Sri Lanka’s economy revives in 2023-CB report
The Sri Lankan economy contracted last year while witnessing a gradual revival from the deepest economic downturn in its post-independence history.
Decisive policy adjustments and structural reforms implemented by the Government and the Central Bank helped restore macroeconomic stability to a great extent, despite the short run hardships faced by economic stakeholders. These measures were essential to prevent further deepening of the crisis and to navigate the economy along a sustainable path of recovery. With risks abound, the unwavering commitment of policymakers along with wider public acceptance remains imperative to continue with the economic reform agenda and efforts to regain debt sustainability, according to the Central Bank’s annual report for 2023 which was released on Thursday.
The report said:
The economic adjustment programme has already yielded promising outcomes in 2023. Inflation was contained at single-digit levels by end 2023 from its highest level recorded in 2022, enabling the commencement of monetary policy normalisation. The economy recorded an expansion in the second half of 2023 bringing an end to the longest streak of economic contraction of six consecutive quarters.
The persistent twin deficit of the overall government budget and the external current account, which was the root cause of the economic downturn, showed signs of correction in 2023. While a surplus was recorded in the primary balance of the Government, the external current account also recorded a surplus in 2023. External buffers, which were almost exhausted during the crisis, were gradually rebuilt during the year. Improved foreign exchange inflows received from tourism and other services exports as well as workers’ remittances, amidst subdued import demand, supported the country in alleviating the severe foreign exchange crunch that prevailed at the time of the crisis.
The Central Bank’s net purchases from foreign exchange inflows along with receipts from the multilateral partners helped augment the country’s international reserves. In light of these developments, along with enhanced confidence in the market, the Sri Lanka rupee witnessed a strengthening in 2023 and early 2024.
Concerted efforts to restructure the Government’s external debt portfolio would provide the required space for the country to make a sustainable recovery, once the process is completed, the report said.
Meanwhile, domestic market interest rates declined substantially with the easing of monetary policy and reduction of risk premia attached to yields on government securities following the successful finalisation of the Domestic Debt Optimisation (DDO) operation.
The economic progression witnessed in the latter half of 2023 is expected to continue in the years ahead, supported by the continuation of the reform agenda under the International Monetary Fund’s Extended
Fund Facility (IMF-EFF) arrangement.
The external sector is anticipated to retain its stability, supported by augmenting external buffers, normalisation of foreign inflows and completion of the restructuring of the foreign debt portfolio of the Government. Reinforced by the legislative amendments and greater consolidation, the financial sector is expected to remain resilient.
However, the formidable recovery of the Sri Lankan economy hinges on the continuity of the reforms implemented thus far, and as part of this process, the successful continuation of the IMF-EFF arrangement and completion of the debt restructuring process remain paramount.