue, depriving the country of the human capital necessary for robust economic growth. This talent depletion markedly reduces the pool of qualified individuals who could drive innovation and productivity in various sectors, making it harder for Sri Lanka to compete on the global stage. Addressing these talent shortages and enhancing domestic opportunities will be critical in reversing this trend and fostering a climate conducive to retaining and nurturing local talent.
Tourism and Fiscal Sustainability
Despite the numerous challenges, tourism remains a bright spot within Sri Lanka’s economy. With more than 2 million tourists visiting the country in 2024 – marking a significant 38% increase from the previous year – the sector has provided a much-needed boost to foreign exchange reserves and overall economic stability. However, to sustain this growth, the government must take proactive measures to ensure the industry’s long-term viability. This involves robust marketing strategies that promote Sri Lanka as a multicultural destination, appealing to a diverse range of global tourists and enhancing the tourism experience in less-visited regions in the north and east of the country.
Fiscal sustainability continues to be one of Sri Lanka’s most contentious issues, with ramifications that stretch across the entire economic landscape. Although government revenue has seen an uptick due to increased taxation, simply raising taxes will not suffice in addressing the broader fiscal imbalances. Reducing spending on non-essential services and robustly tackling corruption are critical to creating a more financially sustainable environment. Earlier efforts to privatize state-owned enterprises have been met with resistance, but the administration’s current strategy focuses on revamping these enterprises through improved management practices.
Regardless of this approach, there remains a compelling argument for reconsidering the privatization or restructuring of significant loss-making entities, such as SriLankan Airlines and the Ceylon Petroleum Corporation. These enterprises, if restructured or privatized, could potentially alleviate some fiscal burdens, inject much-needed capital into the economy, and streamline efficiency across their operations.
Geopolitical Strategy and Foreign Policy
Sri Lanka’s role within the shifting geopolitics of the Indo-Pacific is becoming increasingly complex and multifaceted. Strengthening economic relationships with India is of paramount importance, especially given China’s significant commercial footprint in Sri Lanka. President Anura Kumara Dissanayake’s visit to India in December 2024 laid a promising foundation for bolstered bilateral relations. The government is focused on advancing key areas of collaboration, including business-to-business links, digitization, cross-border energy projects, and finalizing an in-depth bilateral free trade agreement.
These initiatives are not only crucial for strengthening economic ties but also for ensuring long-term stability and growth. Enhancing business-to-business linkages fosters an environment of mutual cooperation and innovation, providing platforms for shared technological advancements and economic growth. Efforts toward digitization reflect a forward-thinking approach that could modernize various sectors and drive efficiencies, while cross-border energy projects have the potential to address some of Sri Lanka’s energy needs in a sustainable manner.
Ensuring a deeper bilateral free trade agreement with India could unlock numerous economic opportunities, increasing market access for Sri Lankan goods and services. It will also enable the country to better integrate into regional and global supply chains, enhancing its competitiveness and resilience to external economic shocks. This strategy underscores Sri Lanka’s commitment to fostering strong diplomatic and economic relationships that can support the country’s ambitions for sustainable growth and economic recovery.
Looking Forward
Sri Lanka’s economic and political landscape has experienced significant changes following the intense economic crisis of 2022–23. The election of the National People’s Power (NPP) government, headed by President Anura Kumara Dissanayake in late 2024, marked a pivotal moment for the nation. As the country grapples with the challenges of economic recovery and debt sustainability, the new administration faces the formidable task of both addressing urgent issues and laying the groundwork for long-term stability. Their goal is to lead Sri Lanka toward a trajectory of sustainable growth. The aftermath of the crisis necessitates a careful approach to balancing immediate economic needs with strategic planning for the future. The government must navigate numerous obstacles and uncertainties while making tough decisions to ensure resilience and progress. This era is crucial for Sri Lanka as it tries to rebuild its economy and instill confidence in its citizens, hoping to emerge stronger and more stable than before.
