ECONOMIC OUTLOOK

NAVIGATING THE GLOBAL ECONOMY

Shiran Fernando addresses the emerging economic challenges

IMF OUTLOOK The International Monetary Fund’s latest outlook projects global growth at 3.3 percent this year and 3.2 percent in 2027, which reflects a modest upward revision from earlier estimates.

This resilience is underpinned by strong technology investment, accommodative financial conditions and a private sector that has proven adept at adjusting to shifting trade policies.

Fiscal and monetary support in advanced economies continues to cushion downside risks even as inflation gradually eases across most regions.

Yet, this apparent stability masks important asymmetries.

For instance, inflation in the US is expected to return to target more slowly than elsewhere, keeping global financial conditions sensitive to policy signals from Washington. The IMF also flags clear downside risks such as a potential reassessment of lofty tech industry expectations and the ever-present threat of escalating geopolitical tensions.

These are not abstract concerns; they shape capital flows, trade patterns and investor sentiment worldwide.

The World Bank’s January 2026 Global Economic Prospects report echoes this cautious optimism. Global growth is projected to remain broadly steady, easing to 2.6 percent in 2026 before ticking up to 2.7 next year – that’s an upward revision from mid-2025 forecasts.

Much of this improvement stems from stronger than expected growth in the United States, which accounts for nearly two-thirds of the upward revision. In other words, global resilience remains heavily concentrated and not evenly shared.

SRI LANKA GROWTH For Sri Lanka, the outlook is more sobering. The World Bank estimates GDP growth at 4.6 percent in 2025 but projects a slowdown to 3.5 percent this year and 3.1 percent in 2027.

The reasons are familiar but no less urgent: structural weaknesses in factor and product markets, lingering scarring from the economic crisis and weaker external demand amid global uncertainties.

Crucially, the projected slowdown is not cyclical alone.

It reflects deeper inefficiencies such as how capital is allocated, how labour markets function and how competitive domestic markets truly are. Without addressing these constraints, Sri Lanka risks settling into a low growth equilibrium even as the world economy becomes more volatile and less forgiving.

The world economy may be proving more resilient than anticipated but that resilience is uneven and fragile

GLOBAL RISK PROFILE These concerns were palpable at Davos in January, where global leaders repeatedly highlighted the fragility of the current world order. Geopolitics is no longer a background risk; it is a defining feature of the economic landscape.

Trade tensions, strategic realignments and regional conflicts are reshaping supply chains, and redefining reliability as a core economic asset. For countries such as Sri Lanka, resilience is no longer optional; it should be incorporated as a central policy objective.

So what does resilience imply in practice?

Firstly, it means reducing vulnerability to external shocks by diversifying growth drivers. Secondly, it requires actively positioning Sri Lanka within shifting global trade frameworks, rather than passively reacting to them.

In this context, exports aren’t merely a source of foreign exchange; they’re also a strategic buffer against volatility.

Markets such as the UK deserve renewed attention. With preferential access under schemes such as the United Kingdom’s Developing Countries Trading Scheme (DCTS), Sri Lanka has an opportunity to deepen its presence in a high value rules based market at a time when world trade is fragmenting.

Tariff preferences alone won’t deliver results but when combined with improvements in standards compliance, logistics and firm level competitiveness, they can greatly strengthen export performance.

This requires moving beyond headline trade agreements to execution. Exporters need clarity, predictability and institutional support to scale. Regulatory bottlenecks, inconsistent policy signals and slow reform implementation erode the very resilience Sri Lanka seeks to build.

Therefore, structural reform isn’t an abstract IMF or World Bank prescription; it’s the mechanism through which the country converts global uncertainty into opportunity.

The proposed new National Export Strategy (NES) must spell this to grow the next set of high export sectors. For example, coconut exports exceeded US$ 1 billion in 2025 but can this be sustained and grown further?

Simultaneously, domestic reforms must align with global realities. As technology investment drives global growth, Sri Lanka must ensure that its own digital and innovation ecosystems aren’t left behind.

As supply chains become more selective, reliability of power, logistics and policy become a competitive advantage. And as geopolitical risks rise, credibility with investors and trading partners become a form of economic insurance.

The world economy may be proving more resilient than anticipated but that resilience is uneven and fragile.

 For Sri Lanka, the next two years won’t be defined by global averages but domestic choices. Slower growth isn’t inevitable but avoiding it requires urgency, coherence and a clear strategy anchored in resilience.