Sri Lanka’s current economic crisis has affected the growth of the South Asian Region according to the Asian Development Bank, which lowered South Asia’s growth expectation to 6.5 per cent in 2022 from 7 per cent and to 71 per cent in 2023 from 7.4 per cent.
According to the Asian Development Outlook Supplement for July 2022, by the Asian Development Bank, Sri Lanka’s economy is expected to contract 7.6 per cent this year.
“South Asia’s growth forecast is lowered mainly due to the economic crisis in Sri Lanka and high inflation and associated monetary tightening in India,” the Asian Development Bank said.
Economic conditions in Sri Lanka have deteriorated drastically, since Asian Development Outlook 2022, on a sharp fall in usable reserves, causing the government to suspend external public debt servicing on 12 April and default on its sovereign debt on 18 May—the country’s first sovereign debt default.
Sri Lanka is beset with multifaceted and deepening challenges emanating from long-standing fiscal and current account deficits that have led to the sovereign debt and balance-of-payment crises. The scarcity of foreign exchange has triggered an acute energy crisis, affecting economic activity in all sectors of the economy, threatened food security, created shortages of other essentials, and hit consumer and investor confidence.
The detrimental effects of a chemical fertiliser ban on agriculture compounded the effects of the balance-of-payments crisis.
Double-digit inflation is squeezing disposable income and discouraging investment. The tight monetary policy to rein in inflation, revenue-based fiscal consolidation, and expenditure rationalisation are also slowing the economy.
Because of these factors, Sri Lanka’s growth is forecast to contract by 7.6% in 2022 and economic activity will remain subdued in 2023. Risks to the forecast are significant and stem from delays in securing external financing, rising commodity prices, a weaker global economy, and spillovers from the debt crisis on the banking industry.
By Mario Andree