Considering the progress made in relation to the IMF- Extended Fund Facility (EFF) programe and debt restructuring negotiations, and the reforms that have already been undertaken and those that are to be implemented in the period ahead, the Sri Lankan economy is expected to transition onto the path to recovery from the latter part of 2023.
The Sri Lankan economy, which faced extreme headwinds and heightened uncertainties during the first half of 2022, has shown signs of stability in the second half of the year.
The IMF Extended Fund Facility (EFF) programme will provide an opportunity to embark on much needed and long neglected structural adjustments in a more structured and timely manner, which will be instrumental in shaping the economy to progress on a trajectory of greater stability and sustained growth.
Although the economy was on a recovery path subsequent to the abating of the COVID-19 pandemic, its progress was muted by the culmination of the entrenched twin deficits in the government budget and external current account. Hence, the growth momentum observed towards the end of 2021 dissipated rapidly and the real economy fell into a contraction during the first half of 2022, driven by the spillover effects of the unprecedented economic crisis felt across several sectors, owing to fuel shortages, power outages, widespread scarcity of key imported raw materials and other essentials, and the soaring cost of production, among other factors.
The debt restructuring process has also reached an advanced stage. The economic issues in Sri Lanka are encapsulated in deeply entrenched structural weaknesses that are a culmination of the lack of policymakers’ commitment to undertaking holistic and efficacious reforms over the long run.
Nevertheless, the expected near-term recovery of the economy is fraught with many challenges due to the unprecedented scale of the crisis that the economy is facing and uncertainties on several fronts which may require swift policy actions as circumstances evolve.
In the midst of significant economic challenges on the domestic front, the economy will also have to grapple with global uncertainties emanating from monetary policy tightening measures adopted by major central banks in response to surging inflation, the spillover effects of geopolitical tensions and thereby a looming global recession, which will make the external environment less conducive for economic recovery.
During the year, servicing of external debt became increasingly challenging, given the lack of access to international markets due to consecutive sovereign downgrades and the bunching of large foreign debt service payments amidst lacklustre foreign exchange inflows.