Two Years of AKD: Stability, Growth and the Reforms Sri Lanka Is Still Waiting For
Two years after Anura Kumara Dissanayake became Sri Lanka’s president, the country’s economic story is no longer dominated by empty fuel stations, runaway inflation and the immediate fear of sovereign collapse.
But neither is the recovery complete.
That was the central tension running through a wide-ranging three-way discussion examining the President’s first two years in office — a period marked by economic stabilisation, strong fiscal numbers, an IMF-backed reform programme, a gradual recovery in output and a continuing debate over whether the government has moved quickly enough on deeper structural reforms.
Joinin up sharing personal opions with Lakbima New is Naveen Perera, Dilan Fernando and Arjun Senanayake.
“Stability has been the defining feature”
Lakbima News: If you had to describe the President’s first two years in one sentence, what would you say?
Naveen Perera: Stability.
The argument is relatively straightforward. The government did not dismantle the macroeconomic stabilisation framework it inherited. Key economic institutions continued operating within the existing framework, while Sri Lanka moved through a series of external shocks.
That continuity mattered.
The IMF programme remained central to the country’s economic policy, while fiscal consolidation continued. The IMF reported that Sri Lanka’s primary balance moved from a deficit of 5.7% of GDP in 2021 to a surplus of 5.4% in 2025.
Dilan Fernando: I agree that stability is probably the clearest description. The government did not make dramatic changes to the macroeconomic programme simply because it had come to power promising political change.
That was important because Sri Lanka’s recovery was still fragile.
The more difficult question is what happened beyond stabilisation.
Arjun Senanayake: And that is where the debate becomes much more interesting.
You can stabilise an economy without transforming it.
The first task after a crisis is to stop the bleeding. The second is to create the conditions for sustained growth.
Sri Lanka has made progress on the first. The argument is about how much progress has been made on the second.
Growth has returned — but how much of it is recovery?
Sri Lanka’s economy grew by 5.1% year-on-year in the first quarter of 2026 and 4.2% in the second quarter. The second-quarter figure represented a slowdown from the previous quarter, with the Department of Census and Statistics attributing the period’s weaker performance partly to the economic effects of Middle East tensions, fuel shortages and related disruptions.
Lakbima News: Does that mean the recovery is losing momentum?
Naveen Perera: Not necessarily. But the composition of growth matters.
A percentage can look impressive when an economy is recovering from a very low base.
Sri Lanka experienced a severe contraction during the economic crisis. So part of the growth seen since then represents recovery of lost output rather than a transformation of the country’s productive capacity.
Arjun Senanayake: That’s the key distinction.
Sri Lanka needs growth coming from productivity, investment, exports, technology and competitiveness.
If construction rises because the country is rebuilding after a collapse, that is useful. But eventually the economy needs to produce more internationally competitive goods and services.
It needs businesses to invest.
It needs exports to become more competitive.
It needs productivity to rise.
That is where the real test begins.
The latest GDP figures underline the complexity. In Q2 2026, industrial activity grew 7.3% and services 2.7%, while agriculture contracted by 2.3%.
The inflation warning
The discussion also raised concerns about inflation and currency stability.
Those concerns are not without evidence.
Central Bank data shows headline CCPI inflation reached 8.0% in August 2026, up from 7.3% in July. Food inflation rose to 8.5%, while core inflation increased to 5.1%.
But there is an important distinction between identifying a risk and predicting an outcome.
Dilan Fernando: Inflation is something the government has to watch carefully.
Arjun Senanayake: Yes, but nobody should automatically translate a rising inflation rate into a prediction that Sri Lanka is heading back to the 2022 crisis.
The circumstances are very different.
The Central Bank itself expects inflation to remain above its 5% target in the near term before easing towards the target, although that outlook depends partly on how long the effects of Middle East tensions persist.
The fiscal numbers tell another story
If growth remains the government’s difficult area, the fiscal side presents a considerably stronger picture.
Sri Lanka recorded a primary surplus of 5.4% of GDP in 2025, according to the IMF, well above the programme target. The IMF also noted that tax revenue reached 15.4% of GDP, its highest level in a decade.
Lakbima News: Is that simply good news?
Naveen Perera: It is good news.
After what happened in 2022, fiscal discipline matters enormously.
Arjun Senanayake: But there is another side.
A government can produce impressive fiscal numbers by collecting more revenue and controlling expenditure.
The question is what happens to that fiscal space.
If the money allows the government to invest in infrastructure, education, transport, energy and productivity-enhancing projects, then the fiscal adjustment becomes part of a growth strategy.
If capital spending is delayed because procurement is slow, then the country can end up with excellent fiscal numbers without seeing the full economic benefit.
The IMF itself has pointed to sustained fiscal reform and stronger growth-enhancing reforms as necessary to reduce Sri Lanka’s remaining vulnerabilities.
The debt problem has improved — but it has not disappeared
One of the most important corrections to make to the public discussion is the idea that Sri Lanka’s debt has simply fallen to “around 90%” of GDP.
The picture is more complicated.
The IMF reported that public debt fell from 125.8% of GDP in 2022 to 101.1% in 2025. The Fund said debt sustainability had improved following restructuring, but also warned that vulnerabilities remained high.
