Sri Lanka to experience back-to-back economic contraction in 2023, tepid recovery in 2024: ADB

• Economy to contract by 3% in 2023, and grow by 1.3% in 2024
• Says SL has long road to recovery
• Inflation expected to ease and return to single digits in 2024
• Stresses need for unwavering commitment to reforms

 By Shabiya Ali Ahlam
Sri Lanka is expected to witness a historic back-to-back contraction in 2023, which is likely to be followed by only tepid recovery in 2024, the Asian Development Bank (ADB) said in its latest economic outlook report.

On assumptions that the island nation will fulfill the expectation laid down by the International Monetary Fund (IMF) to unlock the US$ 3 billion, the ADB forecasts for Sri Lanka a contraction of 3 percent in 2023, and in 2024 a growth of 1.3 percent as the debt overhand wanes. Although Sri Lanka is one of the few countries in the world facing a dip in growth for two years straight, the rate of economic contraction has reduced, the ADB said.

The ADB stressed Sri Lanka’s recovery from the crisis hinges on timely progress on debt relief and steadfast implementation of reforms. The island nation entered the crisis on a weak footing as pre-pandemic macroeconomic vulnerabilities, policy missteps, and shocks left the country with thin buffers on the eve of the pandemic. 
In 2022, foreign currency scarcity led to shortages of essentials and triggered an acute energy crisis with prolonged power cuts and transport bottlenecks due to lack of fuel.

Further, inflation soared and eroded living standards, pushing many into poverty, and impacting the poor and vulnerable disproportionally.  In 2023, inflation is expected to ease and return to single digits in 2024.  The ADB said it projects inflation will reach an average of 24.6 percent in 2023 as fiscal tightening and double-digit interest rates weigh on domestic demand, supply-side disruption easing, and moderating external pressures to alleviate food shortages. While factoring in a high base effect, inflation is expected to be sharply lower in 2024. 

Sri Lanka has a long road to recovery, and it will be critical to ensure the poor and vulnerable are protected,” said Deputy Country Director for Sri Lanka Utsav Kumar yesterday while addressing the ADB’s Serendipity Knowledge Programme that focused on Sri Lanka’s economic crisis. 

“It is imperative that the country addresses the root causes of internal and external imbalances, for which an unwavering commitment to reforms is essential,” he added.

The ADB asserted that reforms Sri Lanka needs include enhancing domestic resource mobilisation, improving the performance of state-owned enterprises to reduce their fiscal burden, strengthening public financial management, and encouraging private sector activities through harmonising trade and investment policies. “Improving governance and accountability mechanisms, such as strengthening anti-corruption legislation, building strong institutions, and increasing transparency, will also be essential to address Sri Lanka’s economic vulnerability,” it stressed.