Sri Lanka Grapples with Economic Woes Amid Parliamentary Challenges

Sri Lanka's economy faces challenges, including a balance of payment deficit and governance issues, with predicted GDP growth rates ranging from 1.9% to 2.5%. The government is working to address these issues, including passing an amendment to delay banks from auctioning collateral and expecting to sign foreign direct investment agreements worth $3 billion.

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Bijay Laxmi
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Sri Lanka Grapples with Economic Woes Amid Parliamentary Challenges

Sri Lanka Grapples with Economic Woes Amid Parliamentary Challenges

Sri Lanka's economy continues to face significant headwinds in 2024, as the country navigates a complex web of challenges, including a balance of payment deficit, unemployment, and governance issues. The depreciation of the rupee and growing indebtedness have further compounded the economic woes, leading to a general malaise among the population.

Why this matters: The economic struggles in Sri Lanka have far-reaching implications for regional stability and global trade, as the country's economic woes can have a ripple effect on neighboring nations and international markets. Moreover, the ability of Sri Lanka to address its economic challenges will serve as a model for other developing countries facing similar struggles.

The World Bank forecasts a moderate GDP growth of 2.2% in 2024 and 2.5% in 2025 for Sri Lanka, while the Asian Development Bank (ADB) predicts a slightly lower growth rate of 1.9% in 2024. Local experts, such as Prof. Priyanga Dunusinghe from the University of Colombo, suggest that the growth rate may range between 1.9% and 2.5%, emphasizing the need for sustained efforts to mitigate the impact of the economic crisis on the poor and vulnerable.

Faris Hadad-Zervos, World Bank Country Director for the Maldives, Nepal, and Sri Lanka, stated, "Sri Lanka's economy is on the road to recovery, but sustained efforts to mitigate the impact of the economic crisis on the poor and vulnerable are critical, alongside a continuation of the path of robust and credible structural reforms." The ADB's Asian Development Outlook, released in April 2024, noted, "Signs of recovery are emerging, with stronger reserves and currency appreciation... However, the higher costs of raw materials, higher taxes, and unpredictable weather will likely weigh on growth across sectors."

Sri Lanka faces several key challenges and risks, including the ongoing external debt restructuring process, political risks associated with the upcoming Presidential Election, and the potential impact of the visa issuance saga on the crucial tourism sector. The appreciating currency may also affect exporters and migrant workers, while a large segment of the population is falling into poverty, which could have ripple effects on the overall economy.

On May 7, 2024, Sri Lanka's parliament voted to pass an amendment to the Recovery of Loans by Banks Special Provisions Amendment Bill, delaying banks from auctioning collateral of bad loans until December 2024. This move comes after a currency crisis led to a decline in domestic demand, resulting in banks auctioning assets. The government is also expecting to sign foreign direct investment agreements worth $3 billion in 2024, with notable projects including a renewable energy project by India's Adani group and an oil refinery in Hambantota by China's Sinopec.

Despite these challenges, State Minister for Investment Promotion Dilum Amunugama stated that Sri Lanka's investment environment has improved compared to last year, citing political stability, monetary stability, and confidence in monetary stability as key factors. However, former President Mahinda Rajapaksa has criticized the current privatization drive, claiming that national assets are being sold off. Critics have blamed Rajapaksa's administration for running down state enterprises for off-budget spending and to give jobs to henchmen and family members.

As Sri Lanka navigates its complex economic landscape, addressing these challenges and risks will be crucial to ensure a sustained and policy-induced recovery. The country operates a flexible inflation targeting framework, trying to target a domestic anchor without a clean float, and has ended up seeking assistance from the International Monetary Fund after running out of foreign exchange. Prof. Priyanga Dunusinghe emphasized the importance of completing credit restructuring, stating, "Achieving completion in credit restructuring is imperative as it will provide a clearer outlook for the economy's future trajectory."

Key Takeaways

  • Sri Lanka's economy faces challenges, including balance of payment deficit, unemployment, and governance issues.
  • Economic struggles have far-reaching implications for regional stability and global trade.
  • World Bank forecasts 2.2% GDP growth in 2024, while ADB predicts 1.9% growth.
  • Sri Lanka faces key challenges, including debt restructuring, political risks, and impact on tourism.
  • Completing credit restructuring is crucial for a sustained economic recovery.