Sri Lankan economy stabilizing – Wignaraja
Sri Lanka is emerging from its crippling economic crisis through stabilisation and Indian and other foreign assistance, said Professorial Fellow in Economics and Senior Research Associate at ODI in London, Ganeshan Wignaraja.
Writing to the Observer Research Foundation he says, “Many had begun to write Sri Lanka off as a basket case of economic development tragically gone wrong, highlighting Sri Lanka’s excessive borrowing. There is little doubt that Sri Lanka’s economic crisis offers cautionary lessons for others in the developing world.”
An acute balance of payments crisis forced Sri Lanka to preemptively default on foreign debt of over US$50 billion in April 2022, triggering a crippling economic contraction with spiralling inflation. Sri Lanka’s GDP fell by 7.8%in 2022, with year-on-year inflation rising to 69.8% in September 2022 and a reversal of previous gains in poverty reduction.
Mass protests by ordinary Sri Lankans resulted in the resignation of the President and Prime Minister. An acute balance of payments crisis forced Sri Lanka to preemptively default on foreign debt of over US$50 billion in April 2022, triggering a crippling economic contraction with spiralling inflation.
“The good news now is that the Sri Lankan economy is showing signs of stabilising. A return to growth in Sri Lanka is expected next year—the latest International Monetary Fund (IMF) forecast released in April 2023 suggests a less severe economic contraction of -3.1% in 2023 and growth of 1.5% in 2024. Year-on-year inflation fell to 35.3% in April 2023.”
The revised economic outlook for Sri Lanka is underpinned by calming of the turbulent political situation, which is allowing ordinary Sri Lankans to live their lives; decisive economic measures by the new Sri Lankan government under President Ranil Wickremasinghe; and timely Indian aid.
From late July 2022 onwards, the Wickremasinghe government began implementing measures to stabilise the economy, intensified talks on an IMF Programme, and sought assurances from Sri Lanka’s bilateral creditors on debt restructuring.
Responding to crisis-hit Sri Lanka’s urgent request for external financing pending an IMF Programme, India mobilised the largest bilateral aid package in its history.
Indian aid of about US$4 billion during the first half of 2022 flowed to Sri Lanka through credit lines, loans, and grants. India also undertook quiet diplomacy for Sri Lanka’s IMF Programme and just extended a US$1billion credit line to Sri Lanka until March 2024.
In March 2023, the IMF Board approved a long-delayed IMF Programme of US$2.9 billion over 48 months for Sri Lanka.