Sri Lanka’s Two-Year Transformation: From Crisis to Lift-Off

The resignation of then-President Gotabaya Rajapaksa in July 2022, followed months of protests that came to be known as the Aragalaya (struggle).

Fast forward to 2025, and Sri Lanka presents a vastly different—albeit still fragile—picture.

While remnants of the crisis linger, the island nation has made significant strides in stabilising its domestic economy, reshaping its government and governance, and redefining its role in the international arena.

The most dramatic shift since 2022 has been economic.

The skyline of Sri Lanka's capital, Colombo. Image: Graeme Acton

The scale of the collapse was staggering: inflation had surpassed 50 percent, foreign reserves were all but gone, and the Sri Lankan rupee plummeted in value to - at one stage - claim the dubious honour of being the weakest currency in the world.

The economy was dealt a further blow when the government inexplicably banned the use of synthetic fertiliser and imported pesticides practically overnight, forcing Sri Lanka’s millions of farmers to go organic whether they were prepared to do so or not.

While there was some support for Sri Lanka to “go organic”, the abrupt nature of the policy change caught the sector unawares. The ban saw rice production drop 20 percent in the six months after it was implemented, causing a country that had been self-sufficient in rice production to spend $450 million on rice imports — much more than the $400 million that would’ve been saved by banning fertiliser imports.

The production of tea, Sri Lanka’s biggest export — fell by 18 percent. The fertiliser move was an unmitigated disaster.

Many of the Sri Lankans I spoke to responded with a wry chuckle when reminded of the fertiliser debacle – one telling me “that was the point at which I knew they were on the way out for good.”

Despite some internal opposition, Sri Lanka was forced to turn to the International Monetary Fund, which approved a $2.9 billion bailout in March 2023. That agreement came with stringent conditions: tax reforms, energy pricing reforms, a major crackdown on corruption, and the restructuring of state-owned enterprises.

Since then, Sri Lanka has taken steps many thought politically impossible. The introduction of direct taxes, including an expanded personal income tax bracket, was met with resistance but ultimately passed. Fuel and electricity prices were liberalized, making them more responsive to global markets rather than being subsidized by the state.

As Sri Lanka has started on the road to recovery, the government has been focusing on a 'Clean' campaign, enhancing the country's image to a more sustainable, clean one. Image: Graeme Acton

By early 2025, inflation had dropped to around 6 percent, the rupee had stabilised, and the country is expected to post modest GDP growth this year—around 2.5 percent, according to the Central Bank of Sri Lanka.

Foreign reserves, while still not abundant, are slowly rebuilding, offering a sliver of breathing space for a country once teetering on the brink of financial collapse.

The Trump tariffs are a new dark cloud for the country. During my visit, the talk was all about the economic damage that could put a massive dent in the recovery.

A 44 percent tariff on Sri Lankan exports, particularly affecting the garment industry, has been a major concern. The garment sector, which contributes approximately $1.9 billion annually and employs around 300,000 workers, is at risk of substantial revenue losses and job cuts.

The tariffs have also impacted Sri Lanka's financial markets, with the Colombo Stock Exchange experiencing significant losses . Additionally, the country's sovereign bonds have seen a decline, increasing borrowing costs and complicating access to international capital markets.​

In response, the IMF has acknowledged the tariffs as an external shock and is reassessing Sri Lanka's economic program.

While the U.S. has temporarily suspended the 44 percent tariff for three months, Sri Lanka is exploring diplomatic avenues to negotiate more favourable trade terms with the U.S. However, the situation remains uncertain, and the country faces the risk of losing market share to competitors with lower tariffs, such as India .​

Political Awakening

The 2022 protests didn't just force the president to resign—they shook the foundation of a political dynasty. The Rajapaksa family's grip on power, once considered absolute, has been dramatically weakened. Mahinda Rajapaksa, the former president and prime minister, now lives largely out of public view, a far cry from his once-iconic status.

