Sri Lanka’s Economic and Geopolitical Balancing Act

KUALA LUMPUR, 10 OCTOBER 2026 —

Economic recovery has brought Sri Lanka a modicum of stability, but domestic strains and great-power rivalry could test how long it lasts.

The Sri Lanka Navy rescued thirty-two Iranian sailors, but the Sri Lankan government’s overall response drew criticism from opposition leaders.

President Anura Kumara Dissanayake—head of the National People’s Power coalition, which is led by the Marxist-Leninist party, the Janatha Vimukthi Peramuna (JVP)— clarified to the Sri Lankan parliament: “Our unwavering stance on this matter is one of neutrality.” But the opposition leader, Sajith Premadasa of the United National Party, challenged Dissanayake’s neutrality position as an excuse for passivity.

The incident was “a death blow to Sri Lanka’s sovereignty,” Premadasa claimed as he pressed the president to condemn American and Israeli aggression against Iran as well as Iran’s targeting of other Gulf states. Former foreign minister G. L.

Peiris was blunter : the “Sri Lankan government has actually insulted Iran, which is a friendly nation where Sri Lanka is concerned.” The opposition also questioned the government’s failure to act quickly on the Iranian frigate’s request to enter Sri Lankan territorial waters and its apparent lack of awareness of the USS Charlotte’s movements.

Dissanayake’s foreign policy of neutrality offers Colombo room to focus on economic recovery, but, as the IRIS Dena incident shows, international economic and geopolitical turbulence will test how long that posture can be sustained. The country’s 2024 presidential elections offered much-needed political clarity after an acute economic crisis in 2022, the ouster of Sri Lanka’s president Gotabaya Rajapaksa amid the Aragalaya (Struggle) protests, and two years of political uncertainty.

The NPP’s promise of reforms and the continuation of an International Monetary Fund (IMF) bailout have been key to Sri Lanka’s post-2022 social contract. Yet with the current IMF loan cycle ending in 2027 and national elections due in 2029, early signs of volatility in Sri Lanka’s domestic and international politics are beginning to show.

At home, the NPP’s inability to deliver many of its promised reforms signals that even if a 2022-style meltdown is unlikely, the economy remains under pressure. Unlike in 2022, however, a future crisis could strengthen a coercive left-wing one-party state rather than produce another popular uprising that sweeps a government from power.

With regard to the country’s external relations, reliance on IMF funding—supported by an Indian backstop —has drawn Sri Lanka closer to India and the West. However, Chinese capital and finance , not just for infrastructure development but also through illicit networks, are also shaping Sri Lanka’s domestic and international politics.

Looking to the future, Dissanayake’s principal challenge is to preserve the political and economic stability that his government has consolidated after 2024 while simultaneously managing multiple pressures that could unsettle both the NPP’s domestic moderation and its carefully calibrated foreign policy. Understand the world with the latest from our scholars around the world.

Sri Lanka turned a corner in September 2024 when the NPP coalition trounced traditional political parties and went on to win 159 of 225 parliamentary seats. The elections marked the start of a new political and economic journey for a country that had witnessed acute turmoil from 2022 to 2024. Dissanayake promised to use his electoral mandate to reform Sri Lanka’s economic and political structures to prevent a recurrence of a similar economic crisis.

Yet beyond adhering to the IMF’s terms and conditions and tightening some anti-corruption regulations, much of the government’s broader reform agenda remains stalled. Three primary factors offer insight into the cause and consequences of this subpar performance: the risks associated with implementing reforms, tension between the JVP’s organizational nature and political character, and sensitive civil-military relations.

In the run-up to the 2024 elections, Dissanayake promised to implement a series of reforms if the NPP was brought to power. These included combating corruption, reforming government institutions and the economy, improving living conditions, overhauling the taxation system, repealing the controversial Prevention of Terrorism Act (PTA) and the Online Safety Act, establishing independent prosecution and accountability mechanisms, and, most significantly, abolishing the executive presidency and its concentration of political power.

These promises were made against the backdrop of a May 2023 IMF bailout that was negotiated by former president Ranil Wickremesinghe. Dissanayake agreed to continue with the loan agreement and meet its terms rather than seek to renegotiate it as the NPP had promised during the election campaign. Of these promised reforms, Colombo has made the greatest progress in complying with IMF requirements and pursuing modest anti-corruption measures.

Thanks to the IMF program and political stability since 2024, the Sri Lankan economy surpassed expectations, recording a 5 percent growth in its GDP in 2024. Its foreign exchange reserves stood at $6.5 billion in June 2026 despite nearly a 10 percent decline in tourism due to the Iran war.

This relative stability has persisted despite limited foreign investment, which stood at $1.04 billion in 2025, of which $352 million is in equity and $692 million is in the form of debt instruments. Anti-corruption measures—such as the Proceeds of Crime Act (2025) to recover assets, a stronger asset declaration system, mandatory reporting of audit-detected corruption, and proactive enforcement—have also helped fuel Sri Lanka’s overall economic rebound.

But economic recovery and political consolidation have not led to delivery on other promised reforms. Though Dissanayake did abolish state-funded privileges for former presidents, he has failed to eliminate the executive presidency or repeal draconian security laws. In December 2025, Dissanayake’s Cabinet proposed the Protection of the State from Terrorism Bill to replace the PTA.