Sri Lanka’s economic bounce: four insights from an economic update

We’ve just published our economic update for Sri Lanka. Four things stand out.

1. The Sri Lankan economy is growing much faster than many expected.

• A consensus beating first half of 2024 supported a lifting of the 2024 GDP growth forecast to 4.4%.
• If realized it’d be a huge 11 %-point shift from the depths of the crisis (the economy declined by 7.3% in 2022).
• When the IMF published their numbers in March 2023, they forecast GDP growth of 1.5% in 2024.
• This is a real positive outcome, but a huge amount of reform would be needed to maintain this bounce-back rate.

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2. The post-crisis macro is doing much better than many expected.

• Inflation is forecast at 3% in 2024 (from 46% in 2022).
• So massive credit is due to an independent central bank for taming inflation (the biggest enemy of the poor) and ensuring financial stability (a financial crisis on top of the debt crisis would have increased the damage of the crisis several-fold).
• The rupee has also performed better versus the USD than many forecast during the depths of the crisis. The rupee recovered some of its crisis-period-loss over the past year, dipping under 300 per/ USD in recent weeks.
• All while usable gross official foreign exchange reserves increased to US$4.5 billion in August 2024 (excludes $1.4bn PBOC swap line), versus US$500 million in December 2022 .

3. There’s a lot of work to do for the new government to realize a decent clip of inclusive economic growth.

• Growth plus sensible fiscal policy is needed to walk the tightrope towards debt sustainability over the next 5 years.
• Careful control of government accounts is needed, so that the stance is sufficiently prudent, but not so tight that it strangles economic growth.
• Growth needs to be inclusive enough so that people across the country feel the recovery and support the ongoing reform effort. The crisis hit people incredibly hard.
• Sensibly some relief measures are being discussed. As poverty doubled between 2021 and 2023 and is now only falling gradually. Meanwhile workers’ wages contracted between 17% and 22% in 2021-24.

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4. Sri Lanka went on an overseas borrowing binge, partly because of insufficient foreign exchange earnings.

• Remittances from workers overseas, tourism and some exports have done well, but net FDI inflows have averaged a paltry 1.2% GDP over past 3 decades.
• And exports of goods and services, as a share of the economy, have been gradually declining since 2000.
• This leaves FX earnings falling short of investment and consumption needs.
• This World Bank update has an interesting part 2 on how the country can boost its foreign exchange earnings from trade and investment.
• A better balance of payments is crucial if Sri Lanka is to be able to easily service its foreign currency debt. Recently I wrote a note about the lessons from the debt crisis (link here).

Here’s a link to the report (with an interesting part 2 on trade and investment).

And here’s some of the macro-data from that report.