The rest of the year is likely to be eventful for Sri Lanka, with the economy facing more challenges given the ongoing debt restructuring, the International Monetary Fund (IMF) loan programme, and the upcoming Presidential Election. The question is where these events will leave the economy by the end of this year.
With just five more months left in 2024 and a major election in one-and-a-half months, ‘Market Mine’ turned to experts for insight into the immediate future of our economy.
Amidst these significant events, Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe predicted that the country’s economy would grow by 4% this year. He said that the country was projected to maintain its positive economic growth momentum for the rest of 2024, achieving figures close to 4% by the year’s end.
“We are aiming for close to 4% Year-on-Year (YoY) growth after several years of economic contraction. Inflation is significantly underperforming,” he said, emphasising that maintaining a single-digit inflation rate within the target range was a challenge for the CBSL.
‘Election uncertainty may disrupt progress’
Speaking to The Sunday Morning Business, University of Colombo Department of Economics Senior Professor Sirimal Abeyratne stated that Sri Lanka’s IMF programme would help the country improve.
“We should understand that we are in a transitional period. This period is a necessary condition but not a sufficient condition. A sufficient condition means we must use this transition period to further strengthen our economic sustainability and macroeconomic stability. These two goals cannot be achieved without economic growth and export growth.”
According to Prof. Abeyratne, the country’s primary focus in the medium term should be on growth, particularly export growth. To achieve this, Sri Lanka will require investment.
“Political reforms are also required. With these efforts, I believe Sri Lanka can improve this year, as it has in the past. However, the election results and the uncertainty they will create, as well as any changes in direction by the new government, may disrupt the progress we have made,” he explained.
‘Unlikely to look significantly different’
Speaking to The Sunday Morning Business, Frontier Research Senior Research Lead Anjali Hewapathage stated that they projected growth to follow an upward trajectory, albeit with some bumps along the way.
According to her, a significant part of how this economic story will unfold by the end of the year depends on how the election period, specifically the Presidential Election, is handled.
“The positive momentum we saw earlier this year continuing towards the end also affects the political landscape, and beyond that, macroeconomic growth will underscore this growth trajectory.”
She added that by the end of the year, the economy was unlikely to look significantly different to what it was now. Whether the growth is higher or whether there is more confidence in the economy will depend on how election-specific uncertainties are dealt with, as well as other complexities that might arise with the IMF review and progress on that front.
“As we see it, the path is not clear-cut. All of these factors affect the growth pathway. While growth can be achieved, broad-based growth is questionable, as some sectors might grow more than others, while some may lag.”
‘Growth numbers are attainable’
Speaking to The Sunday Morning Business, Verité Research Lead Economist Raj Prabu Rajakulendran stated that the growth and revenue were all aimed at ensuring debt sustainability and that Sri Lanka needed to reach the debt sustainability target of 95% debt-to-GDP.
“The problem is that many macro variables play into achieving that target of 95%. If we don’t overperform in areas like growth and revenue, we might not achieve the 95% debt-to-GDP target because interest rates are quite steep. If one variable isn’t performing as well as we need, other variables have to overperform to compensate.”
He added that the IMF and Sri Lanka had overperformed in terms of growth. Achieving a growth rate of at least 4% or higher is critical for debt sustainability as defined by the IMF. The CBSL was targeting this because other variables, including revenue, needed to be higher, Rajakulendran explained.
“We need to reconsider the 15% revenue target to ensure we reach the desired debt sustainability level and prevent Sri Lanka from entering another debt crisis. Regarding the upcoming elections, election periods usually see increased fiscal spending and a rise in deficits. However, since we are under an IMF programme, there must be fiscal discipline, limiting unnecessary spending.”
As for the CBSL’s predicted growth rate of 4%, Rajakulendran believes it is achievable.
“The IMF’s growth forecast might be too pessimistic at 3%, and we have shown we can overperform. Striving for 4% growth is necessary. Achieving this, however, depends on addressing crucial governance and structural reforms.
“If we continue with business as usual, reaching this growth rate will be difficult. But if we take initiatives to address these reforms, the growth numbers are attainable.”
‘Politically popular decisions cannot be taken’
The Sunday Morning Business reached out to State Minister of Finance Shehan Semasinghe, who stated that the Government was confident of achieving above 4% growth.
“The CBSL predicts 4% growth and this is our target, which surpasses speculations. Everyone must ensure this goal is not disrupted. There is no room for unwanted adjustments in the IMF programme, so politically popular decisions cannot be taken.
“We have a framework in place and President Ranil Wickremesinghe has ensured that Sri Lanka will not experience another crisis through the introduction of the Economic Transformation Bill.”
He stated that with the enactment of this bill, no leader or government could put the country at risk by taking political decisions.
“The country comes first, then the political party. If President Wickremesinghe were not determined, he would not have introduced this bill ahead of elections, as it limits his ability to manoeuvre politically with the economy. This shows the importance the President places on the economy. His continuation for the next five years is crucial.”
Semasinghe claimed that otherwise, within a month, the country would see early signs of economic breakdown, queues, and the IMF programme being cancelled while the Treasury would face a severe cash flow crisis.
He added that the upcoming election would determine whether people wanted a better life and country or revert back to the challenges of 2022 for another 15 years.
“If the IMF programme is obstructed and the IMF exits, creditors will also exit their agreements. We will have to start repaying debts, which we cannot afford. Politically, leaders like Sajith Premadasa and Anura Kumara Dissanayake may speak eloquently and paint a rosy picture, but the consequences would be detrimental.”
During election periods, the economy typically slows down. However, according to Semasinghe, Sri Lanka is on a favourable path. He supported this statement by pointing out that Sri Lanka had turned around a contraction of 7.8% in 2022 into a growth of 5.2%, adding that they expected to achieve 4% growth by the end of the year.
“This is shown in numbers, not just slogans or stories. The economy is the key issue in this election and it is up to the people to decide whether they want a better economy and country or revert to the suffering of 2022,” he added.
Growth projections
On 2 April, the World Bank noted that Sri Lanka was expected to experience moderate growth, with projections of 2.2% in 2024 and 2.5% in 2025. The institution anticipates rising inflation and a small current account surplus while expecting fiscal balance pressures due to debt service obligations.
The World Bank also projects Sri Lanka’s poverty rate to stay above 22% until 2026. Risks to this growth outlook include inadequate debt restructuring, a reversal of reforms, financial sector vulnerabilities, and the ongoing impact of the economic crisis.
In contrast, the Asian Development Bank (ADB), in its ‘Asian Development Outlook April 2024’ report, forecasts a slightly lower growth rate for Sri Lanka in 2024. The ADB highlights emerging signs of recovery, such as stronger reserves and currency appreciation.
The ADB also notes improvements in key forward-looking indicators like the Purchasing Managers’ Index and the Industrial Production Index. Construction, which had stalled during the crisis, is resuming but will be affected by an increase in Value-Added Tax (VAT), raising raw material prices and dampening housing construction.
The service sector is expected to benefit from higher tourist arrivals and receipts, while the finance sector will see increased demand for credit due to lower interest rates. Industry will likely experience a boost from resumed construction projects and higher manufacturing output, and agriculture will be supported by cheaper fertiliser. However, growth across all sectors will face challenges from higher raw material costs, increased taxes, and unpredictable weather conditions.