Sri Lanka’s economy experienced a record contraction of 7.8 percent in 2022, according to official data released by the state-run census and statistics department on Thursday. The figures showed that the GDP of the island country shrank by 12.4 percent in the fourth quarter of the year. The situation is a result of the country’s worst financial crisis in seven decades, which triggered unprecedented protests, culminating in a mob storming the home of then-President Gotabaya Rajapaksa in July 2022, forcing him to flee the country and resign.
Although Moody’s Investors Service said that Sri Lanka’s growth was expected to decline by 3 percent this year, the growth is expected to rebound in 2024. The new government has been working to repair Sri Lanka’s battered public finances and secure an International Monetary Fund (IMF) bailout. President Ranil Wickremesinghe has raised taxes and ended subsidies on fuel and electricity to boost government revenue after his predecessor defaulted on Sri Lanka’s $46 billion foreign debt last year.
The data showed some improvement in Sri Lanka’s fiscal position with inflation moderating to about 50 percent in February, down from a record high of 69.8 percent in September. Wickremesinghe has said Sri Lanka can expect to remain bankrupt until at least 2026 and insisted his government has no option but to implement the reforms demanded by the IMF. However, the tax and price hikes have been unpopular, triggering protests and industrial stoppages around the country.
The census and statistics department said the agriculture sector shrank 4.6 percent last year, while industries contracted 16 percent, and services dropped 2 percent from a year earlier. The tax and price hikes are a precondition of a $2.9 billion rescue package from the IMF, which Sri Lanka expects to finalise next week. The reforms are expected to be announced in April, and Sri Lanka aims to step up talks with commercial creditors ahead of an IMF review of the bailout package in six months, according to its central bank governor.
Sanjeewa Fernando, Senior Vice President of Research at Asia Securities, said that the figures were “broadly in line with expectations” and that “with IMF funds expected, the central bank should be able to keep the currency strengthened, eventually reduce interest rates, and continue to see inflation ease.” Sri Lanka’s economy shrank 11.8 percent in the July-September quarter from a year ago, the second-worst quarterly contraction ever for the country.
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