Road to Recovery

After going through an extraordinary economic crisis in 2022, Sri Lanka is now exhibiting signs that its economy is stabilizing and beginning to recover.

By Daniyal Talat | August 2023

Sri Lanka had a major economic and political crisis in 2022, characterized by blackouts, food shortages, and unrest among the citizens. Gotabaya Rajapaksa, the then president of the island country, was ultimately removed after violent outbursts and demonstrations across the country. There were worries that Sri Lanka could descend into chaos, but the new President, Ranil Wickremasinghe, prevented the foreseen disaster from taking place. Since Wickremasinghe’s party had also lost in the legislative elections held earlier, he was seen as the qualified leader to steer Sri Lanka through the deep economic crisis. After declaring a sovereign debt default followed by an IMF rescue programme, Wickremasinghe had a series of debt-restructuring negotiations with international creditors successfully.

The lack of public mandate and a legislative majority to carry out essential economic reforms were the two major difficulties encountered that hampered Sri Lanka’s efforts to recover. Many vulnerable people fell into poverty as a result of a sharp rise in living expenses. The country’s recession has been exacerbated by job and income losses, and it is anticipated that the GDP would decline significantly in 2023 as well. Sri Lanka relies on an IMF bailout to secure access to financial aid from bilateral and multilateral sources to restore the economy.

However, the IMF’s approach requires tight financial restraint, which has a front-loaded impact on adjustment costs and leads to higher taxes and spending reductions. Even in politically calm times, carrying out such a reform plan is difficult. The dangers are particularly larger during a crisis since there are fewer funds available for the government to compensate individuals impacted by the reforms. These dangers are made worse by the waning public confidence in Sri Lanka’s governmental authorities and institutions. The greatest chance for Sri Lanka is for debt restructuring talks with its key creditors, including China, India, Japan, and private bondholders, to be successfully concluded. It will necessitate a delicate balancing act to devise a solution acceptable to both creditor and debtor. Even if the discussions are successful, it will take a while to make things happen for the betterment of the economy. Many people are looking for better possibilities overseas as a result of the decline in real earnings and increasing taxes that are placing pressure on discretionary incomes.

After going through an extraordinary economic catastrophe in 2022, Sri Lanka is now exhibiting signs that its economy is stabilizing and beginning to recover. A severe economic recession, rising inflation, and an increase in poverty were the results of the crisis, characterized by a misbalance of payments and a default on foreign debt. To stabilize the economy, President Ranil Wickremasinghe’s administration has implemented a number of significant economic measures, such as tightening monetary policy, raising taxes, eliminating subsidies, and launching a programme to privatize state-owned businesses.

India has been crucial in helping Sri Lanka through the crisis. Due to pressure from South India, humanitarian concerns, and anxieties over the inflow of refugees, it offered the largest bilateral aid package in its history. The roughly $4 billion package was distributed through credit lines, loans, and grants. In addition to that, India provided Sri Lanka with a $1 billion credit line and assisted the island country in its negotiations with the IMF. The IMF authorized a package for Sri Lanka totaling US$2.9 billion over 48 months, supporting the nation’s efforts to re-establish budgetary and debt sustainability.

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