ECONOMYNEXT – Sri Lanka’s economy has stabilized by the recovery path which was narrow, World Bank officials said underlining the need to maintain stability and continue on the reform path.
The World Bank’s April 2024 Sri Lanka Development Update projected 2024 growth at 2.2 percent up from 1.7 percent projected last year and 2.5 percent for 2025.
Sri Lanka’s economy has stabilized and it was essential for stability and reforms to continue, Country Manager Chiyo Kanda told reporters Tuesday.
Sri Lanka’s inflation was low, interest rates were falling and the rupee was appreciating, World Bank’s Senior Country Economist Richard Walker said.
Results were already beginning to be seen, but there was unlikely to be a quick bounce back, he said.
Sri Lanka upcoming elections and the possibility of reform fatigue or reversals were, a key risk to the recovery path.
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Meanwhile the sudden poverty created from a currency collapse in 2022 was likely to persist for some time.
By 2026 World Bank was forecasting growth at 3.0 percent for 2026. The International Monetary Fund was also forecasting around the same level of growth.
Sri Lanka has to make sure that the debt restructuring was sufficiently deep to prevent repeated events in the future, he said.
“The modest economic recovery will likely be insufficient to reverse welfare losses experienced during the crisis, and the poverty rate is estimated to remain above 22 percent until 2026,” the report warned.
“Falling household spending on health and education is likely to impact future human capital, especially in poorer households.”
Extreme macro-economic policy (tax cuts on top of inflationary rate cuts to target potential output) drove the country to an external default in 2022, after quickfire currency crises in 2012, 2016 and 2018 boosted foreign borrowings and the central bank reserves also turned into net debt, analysts have shown.
The country has had a tendency to recover quickly from currency crises but this was the first external default. The are also possibility of global headwinds over fiscal and monetary risks in reserve currency countries, following years of loose policy analysts say. (Colombo/Apr02/2024)