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

Sri Lanka's economy expanded by 4.2% year-on-year in the second quarter, data showed on Tuesday, despite a surge in inflation fueled by the ongoing conflict in the Middle East. Agriculture output rose by 2.3% year-on-year, while industries expanded by 7.3% and services by 2.7%, according to the Department of Census and Statistics.

The island nation's economic growth mirrored market forecasts, but analysts predict a potential slowdown to 3%-4% in the second half of the year. Full-year growth may reach around 3.5%-4%, they added.

Sri Lanka, grappling with persistently high inflation exacerbated by the Iran war, has been inching towards recovery following a severe financial crisis four years ago. The nation has received a $2.9 billion IMF bailout program to aid its resurgence. However, the global lender anticipates a more tempered growth of 3% for the current year, up from the 5% growth observed in 2025.

The Middle East crisis has led to a 8% spike in inflation, up from 2.2% in March, as Sri Lanka, reliant on fuel imports, has been forced to raise fuel prices by around 35% since March. The Central Bank of Sri Lanka has responded to the rising inflation by raising its key interest rate by 100 basis points in May to curb inflation and stabilize the currency. The rupee has depreciated by 5.7% against the dollar this year.