Sri Lanka on to recovery phase, says ADB
Sri Lanka’s inflationary pressures are expected to ease off this year and return to single digits in 2024, the Asian Development Bank Outlook Report forecasts against the historic back-to-back contraction of the economy.
Inflation is projected to average 24.6 per cent in 2023 as fiscal tightening and double-digit interest rates weigh on domestic demand, supply-side disruption eases, moderating external pressures alleviate food shortages.
As a result factoring in a high base effect, inflation is expected to be sharply lower in 2024, the report highlighted.
Sri Lanka’s economy is expected to contract again to about 3 per cent this year and to 1.4 per cent in 2024 that should see signs of a recovery phase.
ADB Country Director Chen Chen on Tuesday addressing the meeting held to release the ADB Outlook 2023 report stated that this is also the end of one year of Sri Lanka’s crisis and thereby acknowledged the country’s hard work in taking decisive actions at a crucial time.
He noted that the ADB will continue to collaborate with Sri Lanka and hoped the worst of the economic crisis is over.
The country’s financial crisis has set the economy reeling back significantly and in this respect authorities need to ensure they remain on track in terms of reforms, debt restructuring and implementing measures proposed under the IMF programme.
The ADB points out that the outlook for Sri Lanka is clouded by uncertainty concerning progress on debt restructuring, the timely implementation of measures under the IMF programme, political developments as the country enters the electoral cycle that will likely test the authorities’ will to carry out reform, and unpredictable weather patterns.
Risks to the outlook could also emanate from the financial sector which has a significant credit quality, it was noted.
Other downside risks are a global slowdown that exceeds expectations, which could hit foreign exchange earnings; political instability, which could hit tourism or delay reform; and a possible resurgence of the pandemic.
The ADB outlook report also highlighted that the country’s new national account data have shown that growth was negative in four of the eight quarters in 2018 and 2019.
It was also pointed out that enhancing domestic resource mobilization will be critical to addressing macroeconomic vulnerability and imbalances. The country needs to reduce reliance on indirect taxes in a bid to improve progressivity in the tax regime, it was stated.
Further the report identified that nearly 20 of the 52 key state-owned enterprises (SOEs) lost money on average in 2018-2022 and their borrowings constitute a significant part of the country’s public debt. Government-guaranteed SOE debt equals 5.7 per cent of GDP at the end of last year. In addition, SOEs owe debt to each other as well.
Central Bank Governor Dr. Nandalal Weerasinghe pointed out the lessons Sri Lanka has learnt from the economic fallout and the measures needed to be adopted.
He highlighted that Sri Lanka was too late in taking any proactive measures that led to near hyper-inflation, social and political unrest and a collapse of the economy.
He noted Sri Lanka cannot go back to the IMF and that this time is a special time and there is no second chance adding “we can’t afford to do what we did earlier.”
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