Sri Lanka: Latest Economic Outlook and Future Challenges

The economic outlook of Sri Lanka has been challenging, as evidenced by the data and reports available up to May 2024. The country has faced severe economic downturns, with a sharp contraction of about 8.0% in 2022, which was the largest economic contraction on record for Sri Lanka. This was followed by a contraction of 2.3% in 2023. However, there are signs of stabilization and moderate growth projected at 2.2% for 2024.

The economic crisis has led to significant humanitarian hardship, deepened poverty, and created a cohort of newly poor individuals. High inflation rates, particularly food inflation, have made basic necessities prohibitively expensive for low-income earners. The pandemic and the subsequent socioeconomic crisis reversed more than a decade of gains against poverty. The World Bank estimates that the $3.65/day poverty rate rose to 25.0% in 2022 from 11.3% in 2019 and 23.8% in 2009/10 and forecasts the rate to reach 27.5% in 2024. 

The government has engaged with the International Monetary Fund (IMF) for an Extended Fund Facility (EFF) and has been implementing structural reforms and fiscal austerity measures, including raising taxes and reducing spending, as part of the conditions for receiving support.

Despite these challenges, there are efforts underway to restore macroeconomic stability. The IMF-EFF arrangement and debt restructuring efforts are expected to solidify stability and boost confidence. The government is also focusing on addressing vulnerabilities such as corruption and is working on rechanneling resources into productive sectors to improve productivity.

However, the recovery process is fragile, with continued outflows of human capital, especially highly skilled professionals, and the impact of climate change posing additional risks. The country’s close ties with the global economy mean that international developments will significantly impact reform efforts, and challenges such as geopolitical volatility, upcoming elections, and climate-related risks remain.

In summary, while there are positive signs of economic stabilization and recovery, Sri Lanka’s economy still faces significant challenges and uncertainties that could affect its growth trajectory and overall economic health in the near to medium term.

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