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Sri Lankan Economy Expected to Recover and Reach Potential, Central Bank Optimistic

The Central Bank of Sri Lanka forecasts a continued recovery and eventual realization of the nation’s economic potential in the coming years. This optimistic outlook is bolstered by expectations of stabilized inflation around the target over the medium term and signs of economic resurgence observed in the latter half of 2023, poised to manifest into a comprehensive revival across all sectors.

In its Annual Economic Review 2023, released recently, the financial sector regulator highlighted the return of greater macroeconomic stability as a key driver for the anticipated economic upturn. Despite intermittent fluctuations due to supply-side shocks amidst subdued demand conditions, inflation is projected to remain around the target of 5 percent on average throughout 2024, supported by appropriate policy measures.

The Central Bank emphasizes the importance of its independence and increased public accountability in monetary policymaking to uphold domestic price stability in the medium term.

The early indicators of economic rebound witnessed in the latter part of 2023 are anticipated to foster a widespread recovery across all sectors in the foreseeable future. Although there may be a potential widening of the trade deficit due to increased imports alongside heightened economic activity, the external sector is poised to benefit from favorable developments, including the resurgence of the tourism sector, elevated levels of workers’ remittances, and expected non-debt creating inflows, thereby strengthening external buffers.

With the mitigation of significant vulnerabilities in 2023, the financial sector is expected to expand its service offerings in the forthcoming period, bolstered by enhanced resilience reinforced by legislative improvements.

On the fiscal front, the government is anticipated to persist with fiscal consolidation efforts while driving essential reforms to steer the economy towards a sustainable trajectory.

However, amidst longer-term challenges stemming from climate change, population aging, and geopolitical tensions, the overall outlook for the Sri Lankan economy in the medium to long term hinges on the continuation of the IMF-EFF program, successful completion of debt restructuring, and uninterrupted implementation of productivity and efficiency-enhancing reforms, facilitated by broader political and social consensus.

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