Sri Lanka’s economy shrank by record 7.8 percent last year

Sri Lanka’s beleaguered economy shrank a record 7.8 percent last year, official data showed, as the country grapples with its worst financial crisis in seven decades.

The island’s fourth-quarter gross domestic product (GDP) declined by 12.4 percent, according to data released by the state-run Census and Statistics Department on Thursday.

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Moody’s Investors Service said on Monday that Sri Lanka’s growth rate is expected to decline by 3 percent this year, but growth is expected to rebound in 2024.

An unprecedented economic crisis sparked massive protests in the island nation, which culminated last July when a mob stormed the home of then-President Gotabaya Rajapaksa, forcing him to flee the country and resign.

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Since then, a new government has worked to repair Sri Lanka’s deteriorating public finances and secured a much-needed bailout from the International Monetary Fund (IMF).

Last year’s contraction – the biggest in the country’s 75 years of independence – compared to a 3.5 per cent increase in 2021 and a 4.6 per cent contraction in 2020 as the coronavirus pandemic hit.

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“This is due to the deepening of the economic crisis…recurring shortages of electricity, fuel, raw materials and (and) foreign exchange,” the Census and Statistics Department said in a statement.

The data showed some improvement in Sri Lanka’s fiscal position with inflation hovering around 50 percent in February, down from a record high of 69.8 percent in September.

President Ranil Wickremesinghe has raised taxes and ended generous subsidies on fuel and electricity to boost government revenue after his predecessor defaulted on Sri Lanka’s $46 billion foreign debt last year.

The reforms are a precondition for a $2.9 billion rescue package from the IMF, which Sri Lanka hopes to finalize next week.

But the tax and price hikes as a whole have been unpopular, triggering protests and industrial stoppages across the country.

About 40 trade unions warned Thursday they planned a general strike next week if their demands for concessions on the austerity program were not met.

Sri Lanka aims to announce a debt-restructuring strategy in April and step up talks with commercial creditors ahead of an IMF review of the bailout package in six months, its central bank governor said last week.

Wickremesinghe has said that Sri Lanka can expect to remain bankrupt until at least 2026 and insisted that his government has no choice but to implement the reforms demanded by the IMF.

The Census and Statistics Department said the agriculture sector shrank 4.6 percent last year, while industry shrank 16 percent and services shrank 2 percent from a year earlier.

Sri Lanka’s economy shrank 11.8 per cent in the July-September quarter from a year earlier, the second-worst quarterly contraction ever for the country.

“These numbers are broadly in line with expectations. In the last three months of 2022, Sri Lanka was hit by very high inflation, fuel shortage and high interest rates,” said Sanjeeva Fernando, senior vice president of research at Asia Securities.

“For the remainder of this year, with IMF funds expected, the central bank should be able to keep the currency strong, eventually lower interest rates, and continue to moderate inflation.”