Compared to the peak of the economic crisis in 2022, when long queues for basic necessities such as fuel and LP gas were common, essential medicines were scarce in hospitals, goods were scarce in the market, inflation was soaring, and daily power cuts lasted for hours, today’s reality appears markedly different and somewhat improved. Queues have vanished, fuel is plentiful, and the power supply is consistent.

However, while surface-level appearances have certainly brightened, the poverty rate has increased, with over 25% of the population now living below the poverty line, according to the World Bank. Taxes have reached unprecedented levels and economic growth remains slow and is expected to pick up at a sluggish pace. 

This raises a fundamental question: has Sri Lanka’s economy been undergoing a genuine recovery or is this merely an illusion of stability, masking another impending crisis? Is there a risk of Sri Lanka heading into yet another economic abyss? 

For answers, The Sunday Morning Business turned to experts.

Long queues, mounting debt, forex shortage were symptoms 

Speaking to The Sunday Morning Business, Verité Research Lead Economist Raj Prabu Rajakulendran noted that although Sri Lanka indeed demonstrated some signs of micro-stability, this alone did not constitute a sustainable recovery. 

“The benchmark for success in Sri Lanka isn’t simply completing an International Monetary Fund (IMF) programme or the debt restructuring; it’s ensuring we avoid another restructuring in the future. In other words, the key is achieving sustainable recovery.”

According to Rajakulendran, in order to achieve sustainable recovery, the country must understand why it faced the crisis in the first place; the long queues, mounting debt, and foreign currency shortages were all symptoms, not the root cause. The real issue lay in governance, he explained. 

Currently, Sri Lanka appears to be failing in addressing governance issues. According to research, including the IMF Tracker powered by Verité Research, Sri Lanka has failed to meet 16 commitments related to governance out of the total commitments in the IMF programme. 

“By only treating the symptoms and not addressing the root cause, we’re setting ourselves up for another crisis in the future. This recovery requires a focus on governance. Simply addressing the symptoms won’t suffice; it’s essential to tackle the underlying issues to ensure long-term stability. Otherwise, we risk facing another crisis in a few years’ time.”

No plan for long-term growth

Former Deputy Governor of the Central Bank of Sri Lanka (CBSL) Dr. W.A. Wijewardena told The Sunday Morning Business that the current condition, as coined by Dr. Sharmini Coorey, was a “low-level equilibrium” – a situation where Sri Lanka had made some progress but had not achieved optimal outcomes.

Dr. Wijewardena explained that it was akin to a chronically ill patient who, while showing improvement, was still unable to fully engage in activities to enhance their well-being. 

“Our economy is in a similar state. We’ve managed to quell major social disruptions experienced in the previous years. However, the ultimate goal remains long-term economic growth, for which we lack a concrete plan.”

Manifestations of high poverty, taxes, and living costs persist, despite a decelerating inflation rate. For instance, fishermen operating multi-day boats endure substantial costs for fuel, often outweighing their earnings. This financial strain also affected manufacturers, big and small, as production costs soared while market prices remained suppressed, Dr. Wijewardena noted.

Farmers face a similar plight, where rising production costs are not matched by consumer prices. This imbalance threatens to impoverish the country further unless it achieves sustained economic growth, a goal we are yet to attain. 

Dr. Wijewardena highlighted the need for immediate action to avert another crisis or exacerbate the current one. 

“Firstly, the Government must rein in expenditure while allocating more resources to investment. A surplus in the primary account achieved through cuts in capital expenditure harms infrastructure development, crucial for long-term growth. Redirecting funds from current to capital expenditure is vital.

“Secondly, enhancing productivity across all sectors, including fisheries, is imperative. An inadequate catch leads to financial losses for fishermen and mirrors productivity challenges in other industries like garments, tea, and rubber. Overcoming high production costs and low productivity is paramount to our economic resilience.”

Some improvements observed 

University of Colombo Faculty of Arts Department of Economics Head Prof. Sirimal Abeyratne, speaking to The Sunday Morning Business, stated that the country was yet to fully recover.

“We should gauge our progress by comparing our current state to the pre-crisis conditions –  pre-Covid and back in 2019. When we consider the burdens people face today, it’s evident that true recovery is still on the horizon. 

