Courtesy Hiru News

The Central Bank of Sri Lanka (CBSL) expects the economy to grow by 4% to 5%, while inflation is projected to gradually rise and reach the target level of 5% by the second half of 2026, Central Bank Governor Dr. Nandalal Weerasinghe said.

Addressing the launch of the Central Bank’s Policy Agenda for 2026 and beyond, Dr. Weerasinghe also announced a review of the inflation target agreement with the government and the introduction of a benchmark exchange rate aimed at strengthening transparency in the foreign exchange market.

Inflation target to be reviewed

Dr. Weerasinghe confirmed that the Central Bank will reassess the current inflation target framework this year, in line with legal requirements.

As required by law, there will be a review of the agreement with the government regarding the inflation target this year. This is an important part of monetary policy,” he said.

Under the previous administration, the CBSL had secured an inflation target band of 5% as the floor and 7% as the ceiling.

We would like to thank stakeholders who have already expressed various views on target-setting. The Central Bank will conduct a thorough review of economic developments and structural changes in the economy, followed by an analytical assessment of the target. After this assessment, consultations with relevant stakeholders are also planned, as we did in 2023. We will continue this process to agree on an appropriate inflation target,” Dr. Weerasinghe added.

Benchmark exchange rate to be introduced in 2026

One of the key announcements made at the event was the introduction of a benchmark spot exchange rate, a first for Sri Lanka.

Last year, we announced that the Central Bank would review and optimise the Strategic Reserve Ratio (SRR) framework. Accordingly, the SRR framework was reviewed in 2025 to align further with international best practices. This year, several modifications to the SRR framework will be implemented,” he said.

Dr Weerasinghe noted that extensive studies on introducing a benchmark exchange rate were completed in 2025.

As announced last year, the necessary studies to implement a benchmark spot exchange rate were carried out throughout 2025. Accordingly, a benchmark rate will be introduced for the first time in 2026 to foster a transparent foreign exchange market,” he said.

He explained that the benchmark rate would help guide market participants, improve pricing transparency, and support innovation in the foreign exchange market.

This benchmark rate is expected to guide market participants, help manage volatility, and promote more competitive pricing on a given date, thereby enabling the introduction of more innovative foreign exchange products that will also help stabilise the exchange rate,” the Governor added.

Growth outlook and disaster recovery

Expressing optimism about economic resilience, Dr Weerasinghe said Sri Lanka is better positioned to recover from recent cyclonic impacts.

Continuing the growth momentum reported over the past two years, the economy is expected to grow by around 4–5%, according to our estimates. There are both upside and downside risks, depending on the pace of structural reforms and additional government expenditure on rebuilding and reconstruction,” he said.

He added that progress in strengthening fiscal, external, monetary, and financial buffers has enhanced the economy’s ability to rebound faster than in the past.

Counter-cyclical capital buffers in 2026

Highlighting the risks posed by climate-related shocks, the CBSL Governor announced plans to introduce counter-cyclical capital buffers to strengthen banking sector resilience.

Recurring natural disasters highlight the broader risks climate-related shocks pose to financial system stability. This underscores the importance of building buffers during periods of stability,” he said.

In 2026, we will introduce counter-cyclical capital buffers to strengthen the resilience of the banking sector. These are designed to promote the build-up of capital during good times so that it can be released during periods of stress,” Dr. Weerasinghe explained.

Push for offshore banking

Dr. Weerasinghe also outlined the Central Bank’s plans to promote offshore banking activities, particularly in the Colombo Port City.

The Central Bank will continue to support offshore banking activities through appropriate regulatory and supervisory oversight. We expect much more active offshore banking activity this year, especially in the Port City area,” he said.

He added that efforts to strengthen the financial sector would continue under the master plan for the consolidation of banks and finance companies.