Sri Lanka faces a turbulent decade as global risks intensify, warns the World Economic Forum. Economic, geopolitical, and climate threats could challenge recovery, test resilience, and strain the nation’s financial stability.
WEF warns of economic, geopolitical, and climate threats shaping Sri Lanka’s future
The World Economic Forum (WEF) has sounded a warning about an unstable decade ahead, emphasizing that Sri Lanka and other vulnerable economies face mounting pressures from converging global risks. Based on insights from over 1,300 experts, the WEF’s Global Risks Report 2026 identifies economic, geopolitical, and environmental threats that could have far-reaching consequences for the island nation.
Sri Lanka, still recovering from the 2022 debt crisis that triggered shortages, social unrest, and a prolonged economic slowdown, remains exposed to immediate risks over the next two years. The report flags several pressing challenges, including the potential for an economic recession, rising unemployment, limited job creation, persistent inflationary pressures, and a growing debt burden spanning public, private, and household sectors.
Although Sri Lanka has officially exited sovereign default, the WEF emphasizes that the recovery is fragile. Economic growth, which rebounded to around 5 percent in 2024, is projected to slow to 3.1–3.2 percent by 2026. Analysts attribute this deceleration to weakening global demand, constrained fiscal conditions, and structural vulnerabilities that remain unresolved.
One of the most critical threats identified in the report is “geoeconomic confrontation,” ranked as the top global risk for 2026. This concept refers to the increasing use of tariffs, sanctions, and trade restrictions as instruments of national policy. Sri Lanka’s economy, heavily reliant on apparel exports, could be significantly affected by potential U.S. tariff increases. Such measures may reduce export earnings, disrupt factory employment, and exacerbate pressures on foreign exchange reserves, posing further challenges to economic stability.
Debt sustainability is another key concern. Public debt is expected to remain above 100 percent of GDP, sharply limiting the government’s fiscal flexibility. Rebuilding foreign exchange reserves continues to be a pressing challenge, leaving the country vulnerable to external shocks and fluctuations in global markets.
Compounding these financial pressures is a shortage of skilled labour, largely resulting from migration following the economic crisis. Critical sectors, including healthcare, construction, and information technology, continue to experience workforce gaps, hampering productivity and constraining long-term growth potential.
Environmental and climate risks further intensify Sri Lanka’s vulnerabilities. The island nation is highly susceptible to floods, landslides, and extreme weather events, which can disrupt agriculture, damage infrastructure, and deepen economic stress. The WEF cautions that such compound disasters—where multiple hazards occur simultaneously—can magnify existing weaknesses if not proactively addressed through climate-resilient policies and infrastructure planning.
Experts stress that Sri Lanka’s ability to navigate the coming decade will rely heavily on strategic policy decisions. Economic diversification, investment in climate resilience, and measures to attract and retain skilled workers are crucial to mitigating the combined impacts of global and domestic risks. Strengthening fiscal management and maintaining robust foreign reserves will also be essential to cushion the economy from external shocks.
The WEF report underscores a broader trend affecting many emerging markets: increasing interconnectedness in the global economy means local vulnerabilities can be quickly amplified by international developments. For Sri Lanka, balancing the twin goals of stabilizing the economy and building long-term resilience will be a defining challenge in the years ahead.
As policymakers plan for the future, proactive measures that address debt sustainability, workforce development, and climate adaptation will be critical. By mitigating the impact of global shocks and investing in resilient economic structures, Sri Lanka can improve its capacity to withstand volatility and maintain sustainable growth despite the uncertain global landscape.
Ultimately, the Global Risks Report 2026 serves as a reminder that while Sri Lanka has made strides since the debt crisis, the coming decade will test the country’s resilience. Strategic foresight, careful planning, and strong institutional frameworks will be central to navigating a period of heightened uncertainty and securing a stable economic future.