“Can we label ourselves as a ‘recovering economy’ at present? Yes, if we analyse the data trends, we can observe some improvements, much like a doctor interpreting test results to gauge a patient’s progress. Similarly, by examining macroeconomic indicators, we can discern our path to recovery.”

However, as Prof. Abeyratne explained, two critical aspects require attention in our recovery assessment. Firstly, economic stability, encompassing debt restructuring, has been the primary focus in recent years. Yet, sustainability hinges on economic advancement, the second crucial aspect, which necessitates fundamental reforms. Without these reforms, stabilisation and debt restructuring efforts remain unsustainable, impeding income growth, tax revenue enhancement, and long-term economic stability.

Regarding precautions to avoid a relapse into a similar or deeper crisis, swift implementation of reforms to bolster our investment climate and stimulate export growth was imperative, he stressed. 

“Despite 46 years of liberalisation policies, Sri Lanka’s export value remains relatively low at $ 12 billion, contrasting sharply with neighbouring countries boasting export revenues in the hundreds of billions. Relying excessively on remittances and tourism is unsustainable for generating export revenue.”

He added that aligning economic growth with export expansion was paramount for income generation, Government revenue, and overall economic vitality. Fostering investor confidence, facilitating export growth, and streamlining reforms are central areas demanding governmental focus.

Strong possibility of yet another default

Economist and regular columnist for the IMF Talal Rafi expressed that since Sri Lanka had been like an ICU patient in 2022, one could not expect such a patient to leave the ICU and immediately start running. 

“Similarly, Sri Lanka’s 2022 economic crisis was so deep that we first needed to stabilise and I think we have stabilised as all indicators (inflation, exchange rate, reserves, etc.) are more stable. 

“However, we cannot remain happy for long, thinking the economy is stable, as the debt-to-GDP ratio is very high and due to low international credit ratings, our borrowing costs are also high. This means that even after debt restructuring, debt payments may become unsustainable unless we start increasing our exports.”

According to Rafi, the only way for Sri Lanka to come out of this crisis is to increase exports. He opined that export performance should be one way of measuring recovery, with the debt restructuring giving Sri Lanka a short window to shift gears into a more export-focused economy. 

Should Sri Lanka fail to do so in time, with the current level of exports, debt would become unsustainable even after restructuring, which could lead to a second default, he added. To increase exports, Sri Lanka needs a liberal trade regime and more foreign investments. For comparison, 80% of Singapore’s exports and 70% of Vietnam’s exports come from foreign investments.

Rafi further confirmed that there was a strong possibility of yet another default. “The IMF programme target is for Sri Lanka’s debt-to-GDP ratio to come down to 95% of GDP by 2032. Ghana defaulted when its debt-to-GDP ratio was only around 92%. Therefore, even if Sri Lanka meets the debt-to-GDP target of 95% by 2032, we will still be in a position where we are slightly worse off than when Ghana defaulted. 

“It is quite a gloomy outlook unless we do the tough reforms. State-Owned Enterprise (SOE) reforms, trade reforms, educational reforms, governance-related reforms, and land and labour reforms are essential, and if these reforms are not undertaken, we could very well be heading for a second default.”

Definite signs of recovery

Meanwhile, Frontier Research Senior Research Lead Anjali Hewapathage stated that the economy was definitely showing signs of recovery, although the current recovery process remained very fragile.

“We are seeing low inflation levels, the currency has appreciated, and interest rates are falling. So there is a sense of positivity right now. However, we see this as a period of uncertainty, especially as we approach a potential election period. Elections are inherently volatile, regardless of policy shifts that may or may not occur. This current positivity could face short-term volatility because of the election.”

Additionally, the external interest reduction negotiations, which were yet to be finalised, added another layer of uncertainty, she explained. 

“That’s why I describe the recovery as fragile. Government revenues are performing well and they are maintaining their expenditure. We are also exceeding the IMF’s prescribed targets. However, we are entering an election period, which means potential volatility. This short- to medium-term volatility is something we have seen in countries such as Indonesia after the Asian financial crisis. Despite periods of ups and downs, Indonesia’s economy grew in the long term.”

While certain recovery efforts are being made, there are critical areas that need to be managed to maintain this fragile recovery pathway, according to the consensus of economists.