Sri Lanka's economy grew 4.2% in Q2 despite pressures from Iran war

Sri Lanka's economy expanded 4.2% in the April to June period, according to the statistics department, as Business Recorder reported. The growth figure was in line with market expectations, despite inflation at a three-year high that has been worsened by the Iran war. Agriculture output rose 2.3% on a yearly basis, industrial output climbed 7.3% and services increased 2.7%.

Four analysts saw the result coming, yet they expect growth to slow to 3% to 4% in the second half and about 3.5% to 4% for the full year. Ranjan Ranatunga of First Capital Holdings said higher fuel prices will weigh on consumption later in 2026, even though oil is expected to ease to around $80 to $90 a barrel. The IMF expects 3% growth this year after 5% in 2025, while a team in Sri Lanka is conducting the seventh programme review that could release about $330 million.

Sri Lanka imports all of its fuel, and even with rationing and Wednesday public holidays, pump prices have climbed about 35% since March. Inflation reached 8% in August, up from 2.2% in March, and authorities have warned of further pump price increases at the end of this month. The central bank raised its key policy rate by 100 basis points in May, while the rupee has weakened 5.7% against the dollar this year.