SL’s economy might shrink 8%

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Due to the current economic situation of the country which led to many shortages and steep depreciation of the Sri Lankan Rupee, the Central Bank of Sri Lanka is estimating that the gross domestic product would shrink more than eight per cent this year.

Addressing the weekly monetary policy press conference, Central Bank Governor Nandalal Weerasinghe said that the Government was expecting the Sri Lankan economy to shrink 7,5 per cent this year earlier, however, due to the current situation it would contract more than 8 per cent.

According to him the higher the contraction the faster the country would recover.

The impact of persisted supply side disruptions, primarily due to shortages of power and energy and uncertainties associated with socio-political developments are expected to have caused significant adverse effects on economic growth in Q2 2022, the Central Bank said in a statement.

The impact is expected to have continued through Q3 2022 as well, it said.

That, coupled with the already recorded negative growth in Q1 2022 and contractionary policies, could result in a larger than expected contraction in real activity in 2022, it said.

However, real GDP growth is expected to recover in the period ahead, with the envisaged stabilisation of macroeconomic conditions and implementation of structural reforms in the economy, it said.

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