Sri Lanka’s Economic Recovery Faces Fresh External Shocks 📈

• Growth & Vital Signs: Sri Lanka's economy expanded 5.1% YoY in Q1 2026, up from 4.8% in Q4 2025—the fastest growth rate since the crisis. Inflation remains tamed to low single digits, and the government recorded a primary budget surplus. The IMF released a US$ 695 million tranche of its US$ 3 Bn bailout. • Currency & Reserves Pressure: Despite headline improvements, the rupee depreciated over 12% in 12 months, slipping from ~Rs. 296/USD in mid-2025 to ~Rs. 335-336/USD by late June 2026. Gross official reserves stood at US$ 6.77 Bn in April (sufficient for 2-3 months of imports), while the year-end IMF reserve target of US$ 8.9 Bn faces pressure. • Dual External Shocks: Cyclone Ditwah severely disrupted central tea growing regions (reducing output by 1M kg) and slowed the key December tourist season. Ongoing West Asia tensions pushed crude oil prices up, forcing fuel rationing in March. Consequently, the IMF slashed the country's 2026 growth forecast to 3.0% (down from 5.0% in 2025). • Dollar Earners Under Strain: Total export earnings reached a record US$ 17.25 Bn in 2025, yet remained insufficient to offset external shocks: Tea: Earned US$ 1.5 Bn in 2025 (up 5%), but recovery is threatened by cyclone damage. Tourism: Earned US$ 3.2 Bn from 2.36M arrivals, but average spending per tourist fell, leading to a 15% YoY decline in December revenue. Apparel & Textiles: Exceeded US$ 5 Bn for the first time, but faces a potential 12% drop in US exports due to a new 20% tariff. ICT/BPM: Listed as a growth driver, but a potential global AI tech correction poses a major capital flight risk.