Economy shrinks 12.4% in 4Q22 as crisis bites

„Full year contraction at 7.8%, worst in postindependence history „Agriculture bottoms out as sector returned to 0.7% growth in 4Q

„Fx shortages, inflation, higher rates, power cuts and social unrest cited as reasons for sharp GDP decline

„Sri Lankan economy turning a corner as IMF will unfreeze relief package next week

The Sri Lankan economy declined the most in the fourth quarter of last year since the beginning of the pandemic as the economy recorded its worst contraction in 2022 during its post-independence history.

The economy shrank 12.4 percent in the final three months of 2022, deepening the decline from the revised 11.5 percent decline in the third quarter.

The Department of Census and Statistics (DCS) revised up the third quarter Gross Domestic Product (GDP) contraction from an earlier estimate of 11.8 percent to 11.5 percent when it released the fourth quarter GDP estimates this week.

The sector-wise performance showed that the agriculture sector had turned around with 0.7 percent expansion in activity, but the industrial and services sectors had continued to shrink by 30.1 percent and 3.9 percent respectively.

For some, the December quarter GDP estimates came in as a bit of a surprise as they thought the economy might have bottomed in the third quarter.

Before that Sri Lanka had recorded its worst decline in terms of quarterly GDP estimates in the second quarter of 2020 when nearly the entire quarter had to be shut down because of the pandemic.

The Sri Lankan economy gave up 17. 1 percent of its output from April through June 2020 when the pandemic forced the economy to go into hibernation. Along with the pandemic, sweeping tax cuts, excessive Central Bank liquidity and economic mismanagement contributed to Sri Lanka’s economy’s undoing.

DCS cited the economy running out of steam in the early part of last year caused by the shortage of foreign currency, sending inflation and interest rates through the roof.

It also noted that social unrest took a massive toll on almost all sectors of the economy as it had never been.

“In addition, frequent power disruptions, shortages in fuel, raw materials, foreign currency which affected in making supply chain disruptions, amidst price escalations in both domestic and global markets, affected adversely to the whole production process of agriculture, industry and services,” DCS said.

This caused the economy to give up record 7.8 percent in 2022. For the full year, the agricultural sector declined by 4.6 percent, while the industry and services sectors contracted by 16.0 percent and 2.0 percent, respectively.

Sri Lanka’s economy is expected to turn a corner next week with the expected approval of US$ 2.9 billion bailout package by the Executive Board of the International Monetary Fund (IMF).