Sri Lanka must adopt a new approach to economic development that prioritises private sector investment, improved productivity and stronger export competitiveness to maintain its recovery and achieve sustainable long-term growth, according to the Institute of Policy Studies of Sri Lanka (IPS).
In its latest publication, Sri Lanka: State of the Economy 2026, the independent policy research institute highlights the importance of moving away from traditional growth models heavily dependent on government borrowing, tax incentives and consumption supported by substantial imports.
The report, published under the theme Policy Choices for Durable Growth, examines the economic reforms and strategic decisions required to ensure that Sri Lanka’s recovery develops into a period of lasting prosperity.
According to IPS, the country’s immediate challenge is no longer limited to restoring financial stability. Policymakers must now identify ways to accelerate economic expansion without recreating the fiscal imbalances and external financial pressures that contributed to the economic crisis of 2022.
With limited government resources and restricted capacity for external financing, the institute stresses that future economic progress must increasingly depend on productive investments, export diversification and the creation of sustainable employment opportunities.
The report points to encouraging developments in Sri Lanka’s economic recovery. Real gross domestic product (GDP) increased by 5% in both 2024 and 2025, while the economy recorded growth of 4.7% during the first six months of 2026.
Inflation has also declined significantly compared with the exceptionally high levels experienced during the 2022 crisis. Meanwhile, progress in external debt restructuring and the gradual rebuilding of foreign exchange reserves have contributed to an improved macroeconomic environment.
Nevertheless, IPS cautions that economic recovery alone does not guarantee lasting development. Sustained progress will require policies that strengthen the country’s ability to withstand future economic disruptions while ensuring that improvements in national output translate into meaningful benefits for households.
A central recommendation of the report is to maintain fiscal discipline and external financial stability while implementing measures that enhance productivity across the economy.
This includes directing limited public resources towards investments capable of generating substantial economic and social returns, rather than relying on short-term stimulus measures that may create additional financial vulnerabilities.
Private investment is identified as a particularly important component of the proposed growth strategy. A stronger investment environment could encourage businesses to expand operations, introduce new technologies, improve production efficiency and generate employment.
Similarly, developing a more diverse and internationally competitive export sector would help Sri Lanka strengthen foreign exchange earnings and reduce its exposure to fluctuations in domestic consumption.
The institute also places considerable emphasis on human capital development and labour market reform.
According to the report, approximately two-thirds of Sri Lanka’s workforce is engaged in informal employment, highlighting the need for policies that improve job quality, strengthen worker protection and expand access to formal economic opportunities.
IPS identifies skills development, improvements in labour productivity and greater employment security as essential elements of an inclusive growth strategy.
Addressing mismatches between workforce capabilities and employer requirements could also help businesses improve performance while creating better career prospects for workers.
The report emphasises that economic policies should not be evaluated solely through indicators such as GDP growth, investment levels or export earnings. Equal attention must be given to whether economic progress produces tangible improvements in household incomes, employment conditions and overall living standards.
For vulnerable communities, stronger and more effective social protection mechanisms will remain important, particularly as the country continues to navigate the social consequences of its recent economic difficulties.
Another major area examined by IPS is Sri Lanka’s exposure to climate-related disruptions, energy market volatility and changes in the global economic environment.
Recent extreme weather events and international energy shocks have demonstrated how external developments can affect domestic production, transportation costs, food security and economic stability.
To address these risks, the institute recommends greater investment in renewable energy, resilient infrastructure, sustainable agricultural systems and disaster preparedness.
Expanding the use of renewable energy could reduce dependence on imported fuels, while improvements in food production and distribution systems could strengthen national food security.
Similarly, modernising essential infrastructure and improving disaster response capabilities could help minimise the economic damage caused by future environmental emergencies.
The report also explores the role of regional economic development in creating a more balanced distribution of growth opportunities.
Infrastructure improvements, better regional connectivity and investment outside established commercial centres could support business expansion and employment generation across different parts of the country.
Changing population patterns and demographic trends are also highlighted as factors that policymakers must consider when planning future economic development.
By addressing these challenges through coordinated reforms, Sri Lanka could create an economic framework capable of supporting both higher productivity and broader social inclusion.
The IPS recommendations cover several interconnected policy areas, including international trade, public financial management, employment, urban development, agriculture, energy, infrastructure, social protection and education.
Together, these reforms are intended to establish a more resilient economic structure that is less dependent on unsustainable borrowing and better equipped to compete in international markets.
Improving employment quality and protecting vulnerable workers will be particularly important in ensuring that the benefits of economic recovery reach a wider section of Sri Lankan society.
The report draws attention to the country’s substantial informal workforce, where many individuals operate outside conventional employment structures and may have limited access to social security, stable earnings and formal workplace protections.
IPS identifies the transition towards better-quality employment as an essential requirement for translating national economic growth into improvements in household well-being.
Strengthening human capital through education, vocational training and skills development could help workers access emerging opportunities in productive industries and internationally competitive sectors.
At the same time, improvements in labour market policies could encourage greater formalisation of employment and support more secure working conditions.
The institute also recognises that employment reforms must operate alongside wider economic initiatives designed to stimulate business investment and increase productivity.
A growing private sector, supported by an improved investment climate and stronger export performance, could provide additional opportunities for workers to participate in the country’s economic expansion.
However, achieving more inclusive outcomes will require attention to regional disparities, access to infrastructure and the needs of communities that remain particularly vulnerable to economic pressures.
Effective social protection programmes could play a complementary role by supporting individuals and households facing unemployment, income insecurity or other economic difficulties.
The report ultimately presents Sri Lanka’s recovery as an opportunity to reshape the country’s long-term economic direction.
Rather than returning to earlier growth patterns that contributed to financial instability, IPS advocates an approach centred on economic competitiveness, productive investment, institutional reform and resilience.
The institute maintains that preserving macroeconomic stability must remain a priority, even as the government and private sector pursue faster economic expansion.
Sri Lanka’s ability to achieve its long-term development ambitions will therefore depend on maintaining a balance between financial responsibility, structural transformation and social inclusion.
By improving productivity, strengthening export capabilities, creating higher-quality employment and investing in resilience, the country could establish a more sustainable foundation for future economic progress.
Crucially, the effectiveness of this development strategy will also depend on whether its benefits extend beyond headline economic indicators to deliver lasting improvements in the everyday lives of Sri Lankan households.
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