Sri Lanka Enters Investment-Constrained Recovery Phase 📈

HNB Stockbrokers’ 2026 outlook highlights a shift from crisis management to a stable but investment-heavy growth phase. While macroeconomic buffers have strengthened, sustainable growth remains dependent on foreign direct investment (FDI) and debt reduction. • Economic Growth & GDP Real GDP growth forecast at 4.5% for 2026, finally surpassing the 2018 pre-crisis peak. Nominal GDP expected to reach Rs. 35 trillion. Recovery currently driven by consumption and government spending, while investment (Gross Capital Formation) remains low at 27% of GDP (vs. historical 30%+). • Debt & Market Access Re-entry to international bond markets projected for 2028. Requires Debt-to-GDP to fall below 80% (lower than the IMF's 95% anchor) to secure credit rating upgrades. Shift needed from external debt-financing to FDI-led investment to avoid widening the current account deficit. • Monetary & External Sector Private sector credit growth is surging at over 20% YoY, prompting a cautious CBSL stance on rate cuts. Official reserves stand at US$ 6.8 Bn, providing a buffer against shocks like Cyclone Ditwah. Current account surplus expected to narrow from >US$ 1 Bn (2025) to US$ 275 Mn in 2026 due to vehicle imports and US$ 3-3.5 Bn in debt servicing. Currency (LKR) projected to see a modest depreciation of 3-4%. • Fiscal Outlook Primary surplus remains a priority; cyclone-related spending (Rs. 500 Bn) is deemed manageable due to capital expenditure under-execution and treasury buffers. _Data based on HNB Stockbrokers Research (Jan 2026)._