STATE OF THE NATION

VIEWPOINTS

_{MOVINGBEYOND STABILITYTO MORE GROWTH}          

Wijith DeChickera posits that the mercury has settled on a once insalubrious forecast but fears the barometer may drop before it rises again 

Sri Lanka is on the cusp again. Headlines observe the ship of state is no longer taking on water as drastically as it was during the political and economic crises, COVID-19 pandemic and bankruptcy years. 

But the bottom line is that bar the propaganda brigade, nobody should confuse floating with the flourishing we’re yearning for.

There’s no denying (except in the grudging ranks of the sociopolitical opposition to this regime) that the headline numbers are encouraging. The economy expanded by 5.1 percent in the first quarter of this year with industry (7.2%), services (3.4%) and agriculture (1.1%) contributing respectively. 

Construction, manufacturing, finance, transport and IT were among contributors to growth. And unemployment was a relatively low 3.7 percent. On the flip side, agriculture remains relatively weak and industrial production lost some momentum in June. 

There you have it: an economy recovering from collapse will naturally produce impressive percentages before it necessarily produces comparable or commendable prosperity. 

Inflation rose from the low single digits, however.

Headline inflation based on the Colombo Consumer Price Index (CCPI) spiked by eight percent in August, from 7.3 percent in the previous month, while the broader National Consumer Price Index (NCPI) rose by 7.2 percent year on year in July, driven by rising food and energy prices, and an interminable conflict in the Middle East feeding directly into global oil costs and domestic energy tweaks. 

The Central Bank of Sri Lanka defensively flexed its muscles in May with a 100 basis points rate increase, taking its Overnight Policy Rate (OPR) to 8.75 percent, where it remained in July. The medicine may be necessary; but unfortunately, such treatment for inflation can also give credit, investors and small businesses chronic headaches. 

Externally, the picture is equally mixed… 

Workers’ remittances were exceptionally resilient, reaching US$ 5.4 billion in the first seven months of 2026 – up 21.4 percent year on year. 

But tourism also stumbled amid the Gulf crisis and attendant geopolitical turmoil with earnings tumbling 11.9 percent over the same period, while higher energy costs and import pressures added to external sector strains. Gross official reserves stood at 6.6 billion dollars at the end of July – a useful cushion but hardly reason to celebrate prematurely. 

The IMF programme, much praised by neoliberals and reluctantly accommodated by progressives, deserves neither vindication nor vilification. 

It undoubtedly imposed discipline after decades of fiscal fantasy: stronger revenue collection, solid debt restructuring, a more independent monetary framework, and greater attention to state-owned enterprises and governance. 

Yet, its austerity logic has political and social costs, as well as economic boons. 

Tax revenue fell off its perch of 15.4 percent of GDP in 2025 to a projected 14 percent for the current year, even as VAT thresholds were lowered and new levies sought to broaden the tax net. The danger is obvious: reform becomes politically toxic if ordinary taxpayers feel that efficiency, wealth and privilege remain largely unreformed. 

So what’s next on the agenda? 

Sri Lanka must move from mere stabilisation to more production and growth. 

This means predictable taxes rather than perpetual fiscal ambushes; serious export diversification; cheaper and more reliable energy (to say nothing of more stringent quality controls, if the government is sincere in its stated desire and ostensible efforts to cleanse the Augean stables of corruption, waste and mismanagement); commercially disciplined state enterprises; investment in skills, technology and logistics; and targeted (not indiscriminate) social protection. 

And capital expenditure must also stop being the first casualty of fiscal caution.

This is realistic – but only if political survival does not continually trump economic revival. The government therefore, must resist both populist reversals and technocratic tunnel vision. 

Internally, inequality, household exhaustion and public impatience remain potentially combustible. Externally, oil prices, the Middle East conflict, geopolitical rivalry in the Indian Ocean, and dependence on tourism, remittances and imported energy leave Sri Lanka vulnerable to events over which it has approximately zero control.

Our island has escaped the intensive care unit, or so it would seem; but for the heavy toll taken by dengue recently (nearly 100,000 cases and 74 reported deaths) – although recovery is not the same as health, whether aboard the ship of state or in government hospitals. 

And the next challenge is not merely to avoid another crisis or gear up to react to the next epidemic. It is to build an economy capable of surviving one without needing to be rescued – again. 

Nor do economic considerations exist in isolation. 

But social factors such as more persistent poverty than a socialist administration may find politically inconvenient to admit, legal and constitutional battles being fought on Hulftsdorp Hill and possible implications for judicial independence (and even preparing for meteorological realities like the fallout from El Niño) are sufficient to keep the state’s heads swimming all the time…

And there’s no saying how deep the geopolitical waters a recent licensing round for oil and gas prospecting in the Mannar basin will go… or take Sri Lanka: another development to deeply divide our nation.

So common sense must balance national business acumen.