Sri Lankan Economy Headed for Sustainable Stability in 2026: Budget Surplus and Reserves Surge, KPMG Reports

The Sri Lankan economy has firmly entered a path of sustainable recovery in 2026, driven by robust fiscal performance, private sector investments, and strong foreign foreign exchange inflows, according to the latest Macroeconomic Outlook report by prominent financial advisory firm KPMG Sri Lanka.

The report highlights significant positive growth across multiple sectors, signaling a resilient economic turnaround.

According to KPMG, Sri Lanka’s real Gross Domestic Product (GDP) recorded a substantial 5.1% growth in the first quarter of 2026. This growth is largely attributed to low inflation rates, declining interest rates, and improved liquidity within the banking system, which have collectively boosted domestic demand and enhanced consumer purchasing power.

Reflecting a revival in business confidence and investment activities, private sector credit expanded significantly by LKR 485.4 billion.

All three major sectors of the economy demonstrated positive growth during this period:

Industry Sector: Led the recovery with a remarkable 7.2% growth, powered by the revival of manufacturing and construction activities.

Services Sector: Registered a steady growth of 3.4%.

Agriculture Sector: Posted a modest growth of 1.1%.

The government’s revenue management has shown remarkable progress. Tax revenue surged by 36.4% in the first quarter of 2026, leading to a primary budget surplus of LKR 116.4 billion. KPMG points out that this is one of the strongest fiscal outcomes Sri Lanka has achieved in several decades.

On the external front, workers’ remittances saw a sharp increase of 26.5%, reaching USD 2.3 billion. Consequently, Sri Lanka’s official gross international reserves strengthened to USD 6.45 billion by the end of June 2026, with further growth anticipated in the coming months.

Despite the optimistic outlook, KPMG cautions that Sri Lanka remains vulnerable to external global shocks. Ongoing geopolitical tensions in the Middle East, fluctuations in global energy (oil) prices, global inflationary pressures, and rising import costs present ongoing risks.

The report emphasizes that careful management of monetary and fiscal policies remains crucial to sustaining this momentum.

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