SL’s growth to dip amid macroeconomic challenges and external headwinds: ADB

• Forecasts economic growth to dip to 2.4% this year before recovering slightly to 2.5% in 2023
• Says, even as Omicron variant of COVID-19 subsides, country is facing macroeconomic headwinds
• Expects inflationary pressures to moderate in 2023 as global commodities prices fall
• Says SL’s foreign reserves will be limited in absence of access to sustained balance of payment financing

Sri Lanka’s prospects for progress look bleak going forward, as the Asian Development Bank (ADB) in its latest forecast expects a muted recovery for the country from the COVID-19 pandemics, as its economy is yet to find sustainable solutions to the mounting macroeconomic issues.

The Asian Development Outlook 2022 (ADO 2022) report that was launched yesterday painted a grim picture of the country’s future in the near term. Sri Lanka continues to grapple with macroeconomic challenges arising from high debt, low foreign reserves and inflationary pressures.

According to the latest forecast, Sri Lanka’s economic growth is expected to dip to 2.4 percent this year. However, a marginal improvement to 2.5 percent is expected in 2023.

“…even as the Omicron variant of COVID-19 subsides, the country is facing several headwinds. Rising food, fuel and commodity prices, higher import prices, supply chain disruptions, shortages stemming from the foreign exchange squeeze, demand-side pressures and exchange rate depreciation will drive inflation higher in 2022,” ADO 2022 said.

It also noted that inflationary pressures are expected to moderate in 2023, as global prices fall and supply constraints ease.

The forecast assumes that hesitancy in the population over receiving a COVID-19 booster will be largely overcome and there is no further surge in COVID-19 cases and the government will be able to meet its external financing.
ADB Regional Economic Advisor for South Asia Rana Hasan highlighted that a strong vaccination drive helped the economic activity recover from the impact of multiple COVID-19 waves, with tourism, one of the worst-hit sectors, 

gaining strength at the turn of the year.
Despite progress on that front, the debt overhang, large external financing requirements, energy shortages and high inflation hold the island nation back from strong growth.

“The government requirements—and here uncertainty remains over the sources of this financing. All in all, risks to the outlook are tilted to the downside,” the ADB said.

In the absence of access to a sustained balance of payment financing, the agency cautioned that foreign exchange reserves will continue to be limited and external sector vulnerabilities are likely to persist. Furthermore, the implications of the Russian invasion of Ukraine will be seen through higher oil and food prices as well as reduced tourism and exports earnings.

The hope for recovery to gain traction is for the government to roll out immediate measures to restore macroeconomic stability and debt sustainability.

Some of the areas that need urgent and improved focus in restoring macroeconomic stability include having greater exchange rate flexibility, monetary policy independence, revenue-based fiscal consolidation and structural reforms in taxation, public sector management and state-owned enterprises.