Elections in 2024 resulted in a seismic shift, with Anura Kumara Dissanayake (often just “AKD”) taking the leadership and his National Peoples Power (NPP) alliance taking control.

President of Sri Lanka Anura Kumara Dissanayake (left) with the President of India Smt. Droupadi Murmu (centre) and Prime Minister Narendra Modi. Image: Wikimedia Commons/Prime Minister's Office, Government of India

AKD’s party – the Janatha Vimukthi Peramuna (JVP) was responsible for two conflicts that killed tens of thousands of Sri Lankans. For many years they were shunned, but forming alliances with dozens of other smaller parties has transformed them into a more conventional social democrat-style party, a big wrench for some in the former Marxist-Leninist JVP.

Despite improvements in the economy since the election, for many Sri Lankans, life remains difficult. The poverty rate, which doubled during the crisis, has not yet returned to pre-2020 levels. The World Bank estimates that nearly a quarter of the population remains below the national poverty line. Education and healthcare systems, once seen as post-independence success stories, are still recovering from the crisis.

Over 300,000 Sri Lankans left the country in 2022 and 2023 in search of better opportunities, with remittances forming a critical part of the country’s financial lifeline. The brain drain has raised concerns about the long-term capacity of the country to rebuild, as doctors, lawyers, and IT workers head offshore for better prospects.

Social policy reform has also been a priority for the government, most notably the proposed repeal of the Prevention of Terrorism Act (PTA), which will sweep away the vestiges of laws that allowed for the repression of Sri Lankans on ethnic grounds. The law was introduced in 1979, primarily to combat a growing Tamil separatist movement in the north of the country.

Sri Lankan Prime Minister Harini Amarasuriya has been under pressure over the PTA’s replacement, which critics see as only a minor reform of the PTA. However many Sri Lankans see the reform as yet another positive move, shutting the door on a repressive recent past.

Despite the on-going issues, there is definitely a buzz on the streets of the capital Colombo where tech startups, sustainable agriculture ventures, and social enterprises are developing new markets and audiences. A very favourable exchange rate has also drawn the tourists back – from backpackers to well-heeled Europeans lounging around the pool at the Marriott.

Upmarket malls and shops have been a boon for Sri Lanka's recovering economy, as tourists are drawn back and locals begin spending. Image: Graeme Acton

Another key arena of change has been foreign policy. Sri Lanka, long caught in the strategic tug-of-war between China and India, has had to walk an even finer line post-crisis. While China remains a major creditor and investor, particularly in infrastructure like the Hambantota Port and Colombo Port City, Sri Lanka has leaned more heavily on India and Western partners for emergency support during the past two years.

Since the economic collapse in Sri Lanka, India has pushed for greater economic integration, including bilateral trade expansion and investment in renewable energy. The U.S. and European Union have also increased engagement, largely tied to economic reforms funded by the IMF.

The continuing involvement of international agencies like the IMF, World Bank and ADB has brought some criticism from some quarters that the country is being “humiliated”,  and has lost part of its economic sovereignty to the bankers – who have insisted on certain reforms as conditions of the loans.

But the progress made since 2022 is notable: people have money to spend, and there is a general sense of satisfaction with the government’s plan to get the country back on its feet.

But on the streets of the bustling capital Colombo the transformation remains incomplete—and reversible.

Debt restructuring, particularly with bilateral creditors like China and private bondholders, is still ongoing. The success of these negotiations will determine the country’s long-term debt sustainability. Last years elections showed the voters wanted change and that change is underway. The next elections are due in early 2030, and the challenge in the intervening period is to rebuild not just the economy, but the social contract between citizens and the state.

The NVP’s election manifesto offered voters a “thriving nation and a beautiful life”, and the progress towards that will depend on voters accepting some structural changes, but also keeping away from corruption scandals

If reforms continue and political will holds up, Sri Lanka could emerge from its most painful chapter as a stronger, more equitable nation.

Asia Media Centre