Anil Jayantha Fernando, Sri Lanka's Deputy Minister for Economic Development and Minister for Labour, speaks during an interview with Reuters inside his office in Colombo, Sri Lanka, September 15, 2025. REUTERS/Thilina Kaluthotage

By Krishna N. Das and Uditha Jayasinghe

COLOMBO (Reuters) -Sri Lanka is aiming to boost its economic growth to up to 6% in 2026, partly through record government capital expenditure, though delays in passing the budget could drag on its performance this year, a minister said on Monday.

Anil Jayantha Fernando, labour minister and deputy minister of economic development, said Sri Lankans and investors should be "hopeful" as the island nation climbs out of the economic crisis that hit in 2022, its worst since independence.

Sri Lanka recorded economic growth of 5% in 2024. That would likely slow to 4% to 4.5% this year, as delays in passing the budget slowed government spending, Fernando told Reuters in an interview.

"Next year ... we will need to go for 5 to 6% growth. We will aim for that," he said. "In the long run, after five years, we target to maintain an average GDP growth that emerging countries are maintaining. That is around 6 to 7%."

The government planned to increase its capital expenditure by 8% in 2026 to a record 1.4 trillion rupees ($4.64 billion), he added.

The International Monetary Fund, which bailed out Sri Lanka in March 2023, has predicted GDP growth of 3.3% this year and 5.2% for 2026. The economy grew 4.9% year-on-year in the second quarter of 2025, official data showed on Monday.

"We should not really exaggerate (and say) that next year everything would be fantastic and your livelihood would be totally changed, but we are telling the people and the world and investors, be hopeful," Fernando said.

The government projections will likely feature in the upcoming budget, the minister added, and have not been previously reported.

BUDGET DELAY DRAGS

Sri Lanka allocated 1.315 trillion rupees for capital expenditure in 2025, but spending was delayed after the budget was approved later than usual in March by the new government of President Anura Kumara Dissanayake.

The country typically presents its budget to parliament in November, with approval in December, a cycle the government plans to resume this year.

Fernando said government ministries hesitated to initiate procurement without formal approval this year. Spending picked up in the second quarter, but remains below target, making it difficult to achieve 5% GDP growth unless the informal economy compensates.

At the end of July, only a fifth of the budgeted money had been spent.

"Next year will be really fine, because we will adhere to the normal budget cycle," he said. "We have learned something because we have never been in government."

The minister said the country could also more than double foreign direct investment to more than $2 billion in 2026, driven by investments from China, India and the UAE.

He said Sri Lanka was prioritising strategic foreign loans tied to large-scale projects and technology transfer, rather than market-based borrowing to boost reserves or fund existing initiatives.

The country, burdened by high debt levels, is working within an IMF framework to reduce debt to 95% of GDP by 2032, with a target of 80–85% to preserve borrowing space. This year's target is 109.6%.

Fernando said borrowing will be reserved for critical investments, while the government focuses on boosting reserves through export diversification and tourism.

Crucial remittances from expatriates have already topped $5.2 billion in the first eight months of the year and could hit a record $8 billion, compared with $6.57 billion last year, he added. The previous high was $7.24 billion in 2016.

($1 = 302.0000 Sri Lankan rupees)

(Reporting by Uditha Jayasinghe and Krishna N. Das in Colombo; Editing by Andrew Heavens)