• Standard Chartered Bank’s top Asia and South Asia research heads highlight portfolio investors acknowledge progress of SL’s economic stabilisation 
• Opine global trade shifts present new opportunities for SL to benefit from emerging market trade flows
• Project economy to grow at 3.5% over next two years, inflation to rise above 5% in 2H of 2025
• Say concerns persist over tax revenue and fiscal deficit targets 
• Tip debt-to-GDP ratio likely to remain at 110%, but strong fiscal management could lower it to 100% by 2026-27
• Reserves to reach $ 7 b by year end, while tourism and workers’ remittances help offset risks of widening trade deficit
• Note external debt repayments include $ 600 m soon, following $ 1 b annually thereafter 
• Predict US dollar to remain strong, while SL rupee  may see mild depreciation—but stable
• Cite oil prices, vehicle imports and global trade sentiment will influence rupee

By Charumini de Silva

SCB Global Head of Fixed Income Research and Head of Asia Research Kaushik Rudra

SCB Economist for South Asia Saurav Anand

SCB Head of ASA FX Research Divya Devesh

The Standard Chartered Bank yesterday said Sri Lanka is increasingly attracting positive investor sentiment, particularly from international portfolio investors, indicating confidence in macroeconomic improvements, whilst urging policy stability and continuous improvement as certain risks still remain along with multiple challenges.

“International investors are viewing Sri Lanka favourably, recognising the progress made in economic stabilisation. These are portfolio investors, particularly those in debt markets who are increasing their exposure to Sri Lankan assets, indicating confidence in macroeconomic improvement,” SCB’s Global Head, Fixed Income Research and Head, Asia Research Kaushik Rudra told journalists, following the bank’s Annual Global Research briefing in Colombo.

He was joined by SCB’s Economist for South Asia Saurav Anand, Head of ADA FX Research and Divya Devesh at the SCB’s Annual Research presentation to clients and other stakeholders. SCB Sri Lanka CEO Bingumal Thewarathanthri was also present.

“The portfolio investors are impressed with the progress made by Sri Lanka which is clearly indicated in the matrix,” Rudra stressed.

With global trade fragmentation surrounding the potential impact of the new Trump administration’s policies on economies, he said there will be new opportunities for Sri Lanka.

“South-South trade (emerging market trade flows) is on the rise, particularly between China, ASEAN and the Middle East and Sri Lanka is geographically positioned to benefit from this—serving as a key trade hub in regional supply chains,” he said.

Noting that geopolitical and economic shifts in global trade offer a significant opportunity, he said Sri Lanka must position itself to capitalise on regional supply chain integration and trade partnerships.

“Sri Lanka is well positioned to leverage on the potential of the future trade and to benefit from those dynamics in the medium-term,” Rudra added.

Anand said Sri Lanka’s economic outlook suggests a recovery phase with moderate growth, potential inflationary pressures and commitment to fiscal targets under the International monetary Fund (IMF) program.

Although key sectors are rebounding from past contractions, he said structural challenges persist, requiring consistent policy implementation and external stability.

“Sri Lanka’s economy is projected to grow at 3.5% in the next two years with potential for exceeding this target due to strong base effect and sectoral catch-up. The economy, which had contracted 10% in real terms in the past two years amid the economic crisis, still lags behind the normal trend growth,” he added.

Anand said the inflation has remained in a deflationary zone in early 2025, largely due to fuel and electricity tariff adjustments, though the overall price levels have surged significantly impacting the purchasing power.

“Inflation is likely to increase in the second half of 2025, exceeding 5% and may be around 6% in the fourth quarter—with Central Bank expected to remain with bold measures,” he said.

With policy rates currently at 8% and forward-looking inflation estimates ranging between 4-5%, Anand said there is limited scope for rate cuts.

However, on the fiscal front, he said concerns over tax revenue collection persist. “Any revenue shortfalls this year may require expenditure adjustments to maintain the fiscal deficit target. Sri Lanka’s debt-to-GDP ratio is projected to remain at 110% over the next two years, but disciplined fiscal management could enable the country to reach the 100% debt-to-GDP reduction target by 2026-27, ahead of the 2029 IMF estimate,” he added.

SCB’s South Asian Economist also said the external sector continues to show improvement, with foreign exchange reserves expected to reach $ 7 billion by end of 2025.

He said this increase is supported by IMF disbursements and multilateral funding alongside a rebound in tourism and remittance inflows. “The external debt repayments remain substantial with $ 600 million due in the near term, followed by an annual payment of $ 1 billion thereafter,” he noted.

As import restrictions ease, he cautioned that the trade deficit could widen, though strong tourism revenues are likely to cushion the impact.

Anand said despite external risks, a well-managed policy approach could help Sri Lanka navigate ongoing challenges and build a more resilient economic foundation.

Sharing insights on the global currency market, Devesh said the US dollar remains strong driven by high interest rates and resilient economic performance and this has exerted pressure on emerging markets currencies, including Sri Lankan rupee.

However, he was of the view that Sri Lankan Rupee may experience a mild depreciation against the global scenario, but opined the rupee will remain more stable compared to previous two years.

“The rupee trajectory will largely depend on three key factors such as oil prices, vehicle import demand and the overall global trade sentiment,” he said, adding that a ceasefire in Ukraine could lower energy costs in Europe, potentially strengthening the Euro, while China’s control over the Yuan despite 30% US tariffs has kept its currency stable.

Nevertheless, he cautioned that any escalation in trade tensions could disrupt Asian currency markets.

 –Pix by Lasantha Kumara