Region 
 

Colombo

No End in Sight

Despite the recent IMF bailout, the economic future of Sri Lanka looks uncertain.

By Daniyal Talat | June 2023

Sri Lanka is at a crossroads in its 75-year history. The country had its worst-ever crisis in 2022 as a result of years of economic mismanagement, poor governance, bad policy decisions, and the effects of global disasters like COVID-19 pandemic and the ongoing Russian invasion of Ukraine.

The poorest and most vulnerable people in Sri Lanka have suffered the greatest losses as a result of economic collapse and political upheaval. The vulnerability of Sri Lanka is exacerbated by frequent natural catastrophes. The severity of the crisis has demonstrated the country’s need for a new development strategy. However, the recovery process will not be easy, and a slew of harsh fiscal adjustment measures may be required. Sri Lanka urgently needs debt relief from its creditors and funding from foreign financial organizations.

The financial crisis has caused lasting wounds. According to a poverty line of $3.65 per person per day, the rate of poverty in Sri Lanka nearly doubled between 2021 and 2022, rising from 13 per cent to a startling 25 per cent. In 2023, the rate of poverty is expected to rise by more than 2 percentage points. Urban poverty quadrupled in that time, from 5 to 15 per cent. People in Sri Lanka have been forced to swiftly adjust to a new reality where options for a better future are few, chances for good work are rare, and earnings are reduced and degraded by inflation. According to Sri Lanka’s president, the country is “bankrupt.”

After going into default on its national debt in May 2022, the tiny nation in the Indian Ocean experienced economic and political upheaval. The Colombo government secured a $2.9 billion (£2.4 billion) bailout in principle from the International Monetary Fund (IMF) in September, 2022. The money won’t be provided to Sri Lanka, however, unless China and India, Sri Lanka’s sovereign creditors, agree to a restructure of the billions of dollars in bilateral debt they owe. Despite hopes that such an accord would materialize during the previous month, nothing has happened so far.

The main source of suffering is a trade imbalance, with the trade deficit presently running at 6 per cent of GDP annually and a dire need to increase exports. When you take into account how fiercely domestic markets are regulated, largely to preserve entrenched interests, you can certainly see why liberalizing the economy is necessary if you want to see some relief.

For several reasons, trade can be crucial for the economic growth of low-income nations. Trade enables low-income nations to reach new markets for their products and services, which can raise demand and accelerate economic growth. For instance, EU may give a preferred treatment to exporters from the low-income countries.

Opening up to free trade exposes low-income nations to more international competition, which may spur innovation and raise the standard of goods and services. Trade may assist low-income nations in diversifying their economies by reducing reliance on a small number of basic commodities and allowing them to access new markets. Through trade, low-income nations can get access to cutting-edge solutions, industry best practices, and leadership strategies that can boost their competitiveness and productivity.

Trade may open doors for investment from outside in low-income nations, which can supply the money, expertise, and technology necessary for economic development. Despite some risks, trade has the potential to be a significant force for economic growth and development in low-income countries, thereby assisting in the improvement of living conditions and the eradication of poverty.


The majority of Sri Lanka’s exports have historically been agricultural, with tea serving as the main product. However, the previous administration’s prohibition on fertilizer imports, which reduced output by a fifth, has severely hurt the tea industry. The apparent solution for politicians is to increase agricultural production, but many companies in the tea industry pride themselves on being “artisan” producers, still plucking their leaves by hand as they did 200 years ago.

Additionally, many estates continue to use outdated processing technology, and employees are averse to adopting new, more effective picking techniques. One suggested change is to allow pickers and their families to harvest their specific plantation areas rather than labouring in the conventional work teams for set daily hours. Wherever it has been used, it has been shown to boost yields, although pickers are opposing the move.

There are also issues with corruption and transparency, as well as worries about how expanding the port may affect the environment.

Another significant export industry for Sri Lanka is textiles, particularly the production of clothing for Western companies. However, because this business is so reliant on imported gasoline and raw supplies, its costs have skyrocketed as a result of the epidemic and Russia’s invasion of Ukraine. Although it is anticipated that these costs may decrease this year, it is doubtful that Sri Lanka will move very far up the global export value chain because of its dependence on tea and textiles. What else may Sri Lanka export, then? There is no clear indication of a specific industry where Sri Lanka may and should gain an edge, in contrast to other Asian countries like Malaysia or Vietnam, which had a significant state-led push towards electronic manufacturing.

Port services are one sector with enough potential to become a trans-shipment hub due to its strategic location in the middle of the Indian Ocean. The Port of Colombo, the biggest port in Sri Lanka, is already the busiest in South Asia and has been growing quickly. Sri Lanka has the potential to play a significant role in the global logistics sector with the correct investments and regulatory environment.

There are also issues with corruption and transparency, as well as worries about how expanding the port may affect the environment. Technology has also been hailed as a prospective industry with room for expansion. People in Sri Lanka are generally well-educated, and a large percentage of them have degrees in STEM fields (Science, Technology, Engineering, and Mathematics) fields. To support the digital sector, Sri Lankan government has established a start-up accelerator, providing tax breaks to international tech companies.

In conclusion, despite the recent IMF bailout, Sri Lanka’s economic future is still hazy. The nation must deal with its trade imbalance and create a sustainable economic structure that relies less on conventional exports. While businesses like agriculture and textiles will always be important, there is a need to look into new markets and possibilities. Although port technology and services have been considered promising development areas, they also provide their own set of difficulties.

Sri Lanka must ultimately concentrate on developing a climate that is conducive to business and promotes innovation and investment, while simultaneously tackling problems like corruption and environmental sustainability. Sri Lanka can overcome its economic problems and become a more successful and resilient country with the correct investments and policies.

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