Sri Lanka: Economic Outline

Economic Indicators

Sri Lanka has experienced strong and sustained growth since the end of the conflict between the government and the Tamil Tigers in 2009. Nevertheless, in recent years, a catastrophic economic and humanitarian crisis has struck the country, with the economy grappling with significant challenges: a severe recession amid high inflation, depleted reserves, and an unsustainable public debt, exacerbated by a series of external shocks. The crisis can be traced back to pre-existing vulnerabilities and policy missteps that occurred prior to its onset. Following the loss of access to international financial markets in 2020, official reserves sharply declined, leading to a forex liquidity constraint and severe shortages of essential goods. In April 2022, the country declared an external debt service suspension pending debt restructuring. The economy experienced a total contraction of 9.5% during 2022 and 2023, while public and publicly guaranteed debt surged to 119.2% of GDP in 2022 amidst high inflation (46.4% annual average in 2022) and a steep currency depreciation (81.2% year-on-year, 2022). In 2023, the economy shrank by 2.3%, despite growth in the third and fourth quarters at 1.6% and 4.5% year-on-year respectively, marking the end of six consecutive quarters of contraction. This decline was primarily due to reductions in construction, mining, financial and IT services, and textile manufacturing, driven by weak demand, limited private credit availability, and input shortages. However, growth was observed in transportation, accommodation, food, and beverage services, fueled by a resurgence in tourism. Future growth hinges on progress in debt restructuring and ongoing structural reforms. Fiscal adjustments, mainly reliant on revenue, may further reduce disposable incomes, dampen demand, and hinder short-term growth. Despite a modest recovery, it is unlikely to offset welfare losses from the crisis, and poverty rates are expected to remain above 22% until 2026.

Recent structural reforms, such as implementing cost-reflective utility pricing and introducing new revenue measures, contributed to macroeconomic stability but put pressure on household budgets. Domestic debt restructuring concluded in September 2023, and negotiations with external creditors are ongoing. In March 2024, a Staff Level Agreement was reached between authorities and International Monetary Fund staff for the second review of the Extended Fund Facility program, for a total amount of about USD 3 billion. Key reforms targeting debt, fiscal management, trade, investment, and State-Owned Enterprises (SOEs) are making progress. In 2023, the current account posted its first surplus since 1977, fueled by a sharp rebound in remittances and tourism, coupled with restrained imports. Despite a positive primary balance resulting from increased revenue and SOE repayments, a significant surge in interest payments led to a considerable fiscal deficit. Interest payments accounted for roughly three-quarters of total revenue collected. Additionally, the continued external debt service suspension, inflows from development partners, significant foreign exchange purchases, and deferred repayments on existing credit lines bolstered usable official reserves to around two months of imports. While the primary deficit is anticipated to decrease further, the overall fiscal balance is forecasted to remain elevated in 2024, primarily due to the substantial interest payments. Debt restructuring efforts and ongoing fiscal consolidation are expected to gradually reduce the overall fiscal balance in the medium term. Inflation remained mild, stabilizing at single-digit levels by July 2023, buoyed by currency appreciation and enhanced supply. However, it is expected to increase moderately in the short term, driven by new revenue measures and diminishing favorable base effects, yet maintaining a benign outlook in the medium term due to subdued demand.

The country has been classified as a middle-income economy by the IMF since 2010. According to the latest figures from the World Bank, labor force participation dropped from 49.8% to 48.8% between 2022 and the third quarter of 2023, notably in urban regions. Facing reduced incomes and price pressures, households resorted to risky coping methods, such as dipping into savings, increasing debt, and cutting back on food consumption. Food insecurity escalated in the latter half of 2023, affecting 24% of households. In recent years, food insecurity and malnutrition have surged, with poverty doubling and inequality widening. Around 60% of households saw income declines as a result of reduced work hours or job losses, and poverty is estimated to remain above 22% until 2026. In 2023, the unemployment rate increased to 6.6% (from 6.2% one year earlier), whereas the GDP per capita (PPP) stood at USD 14,410 (data World Bank).

Monetary Indicators	2016	2017	2018	2019	2020
Sri Lanka Rupee (LKR) - Average Annual Exchange Rate For 1 GBP	196.56	196.20	216.76	223.38	237.85

Source: World Bank - Latest available data.

© eexpand, All Rights Reserved.
Latest Update: May 2024