Sri Lanka’s economy has grown for 11 consecutive quarters, expanding 4.2% in the second quarter of 2026, but the International Monetary Fund warned that risks are increasingly tilted to the downside because of a Middle East war-driven oil shock, global trade uncertainty and the potential effects of El Niño. Headline inflation reached 8% year-on-year in August, while gross official reserves rose to $6.9 billion. The banking sector remained well capitalized and profitable, fiscal performance was strong in the first half of 2026 and debt restructuring was largely complete. The IMF urged the government to broaden the tax base, reduce exemptions, strengthen tax administration, maintain cost-recovery energy pricing and improve capital-spending execution, including recovery and reconstruction funding after Cyclone Ditwah. It recommended retaining the 5% inflation target and current accountability band for now, while allowing greater exchange-rate flexibility and remaining prepared to address inflationary pressure. The IMF also warned that recently tabled anti-corruption law amendments could weaken transparency and accountability. Sri Lanka remains under a $2.9 billion IMF program following its 2022 dollar shortage crisis; the fund approved a $700 million double tranche in May and previously forecast 3% growth for the year.