Sri Lanka is navigating an unparalleled economic crisis, and according to the Asian Development Bank’s (ADB) annual report, the Asian Development Outlook (ADO) April 2023, the country’s GDP would continue to decline in 2023 before starting to slowly recover in 2024. In 2022, the economy shrank by 7.8%, and in 2023, it is expected to shrink by 3% as it continues to struggle with debt restructuring and balance of payments issues. The country’s efforts to stabilize its economy will be aided by reform measures including the rollback of the 2019 tax cuts and the recent acceptance of the Extended Fund Facility agreement with the International Monetary Fund (IMF). The speedy resolution of the debt issue and the unwavering execution of reforms are essential to Sri Lanka’s recovery from the crisis.
However, due to policy mistakes, global economic shocks, rivalries among the big powers, and pre-pandemic macroeconomic vulnerabilities, Sri Lanka was already in a precarious position when the crisis began. In 2022, a lack of foreign currency caused a shortage of goods that were necessary for survival, as well as an acute energy crisis that resulted in protracted power outages and traffic jams since Sri Lanka was running low on fuel. Many fell into poverty as a result of rising inflation and declining living conditions. The poor and vulnerable have suffered disproportionately from the economic crisis.
While different economic packages have been sanctioned for the island state and relatively sound political stability is on the eve, it can be perceived that an upward movement may be seen in the next year. This year is the year of policy reformations, then the reaping time will be 2024. Meanwhile, the Sri Lankan currency last appreciated versus the dollar by 4.5 percent on March 14. The writeup will therefore shed light on the prospects of economic upwardness.
Finally receiving approval from the IMF for a $3 billion rescue package for Sri Lanka, the island nation may now restructure its debt and expect economic growth in 2024. The IMF’s decision will enable for the prompt disbursement of a $333 million loan over four years to the South Asian nation, which is currently experiencing its worst financial crisis in decades. According to IMF director for Asia and the Pacific Krishna Srinivasan, Sri Lanka has been “hit hard by catastrophic economic and humanitarian crisis.” In an interview with CNBC’s Sri Jegarajah in Asia, he said, “This you can trace back to three factors: One is pre-existing vulnerabilities, policy mistakes, and shocks.”
However, Ranil Wickremesinghe, a six-time prime minister, was elected president by the nation’s lawmakers in July. Wickremesinghe congratulated the IMF in a tweet in response to the most recent IMF bailout and stated that his nation is dedicated to its “reform agenda,” adding that the IMF program is “critical to achieving this vision.”
Previously, as mentioned, the biggest economic crisis the island nation has seen since gaining independence began in early 2022, according to the Central Bank of Sri Lanka, and is projected to gradually cease in the second half of this year. According to Xinhua news agency, the central bank stated its monetary policies for 2023 on January 4 and noted that the sharp acceleration of inflation that started in early 2022 reversed in October. “The Sri Lankan economy, which is projected to register a real contraction of around 8.0 percent in 2022, is expected to record a gradual recovery in the second half of 2023 and sustain the growth momentum beyond,” the bank stated.
According to a recent study by the Central Bank of Sri Lanka, the GDP of the nation increased by 3.6% in the first quarter of 2023 compared to the same time in 2012. Compared to the previous quarter, when the GDP expanded by just 1.5%, this is a huge increase. This development has been attributed to a variety of factors, including increasing industrial production and greater demand for Sri Lankan exports. Particularly, the manufacturing industry has experienced rapid development, with production rising 6.9% in the first quarter of 2023. The agricultural industry has also done well, with considerable increases in tea and rubber exports. Additionally, there have been indications of a rebound in the tourism sector, as seen by a 29% rise in visitor arrivals in the first quarter of 2023 compared to the same period in 222. Given that the tourist sector has been one of the hardest hit by the COVID-19 pandemic and associated travel restrictions, this is particularly noteworthy.
However, since Sri Lanka’s governmental collapse and near-bankruptcy last summer, there appears to be a return to calm in the South Asian country. Fuel lines that once snaked for blocks have been removed, and a beachside area that had been the location of a protest camp for months was decorated for the holidays with Christmas lights and carnival rides. Moreover, the island’s economy still runs on a ventilator since the government has not found a solution to escape its crippling debt. Sri Lankans have come to terms with a depressing reality that includes fewer meals, smaller paychecks, and lower aspirations.
Meanwhile, instead of fixing the economy, a series of punitive tax hikes and subsidy reductions that further limited demand have brought about a semblance of stability. Although necessary, the actions are unpopular and provide fodder for the political opposition, increasing the likelihood that this administration or the one after it will back off from them. Therefore, the economy is still running on a thin line.
– Syed Raiyan Amir is a Research Associate at the KRF Center for Bangladesh and Global Affairs (CBGA).