03/07/2023, 17.22
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Sri Lanka’s economy shows signs of improvement

by Arundathie Abeysinghe

Foreign exchange reserves rose by 23.5 per cent. For economists, this is the beginning of the end of the economic crisis. The possibility of obtaining a loan from the International Monetary Fund is increasing.


Colombo (AsiaNews) – Sri Lanka's foreign exchange reserves reached US$ 2.1 billion last month after falling to US$ 1.7 billion in September 2022.

According to Finance Ministry officials, reserves increased by US$ 400 million (23.5 per cent) in the first week of last month.

Economic analysts Darshani Senanayaka and Sumith Lahandupura told AsiaNews that “these statistics show that the island nation, which was in a deep abyss, is marching towards a prosperous future. Currently, the Sri Lankan rupee is appreciating against the US dollar."

Sri Lanka is still facing unsustainable debt and a severe balance of payments crisis that have had a negative impact on growth and poverty. According to the latest forecasts from the South Asia Economic Focus, Sri Lanka's GDP is expected to decline by 4.2 per cent in 2023.

In early 2022, the government announced a temporary suspension on part of its external debt due to the severe currency shortage and measures were taken to consolidate public debt in anticipation of a financing agreement with the International Monetary Fund (IMF).

Towards the end of last year, Sri Lanka's monetary policy was tightened with an unprecedented adjustment in interest rates to prevent inflationary pressures from worsening.

These measures have ensured the availability of foreign currency to import basic goods, like fuel, coal, cooking gas, medicines and food, alleviating, at least in part, socio-economic stress.

“Sri Lanka’s economy will recover in the second half of 2023,” officials with the Central Bank of Sri Lanka (CBSL) believe. However, “Due to structural economic impediments that existed across various spheres of the economy over decades, compounded by economic shocks, along with ill-timed policy choices, Sri Lanka had to undergo an adverse economic situation.”

In early 2022, the country’s economy plunged into the worst-ever crisis since independence. After shrinking by about 8 per cent last year, it is now “expected to record a gradual recovery in the second half of 2023 and sustain the growth momentum beyond,” the CBSL says.

At present, the central bank “needs to provide dollars to repay the IMF once it is approved in late March or early April and multilateral lenders,” this according to experts Sampath Amaraweera and Sachintha Madugalla.

“Unlike other bailouts, the IMF programs work according to tight policies such as stopping money printing and reducing domestic credit through tax hikes, keeping the external sector in balance.

“Hence, both floats and consistent pegs work in the same principle where inflows and outflows match and no extra outflows are generated by reserve sales, thereby encouraging a nation to live beyond its means.”

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