A turnaround in the construction sector and continued expansion in services will help growth rise from 3.2% last year to 3.6% in 2019 and 3.8% in 2020, the bank predicts.

But rising economic activity could push up headline inflation as measured by the national consumer price index to 3.5% in 2019 and 4.0% in 2020.

“While the economy is projected to recover over the next two years, for Sri Lanka to sustain and accelerate growth, fiscal and structural reforms remain essential,” said Utsav Kumar, senior country economist at the ADB’s Sri Lanka Resident Mission.

“Addressing policy constraints will be critical to avoiding repeated macroeconomic pressures and generating sustained sources of foreign exchange earnings.”

The bank’s annual economic publication, Asian Development Outlook 2019, forecasts a gradual recovery supported by growth in the construction sector and services.

The ADB says measures outlined in the country’s 2019 budget – which aim to keep the primary balance in surplus in 2019 and 2020 and reduce the fiscal deficit further – will support private expenditure and growth.

The ratio of public investment to GDP is expected to pick up, and the current account deficit will drop to 2.5% of GDP in 2019 and increase marginally in 2020.

Agriculture, which began to recover in 2018 after two sluggish years, is expected to continue growing at the same pace assuming weather conditions remain normal.

Recurrent weather-related disasters continue to be a key policy challenge for the Sri Lankan economy and have been partly responsible for slow economic growth.

With a large proportion of the population close to the poverty line, bad weather could pose risks to gains made in poverty reduction over the past two decades.

The ADB believes Sri Lanka needs to focus on areas prone to disasters and should mobilize funds for risk reduction and adaptation.