ADB says SL’s growth recovery in 2024 ‘exceeded expectations’ but remains fragile

ADB Country Director 

Takafumi Kadono 

• Forecasts recovery to continue at moderate growth of 3.9% in 2025 and 3.4% in 2026 following strong rebound in 2024
• SL, however, will lag against average of South Asia as the region is expected to rise from 5.8% in 2024 to 6% in 2025 and 6.2% in 2026
• ADB says downside risks to SL’s growth outlook include trade uncertainty, including recently announced US tariffs on imports from Sri Lanka, loss of reform momentum, and macroeconomic policy slippages
• Urges SL to sustain reform efforts to mitigate debt vulnerability in medium term, establish foundation for sustainable recovery, resilience building, and growth revival
• ADB lent $ 808 m to SL in 2024; a similar or higher commitment is likely this year in tandem with growth and progress in reforms

By Nisthar Cassim

The Asian Development Bank (ADB) yesterday described Sri Lanka’s 5% growth in 2024 as having “exceeded expectations” and forecasts over 3% improvement in the economy in the next two years, but warned the country remains fragile and the outlook faces several downside risks.

The ADB revealed its observations on Sri Lanka whilst launching its flagship economic publication, the Asian Development Outlook (ADO) April 2025. It forecasts Sri Lanka’s recovery to continue at a moderate growth of 3.9% in 2025 and 3.4% in 2026 following the strong rebound in 2024.

However, the growth forecast for Sri Lanka is still below the average for South Asia, which is set to remain the fastest-growing subregion, with robust domestic demand boosting growth in several economies this year. Growth in South Asia is expected to rise from 5.8% in 2024 to 6% in 2025 and 6.2% in 2026, according to the ADO April 2025 release.

The ADB said economic recovery in Sri Lanka that began in the second half of 2023 continued across all sectors in 2024. Inflation decelerated significantly in 2024 following major cuts in energy prices. Credit to the private sector picked up and reserves continued to build up, while tourism and remittances inflows remained strong. The ADB expects recovery to continue in 2025 and 2026. 

As uncertainties from elections and debt restructuring fade, improved investor confidence will support private investment, although consumer demand will remain sluggish amid expected rising inflation. 

Downside risks to the growth outlook include trade uncertainty, including the recently announced US tariffs on imports from Sri Lanka, loss of reform momentum, and macroeconomic policy slippages. The ADB’s growth forecasts were finalised prior to the 2 April announcement of new tariffs by the US administration, so the baseline projections only reflect tariffs that were in place previously. However, ADO April 2025 does feature an analysis of how higher tariffs may affect growth in Asia and the Pacific. The ADB intends to update its forecast in July after a proper assessment on the US move. 

“In 2024, Sri Lanka’s recovery exceeded expectations after the deepest economic downturn experienced. The road to recovery was challenging, but much needed reforms are yielding positive outcomes,” ADB Country Director for Sri Lanka Takafumi Kadono told journalists yesterday.

He noted that the severe contraction of the GDP by a cumulative 9.6% in the past two years of 2022 and 2023 turned into a remarkable growth of 5% in 2024. “We believe the foundation for sustained economic growth has been laid,” he added.

The Government and the Central Bank of Sri Lanka have taken bold steps in the recovery journey. The International Monetary Fund (IMF) reviews will complete it successfully; the structuring of domestic, bilateral, and commercial tests have almost been completed. Inflation has been tamed and will be appreciated for two quantitative years. Foreign reserves have built up to over three months of imports and the primary surplus for the second consecutive year.

Despite these achievements, Kadono observed that the “recovery remains fragile.” The continued fiscal discipline and further strengthening of external and fiscal buffers are essential as the country navigates both domestic and global activities.

Since macroeconomic stability is now being restored to a greater extent, the commitment to sustained efforts for much needed structural reforms to support trade and investment through private sector-led growth and other flows that do not add to the debt burden is crucial for long-term growth. Further enhancing regional cooperation is essential to address shared issues, he said.

“The ADB will remain a steadfast partner to support Sri Lanka in securing a strong and durable recovery,” the Country Director emphasised.

Kadono revealed that in 2024, with the support of the Government of Sri Lanka, the ADB approved seven loans in the total amount of $ 808 million, including three policy-based loans in the amount of $ 400 million to support the State Budget. 

“Going forward, the ADB has pipelined a similar volume in Budget support for 2025, in line with the IMF program, to continue supporting the Government’s ambitious reforms in various areas, including energy, finance, tourism, trade, public financial management, etc.,” he said. 

“As the economy recovers and the Government’s fiscal position strengthens, we will expand our support to investment projects to ensure the Government’s growth and development objectives are achieved, while supporting the traditional sectors that the ADB has been involved in for over decades in Sri Lanka, such as energy, water and sanitation, education, skills development, and transport,” Country Director Kadono said, adding, “The new pipeline of lending and long-ending projects is expected to include new areas such as tourism and digitalisation in line with evolving Government priorities.”