Sri Lanka’s economy witnessed a remarkable expansion for the second consecutive quarter, driven by a surge in industrial activity, bolstered by an International Monetary Fund (IMF) bailout and decreased interest rates.
According to the Statistics Department, Gross Domestic Product (GDP) grew by 4.5% in the three months ending December compared to the same period last year. This exceeded the median forecast of 3.7% growth in a Bloomberg survey of economists, marking a significant improvement from the 1.6% recorded in the July-September quarter. However, for the entire year, the economy still registered a contraction of 2.3%.
The resurgence in economic activity coincides with Sri Lanka’s efforts to secure initial approval for the next tranche of a $3 billion IMF loan program. Authorities are actively engaged in restructuring the nation’s debt by June, a crucial step to ensure the continued flow of funds from the bailout. Negotiations with dollar bondholders regarding the terms of restructuring are currently underway.
Industrial production notably expanded by 7.9% compared to the previous year, while the services sector saw a modest increase of 2.8%, as per the data.
The reduction in borrowing costs has played a pivotal role in Sri Lanka’s economic recovery. The country’s central bank slashed its benchmark rates by a total of 650 basis points throughout 2023. Despite concerns about rising inflation accompanying the economic rebound, the monetary authority maintained rates for the first time in five months in January. It remains confident in achieving its inflation target of 5%, with expectations that price pressures will peak in the coming months.
Moreover, increased inflows from tourism and remittances have contributed significantly to Sri Lanka’s turnaround. The leisure sector is experiencing a resurgence, approaching pre-pandemic levels, with January marking the highest earnings from visitor arrivals in four years. Furthermore, the local currency has strengthened, appreciating by 6% against the dollar since the beginning of the year.
Source: Bloomberg
