By Kamil Kuthubdeen
As Asian economies grapple with the challenges of growing interest rates and diminishing export demand, Sri Lanka, in comparison, stands as a unique case. Amid the twin effects of the COVID-19 pandemic and the Ukraine war, Sri Lanka emerges with a positive economic outlook.
Tourism revenue and remittances from Sri Lankan overseas workers have skilled a robust resurgence. Inflation, which had spiked to 70% in September last year, has now receded to 6.3% by July. Consequently, the Central Bank of Sri Lanka has decreased its benchmark interest rate by 4.5 per cent points since June.
The past year noticed Sri Lanka’s default due to an aggregate of factors that depleted foreign exchange reserves. Tourism receipts, a quarter formerly contributing nearly $5 billion annually to foreign exchange plummeted following the 2019 Easter Sunday incidents regardless of the pandemic, the downward trajectory in tourist numbers persisted.
Investor confidence waned due to heavy external borrowing, populist tax cuts, political disagreements, and the weakening of the state’s macroeconomic position. The outbreak of the Ukraine conflict in addition to Sri Lanka’s weak fiscal position led to an acute shortage of imported essentials as foreign reserves diminished.
To cope with its deficit the Central Bank of Sri Lanka resorted to printing money, leading to the devaluation of the Sri Lankan rupee and soaring inflation and an incapability to satisfy the day-by-day needs of the general public and public sentiment against the government escalated, leading to President Gotabaya Rajapaksa’s resignation in July 2022.
President Ranil Wickremesinghe, his successor, moved swiftly to stabilize the state of affairs engaging with the International Monetary Fund for financial aid, and securing periods in-between resources from nearby allies like India were key steps.
“To gain IMF backing, Sri Lanka carried out essential however tough measures, which include raising energy prices, taxes, and the broadening of the tax base. A new Central bank governor accelerated benchmark interest rates via 8 percentage points in 2022, aiming to bring down inflation” Kamil Kuthubdeen Chairman of Global Business Trust LLC Dubai said.
Within the first half of this year, tourism receipts almost touched $1 billion, followed by $3 billion in inward foreign remittances. The IMF, having authorized its assistance in March, forecasts Sri Lanka’s current account deficit to remain around 1.5% of the GDP.
The Government’s domestic debt restructuring program has decreased uncertainties, especially within the banking sector. Talks with external creditors for the restructuring of external debt are ongoing. With declining inflation, falling interest rates, and a rebounding tourism sector, alongside the government’s commitment to reforms, Sri Lanka’s future seems promising.
Sri Lanka’s strategic geographical advantage needs to be fully harnessed to strengthen its tourism and logistics sectors. Policymakers have to seize this possibility by using prioritizing infrastructure improvements.