Sri Lanka economic recovery is gaining momentum with stronger-than-expected growth, but experts warn that sustaining this rebound will depend on deep structural reforms and productivity gains, according to the latest IPS report on the State of the Economy 2025.
Sri Lanka economic recovery shows strength, but IPS warns long-term growth hinges on structural change.
Sri Lanka’s post-crisis economy is showing encouraging signs of resilience, but the next phase of its journey will require bold reforms to secure long-term, sustainable growth. The Institute of Policy Studies (IPS), in its flagship Sri Lanka: State of the Economy 2025 report, emphasized that the nation must turn its short-term rebound into a foundation for lasting prosperity.
The report revealed that GDP growth reached 4.9 percent in the first half of 2025, supported by improved macroeconomic fundamentals. This performance exceeded many expectations, especially given the severity of the economic crisis just a few years ago. However, IPS cautioned that cyclical recoveries alone cannot guarantee durable economic expansion without significant structural transformation.
“While this cyclical recovery is promising, the sustainability of growth will increasingly rely on productivity and efficiency gains,” IPS stated, underlining the urgency of reforms that address the root causes of economic stagnation rather than temporary fixes.
Among the critical areas identified are land and labour market reforms, along with policies that liberalize trade and attract investment. According to IPS, these measures are vital to improving resource allocation and driving productivity growth, especially in sectors that have been slow to modernize.
The report also highlighted that pushing through such reforms is neither ideologically neutral nor politically easy. “Regulatory policy guidance is not ideologically neutral, nor easy to push through, and its dividends often accrue over the longer term,” the think tank noted. This is particularly challenging in a context where short-term socioeconomic pressures often dominate political agendas, diverting attention from structural changes that yield results over time.
A key recommendation in the IPS report is to leverage digitalization and technological innovation as accelerators of productivity. With national computer literacy currently at just 39 percent—and only 17.9 percent in estate sectors—there remains a significant digital gap. Yet, nearly 42 percent of adults among the poorest 40 percent of the population are already using digital payments, pointing to a powerful, untapped opportunity.
The think tank argues that technology can play a transformative role in multiple sectors. Digital platforms can boost e-commerce and make public transport safer and more efficient, while also offering scalable tools for farmers to access markets and information. In the export sector, technology can enhance competitiveness by improving product traceability and quality assurance—key advantages in an increasingly uncertain global trade environment.
IPS also stressed that global economic headwinds should not discourage reform efforts. On the contrary, “external uncertainties and compulsions should hasten policy focus on the domestic economic agenda,” the report urged. By harnessing productivity and technology, Sri Lanka can craft a resilient growth strategy that aligns with its debt service commitments and positions the economy for stability.
Economists warn that without a firm commitment to structural reforms, the current rebound may be short-lived. Cyclical recoveries can create optimism, but they often lose momentum if underlying inefficiencies are not addressed. Labour market rigidities, outdated regulations, and trade barriers can all act as drag factors on economic expansion if left untouched.
The IPS report’s message is clear: Sri Lanka stands at a pivotal moment. With economic growth returning and investor confidence slowly improving, the country has a rare window to implement reforms that could shape its future trajectory. By combining macroeconomic stabilization with microeconomic efficiency measures, policymakers can transform a fragile rebound into a sustainable, inclusive growth story.
As Sri Lanka prepares to resume debt service obligations, building credibility through reform-driven growth will be essential. A stronger economy will not only help meet fiscal targets but also expand opportunities for citizens and businesses alike.
The coming months will be crucial for determining whether the country can sustain its post-crisis progress. If policymakers can align digital transformation, structural reforms, and inclusive growth strategies, Sri Lanka could set the stage for a resilient economic future.