The latest data from the Department of Census and Statistics (DCS) show that Sri Lanka’s economy grew by five percent in 2024, reversing two years of contraction. However, while the rebound is encouraging, Sri Lanka’s future economic growth is layered with uncertainty and that economic reforms and attracting new foreign investments are vital for this momentum to last.
After two years of economic contraction, following the country’s worst economic crisis since Independence, which saw GDP shrink by nearly nine percent. Sri Lanka’s five percent GDP growth in 2024 is seen as a sign of recovery.
DCS data shows that all three sectors of the economy — agriculture, industry and services — expanded by 1.2 percent, 11.0 percent, and 2.4 percent in 2024, according to the DCS. The GDP growth rate for the fourth quarter of 2024 is estimated at 5.4 percent, the DCS said. The Gross Domestic Product (GDP) of Sri Lanka for the year 2024 at current price increased up to Rs. 29,898,564 million (about 101 billion U.S. dollars) from Rs. 27,419,804 million (about 93 billion dollars) in 2023, registering a 9.0 percent positive change in the GDP at current prices, the DCS said.
The recovery, driven by a combination of State reforms, international support and improved external conditions, has sparked cautious optimism about the future. However, worries remain whether this growth trajectory can be sustained in the face of lingering structural challenges and global uncertainties. There are serious concerns across the world that the current uncertainty in the international system could lead to potential global economic recession by end 2025.
Tourism returns to pre-pandemic levels
Political economist at the Tricontinental: Institute for Social Research and columnist, Shiran Illanperuma said that the country is just getting back to where it was before the pandemic. The increase in tourist arrivals and remittances played an important role, he said.
Tourism, which accounted for nearly five percent of Sri Lanka’s economy when the sector was at its peak in 2018, bounced back from the 719,000 mark in 2019 to over two million in 2024. Visitors from conflict-affected countries such as Israel, Russia and the Ukraine flocked to Sri Lanka taking advantage of Sri Lanka’s depreciated currency. Remittances which slumped to 3.8 billion U.S dollars in 2022, climbed to 6.6 billion dollars in 2024. At the same time, apparel exports showed signs of returning to pre-crisis levels. Given that Sri Lanka received close to 650,000 tourists by March 17 and that workers have remitted 1.1 billion dollars in the first two months of 2025, it is likely that the contribution of the two sectors could be larger this year.
However, Illanperuma said that despite the positive trends, the growth momentum is not guaranteed to continue in 2025, citing a lack of investment in productive capacity and looming global trade uncertainties. “What economic history has shown us is that we need industries and productivity increases. This has not been a focus of successive Governments since the late ‘70s. However, at least with this Government, we know they know the importance of industries but the restrictions imposed by the IMF makes it difficult for the Government to finance industries. They have to depend on Foreign Direct Investments (FDI) and good foreign relations which are important to attract FDIs,” he said.
While the industrial sector grew by 11percent in 2024, Illanperuma attributes much of the industrial recovery to the fall in interest rates, which has kick-started manufacturing and construction. Moreover, industrial output had declined significantly in 2022 and 2023.
“In 2022 and 2023, energy prices were crippling and interest rates were unbearable. Industrial electricity use dropped by 20 percent in those two years. In 2024, things improved slightly, especially with interest rates coming down,” Illanperuma said. While a five percent increase of the GDP is a welcome development, the increase comes from a low base given that the economy had contracted for two years and, CEO of the Advocata Institute, Dhananath Fernando said that while five percent growth is welcome, it’s not enough given that Sri Lanka has to start repaying its debts from 2028.
“We need seven percent or more to really get out of this crisis. That requires deep reforms,” he said.
Lecturer at the University of Colombo, Umesh Moramudali, described 2024 as a unique year marked by low inflation and modest but meaningful real growth. “Inflation averaged around two percent and in the last quarter of 2024, we even saw deflation. That’s extremely rare for us,” he said. According to him, the five percent growth figure is significant because it reflects real growth, not just nominal increases driven by prices. He expects a similar performance in 2025, noting that salary hikes and tax cuts planned for April will likely boost domestic consumption, especially in retail, construction and construction-related sectors.
The IMF’s $2.9 billion bailout and the debt restructuring deal finalised in December 2024 also played a crucial role in restoring economic stability. For Fernando, these moves brought essential breathing space. “We entered the IMF program because we desperately needed stability,” he said. “But if we only do what the IMF tells us, we won’t grow. We need to think beyond stabilisation—about how to actively grow our economy.”
Illanperuma agrees but cautions that IMF-imposed fiscal restrictions limit the Government’s ability to invest directly. “They can’t drive investments. That’s why foreign investors matter so much now. We got a $3.7 billion investment for a refinery in Hambantota. If we can implement a few more like that, without bureaucratic and political hurdles, we might sustain short-term growth.”
However, IMF benchmarks present risks too. Illanperuma said that failing to meet targets could trigger further tax increases, especially on electricity. “If energy prices spike, the industrial and agricultural sectors will be hit hard. If people are taxed more, domestic consumption will drop. That’s a problem for inward-facing industries.”
Only remittances taxed
Moramudali said fears that new taxes on foreign currency earnings will discourage remittances are exaggerated. “The tax isn’t on remittances—it’s on foreign earnings from things such as IT and freelancing. It mainly affects the upper middle class. The tax rate is modest, and the risks of avoiding it outweigh the benefits. Most will continue to use formal channels”, he added.
While 2024’s recovery is encouraging, projections for 2025 and beyond are less rosy. The IMF forecasts just three percent growth in the coming years, citing global uncertainty. Moramudali, however, said Sri Lanka will exceed those projections again. “I see us reaching five percent in 2025 too, largely driven by domestic consumption. The salary increases and tax relief in April will raise aggregate demand. Inflation will likely remain below five percent until the third quarter, so we’ll have space to grow.”
However, all these predictions depend on the external environment which could upend this optimism. With global trade under stress, particularly due to potential tariff escalations in the United States, Sri Lanka’s export-dependent economy could face headwinds. “Forty per cent of our exports are apparel, and nearly half of that goes to the US,” Moramudali said. “If Trump returns and slaps on tariffs, we’re in trouble.”
Fernando sees potential silver linings. “If the US targets China and Mexico with tariffs, Sri Lankan exports might become more competitive. But we can’t bank on that. We need to diversify our markets and integrate into global value chains.”
Sri Lanka has the potential to integrate into emerging sectors such as electric vehicle and semiconductor supply chains—at least in lower-tier functions such as assembly and packaging.
But to do that, the country needs coherent policy, vocational training and strategic public-private partnerships. This leads to one of the country’s most pressing challenges: productivity. A large number of Sri Lankan professionals left the country between 2022 and 2023, and thus Sri Lanka is suffering from a shortage of mid-level skilled labour due to migration.
Energy reform is also essential. Both Moramudali and Illanperuma advocate for transparent, competitive investments in renewable energy to reduce costs and align with global sustainability goals. “It’s not just about saving money,” Illanperuma says. “If we can power our industries with renewables, we can also sell our products in the EU and other green markets.”
Sri Lanka’s five percent growth in 2024 offers a much-needed reprieve. But whether it marks the start of a new economic trajectory or a short-lived bounce will depend on what comes next. Reforms, investment and strategic planning are urgently needed. “We have a good Budget and a decent plan. But now it’s all about implementation,” Fernando said.
