Colombo

Sri Lanka’s economy has proved remarkably resilient to successive shocks, with economic activity expanding 4.2 per cent in the second quarter of 2026, the International Monetary Fund (IMF) said on Wednesday.

The growth marked the 11th consecutive quarter of strong economic expansion, the IMF said in a statement issued at the end of its September 10-23 mission to Sri Lanka.

“While headline inflation rose to 8 per cent year-on-year in August due to the global oil price shock, expectations are broadly anchored. Gross official reserves have increased, reaching US$6.9 billion at end-August 2026. Banks remain well capitalised and profitable,” it said.

Sri Lanka, however, continues to face downside risks from uncertainty over the duration and intensity of the conflict in West Asia, global trade policy and the impact of El Nino, said the international body.

“Safeguarding macroeconomic stability in a shock-prone environment requires unwavering commitment to prudent policies and reforms to rebuild fiscal and external buffers, maintain price stability, and advance the governance agenda while strengthening social safety nets to protect the most vulnerable,” it said.

The IMF said it would be critical to develop and implement a medium-term revenue strategy to sustain revenue mobilisation while improving the efficiency and fairness of the tax system.

“Steadfast efforts are needed to broaden the tax base and rationalise tax exemptions and incentives,” it said.

The Fund also said it would be prudent to maintain the 5 per cent inflation target.

The IMF team visited Jaffna and learned first-hand about the Northern Province’s economic potential. Discussions with the private sector and civil society highlighted opportunities to unlock growth and create jobs through investments in connectivity, skills and sectors such as agriculture, fisheries, tourism and renewable energy.

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It also called for strengthening social protection so that the benefits of Sri Lanka’s economic transformation are shared more broadly.