matechcorp.com – Sri Lanka’s economy has been through a tumultuous period, marked by severe economic crises and significant challenges. However, recent updates from the World Bank suggest a path towards recovery. This article delves into the latest economic forecast for Sri Lanka as of 2024, highlighting key developments, challenges, and the outlook for the future.
Current Economic Situation
Sri Lanka’s economy experienced a contraction of 2.3% in 2023, following six consecutive quarters of economic decline. This contraction was driven by several factors, including shrinking construction and mining activities, financial and IT services, and textile manufacturing. Despite these challenges, there were positive developments in the third and fourth quarters of 2023, with growth rates of 1.6% and 4.5%, respectively, primarily due to a rebound in tourism and transport services.
World Bank’s Growth Forecast
The World Bank has revised its forecast for Sri Lanka’s economy, projecting a growth rate of 2.2% for 2024. This forecast is a significant improvement from the previous year’s contraction and indicates a stabilization of the economy. The growth is expected to be driven by improvements in remittances, tourism, and foreign exchange reserves.
Key Developments and Challenges
Inflation and Monetary Policy
Inflation in Sri Lanka has shown signs of deceleration, dropping to single-digit levels in July 2023. However, recent spikes in food prices and utility costs have led to an increase in headline inflation to 5.9% in February 2024. The Central Bank responded by cutting policy rates by 650 basis points between June and November 2023, which helped reduce the government’s cost of domestic borrowing and improve liquidity.
Fiscal and External Balances
Sri Lanka’s fiscal deficit increased in 2023, primarily due to a sharp rise in interest payments. Despite this, the primary balance registered a surplus, supported by increased revenue and the repayment of an on-lent amount by a State-Owned Enterprise (SOE). The country’s external debt service suspension and inflows from development partners have helped build usable official reserves to about 2 months of imports by the end of February 2024.
Poverty and Social Protection
The economic crisis has had a severe impact on poverty levels, with an estimated 25.9% of Sri Lankans living below the poverty line in 2023. The government has introduced the Aswesuma program to consolidate state-sponsored cash-transfer programs, aiming to cover nearly 40% of the population. However, addressing poverty remains a significant challenge, requiring comprehensive social protection strategies and targeted measures to support the most vulnerable groups.
Outlook and Risks
The World Bank’s outlook for Sri Lanka’s economy is cautiously optimistic, with a projected growth rate of 2.5% in 2025. However, several risks remain, including inadequate debt restructuring, potential reversals of reforms, and ongoing financial sector vulnerabilities. The success of the economic recovery will depend on the continued implementation of structural reforms, debt restructuring, and efforts to stimulate private investment and capital inflows.
Conclusion
Sri Lanka’s economy is showing signs of stabilization and recovery, with a projected growth rate of 2.2% for 2024. While there are positive developments in remittances, tourism, and foreign exchange reserves, the country still faces significant challenges, including high poverty rates and the need for comprehensive social protection. The success of the economic recovery will hinge on the effective implementation of structural reforms and debt restructuring, as well as sustained efforts to support the most vulnerable segments of the population.
