Sri Lanka’s economic recovery has entered a more stable phase, but beneath improving reserves, falling inflation and restored growth lies a more difficult question: how much of the recovery has actually reached ordinary households?
Capital Alliance Holdings PLC (CAL), in its 2025/26 Annual Report, describes Sri Lanka’s macroeconomic foundations as stronger than they have been in years. Inflation, which reached a devastating 69.8% in September 2022, eventually fell into negative territory before settling at 2.2% year-on-year by March 2026, compared with the Central Bank of Sri Lanka’s 5% target.
Foreign exchange conditions have also improved dramatically. Gross official reserves climbed from barely 0.3 months of import cover at the end of 2022 to $7.3 billion by February 2026. The IMF’s $3 billion Extended Fund Facility, approved in March 2023, has provided the principal framework for fiscal and structural reforms, with three consecutive reviews completed.
On paper, these numbers represent a remarkable turnaround from the economic catastrophe of 2022.
But CAL’s own assessment exposes a major weakness in the recovery story.
Poverty remains at 24.5% of the population—roughly twice the 2019 level. This creates a dangerous disconnect between macroeconomic stabilisation and household economic security.
The country may have rebuilt reserves, restored fiscal discipline and regained access to international confidence, but millions of citizens continue to face the consequences of the crisis through reduced purchasing power, higher living costs and weakened household resilience.
The warning about “reform fatigue” therefore deserves serious attention.
Three consecutive years of fiscal consolidation, subsidy reforms and structural adjustments have imposed significant costs on households. The danger is that political and social pressure could eventually encourage policymakers to slow or reverse reforms before the economy becomes sufficiently resilient.
Another concern is government capital expenditure.
Between 2022 and 2025, actual capital expenditure averaged only around 3% of GDP, compared with budgetary allocations of 5% to 6%. That gap is not merely an accounting issue. It raises questions about the Government’s capacity to convert fiscal resources into productive infrastructure, employment and long-term economic growth.
Construction has emerged as one of the stronger components of the recovery, supported by private residential activity and public infrastructure. Reconstruction following Cyclone Ditwah could provide another boost in 2026.
However reconstruction-led growth cannot substitute for a broader productivity transformation.Sri Lanka now faces a crucial second phase: moving from stabilisation to inclusive growth.
The danger is that headline economic indicators could improve while household incomes, employment quality and living standards remain under pressure.
CAL’s assessment therefore offers both reassurance and a warning. Sri Lanka has demonstrated that recovery from sovereign default is possible. But credibility cannot be measured only through reserves, inflation and fiscal targets.
The ultimate test will be whether economic stability produces better incomes, stronger investment, productive jobs and falling poverty.
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