Dilan Fernando: So the direction is positive, but the level remains high.
Naveen Perera: Exactly.
Debt restructuring has bought Sri Lanka breathing space. It has not erased the debt problem.
And that distinction matters because Sri Lanka still has to generate enough growth, revenue and foreign exchange to service its obligations over the long term.
Reform versus state ownership
Perhaps the most interesting part of the discussion concerned state-owned enterprises.
The government has chosen, in several cases, to pursue reform rather than immediately sell state enterprises.
MILCO is a useful example.
The state-owned dairy company reported a record net profit of Rs.1.49 billion in 2025, according to government statements reported in August 2026.
Lakbima News: Doesn’t that challenge the argument that state enterprises must necessarily be sold?
Arjun Senanayake: It certainly shows that ownership alone doesn’t determine whether an enterprise can perform better.
But one profitable year does not settle the larger question of how the state should manage commercial enterprises.
You have to look at the full balance sheet, accumulated liabilities, capital requirements, competitive conditions and whether the improvement can be sustained.
Dilan Fernando: And the same discussion applies to SriLankan Airlines.
The government has explicitly decided to retain the airline as a state-owned national carrier while trying to restructure it and improve its financial performance. A new restructuring committee was appointed in June 2026.
The question now is whether reform can produce a sustainable airline rather than simply postpone the underlying problem.
Tariffs and the long reform timetable
Another significant reform underway is the gradual removal of para-tariffs.
The government has been moving towards a simpler tariff structure, with the phase-out of para-tariffs such as CESS planned over several years. Current government policy provides for phased changes rather than an overnight removal.
Arjun Senanayake: This is one area where the government deserves attention because tariff reform affects almost everything — imports, manufacturers, exporters and consumers.
The challenge is timing.
Protection can help an industry survive, but permanent protection can also reduce incentives to become competitive.
Naveen Perera: And that’s why the transition matters.
You cannot remove every protective measure overnight and expect domestic industries to adjust instantly.
The government has to balance competitiveness, consumer prices, employment and government revenue.
CEB reform is another test
The electricity sector is undergoing structural reform as well.
The Electricity Act and subsequent amendments provide for the unbundling of the Ceylon Electricity Board into successor entities covering areas such as generation, transmission, system operation and distribution. The Asian Development Bank has described this as part of a broader effort to establish a financially sustainable power sector.
That reform could ultimately prove more significant than a single year’s financial result.
Because electricity affects every part of the economy.
Cheaper and more reliable power affects factories, exporters, hotels, households and investors.
The X-Press Pearl question
The conversation eventually moved from economics to one of Sri Lanka’s most difficult unresolved legal and environmental issues: the X-Press Pearl disaster.
The Supreme Court’s July 2025 judgment ordered an initial US$1 billion compensation payment in relation to the disaster.
But the figure needs careful explanation.
X-Press Feeders says it has already spent more than US$170 million on wreck removal, environmental remediation and compensation claims. The company also says more than US$7.75 million was paid directly to the Sri Lankan Government for beach-cleaning work.
Those payments are not the same thing as the US$1 billion ordered by the Supreme Court.
Dilan Fernando: That distinction is critical.
The US$170 million is a figure provided by the company for money already spent on various forms of remediation and compensation.
The Supreme Court’s US$1 billion order is a separate legal obligation.
Arjun Senanayake: And the enforcement question remains complicated because the company has challenged the judgment and international proceedings are involved.
The London Admiralty Court had previously imposed a liability limitation of £19 million, which Sri Lanka has challenged. The Singapore proceedings have also been connected to the wider dispute.
So the question is no longer simply, “How much did Sri Lanka win?”
It is also about how a judgment of this magnitude can actually be enforced across jurisdictions.
What should happen in the next two years?
The final question posed to the three participants was deliberately simple.
If the government could accomplish only one major thing over the next two years, what should it be?
The answer came back to one word:
Reform.
But the speakers approached that word from different directions.
For one, the priority was reform of state-owned enterprises.
For another, it was land reform and unlocking productive assets.
The wider argument was that stabilisation cannot be the endpoint.
Sri Lanka now needs to move from crisis management to productivity.
That means faster procurement, better infrastructure, stronger exports, more investment, labour-market reforms, more efficient state institutions and a business environment in which companies can grow.
Two years on, the real test is changing
President Dissanayake took office after Sri Lanka’s deepest economic crisis in decades. The government’s first challenge was therefore unusual: prevent a return to instability while rebuilding confidence.
On that measure, the economic indicators show substantial progress in fiscal consolidation and macroeconomic stabilisation. The IMF has explicitly recognised the improvement in Sri Lanka’s fiscal position and debt indicators.
But the next phase is different.
Inflation has risen again, growth slowed to 4.2% in the second quarter, public debt remains above 100% of GDP according to the IMF’s latest assessment, and structural reforms are still being implemented.
That leaves Sri Lanka facing a different question from the one it faced two years ago.
It is no longer simply whether the economy can survive.
It is whether the country can turn stabilisation into sustained growth — and whether the reforms now being discussed can actually change how the economy works.
That may ultimately become the defining measure of the next two years.
