In a positive development for South Asia, Sri Lanka has quietly and effectively embarked on a remarkable economic reco-very in recent months. This resurgence can be attributed to successful anti-inflation measures and disciplined import reductions. Policymakers are now experiencing a sense of relief as the immediate fears of a financial crisis have abated.
Sri Lanka can also find satisfaction in its current economic outlook, which stands out favourably when compared to its financially stronger neighbours like Bangladesh or Nepal. Inherent factors such as the country’s modest yet well-educated population have played a pivotal role in catalysing a swift recovery. The Sri Lankan population adeptly adjusted to the challenges of the new economic landscape.
India, too, can take pride in Sri Lanka’s commendable efforts to revitalize its struggling financial system. During a previous financial crisis, India provided $4 billion in assistance to Sri Lanka. The departure of the country’s former leaders during the crisis left the nation in disarray, with bewildered and frustrated citizens grappling with the aftermath. Japan and Bangladesh also contributed significantly by granting Colombo unconditional extensions on scheduled repayments and offering financial assistance.
The International Monetary Fund (IMF) played its part by extending a $3 billion special aid package, which proved instrumental in bolstering Sri Lanka’s depleted foreign exchange reserves.
Nonetheless, the path to recovery has not been without challenges. Policymakers are acutely aware that the journey toward normalization has only just begun, and they recognize that the road ahead will be arduous.
The resilience of Sri Lankan administrators and citizens is worth acknowledging. They have embraced stringent austerity measures akin to the economic restrictions and rationing witnessed in post-World War II UK and Europe, without any significant protest. The implementation of extensive import controls has been a critical move to conserve foreign exchange reserves. Presently, Sri Lanka is focusing its imports primarily on essential goods, which constitute only about 18% of its previous volumes.
The era of reckless spending and corruption, characterized by extravagant purchases of foreign luxury items, has faded into the past. The economy, heavily reliant on tourism, suffered from the restrictions imposed by the COVID-19 pandemic, which in turn led to a decline in local food and industrial production. The conflict in Ukraine in February 2022 further exacerbated the nation’s economic challenges.
The affluent segments of Sri Lankan society found themselves grappling with an astonishing year-on-year inflation rate of 70%. For the first time since gaining independence, Sri Lankans faced difficulties in obtaining fuel, essential medicines, food items, and cooking gas. The financial crisis and dwindling foreign exchange reserves affected even the middle class, prompting adults to skip meals in order to provide for their children.
To counter these issues, the government raised taxes, removed subsidies on fuel and power consumption, and initiated privatization efforts in sectors like airlines and telecom to generate additional revenue.
While official sources report current foreign exchange reserves at approximately $3.7 billion, there is growing confidence that it might not be necessary for Sri Lanka to exhaust all the borrowed funds. However, observers caution that navigating the road ahead will require careful and skilful manoeuvring.