Sri Lanka’s Accelerated Growth Estimation

Sri Lanka (Commonwealth) _ The World Bank upgraded its estimate for Sri Lanka’s GDP on Tuesday, predicting 2.2% growth in 2024 as the country grappling with the worst financial crisis in decades emerges from it more quickly than anticipated.

After its economy collapsed in 2022, Sri Lanka received a $2.9 billion bailout from the International Monetary Fund (IMF) in March of last year. This helped the country reduce inflation, boost state income, and replenish its foreign exchange reserves. After falling 2.3% in 2023, Sri Lanka’s GDP is predicted to rebound this year thanks to the IMF program.

In its most recent South Asia report, the World Bank increased its growth estimate for Sri Lanka by 50 basis points. Additionally, real GDP growth was anticipated to pick up steam. According to the bank assessment, moderate recoveries in reserves, remittances, and tourism were predicted to support real GDP growth further, to 2.5% in 2025.

Richard Walker, senior economist at the World Bank, told reporters that growth is expected to be positive in 2024 and moderate over the long term—an immediate recovery is not anticipated.

The biggest financial crisis since gaining independence from Britain in 1948 was brought on by a significant lack of foreign exchange reserves, which led to a 70% increase in inflation in the months that followed, and ultimately resulted in Sri Lanka’s default on its international debt in May 2022.

The World Bank predicts that although prices have lately decreased, Sri Lanka’s poverty rate would still be higher than 22% until 2026.  According to the World Bank, it was almost 26% in 2023 as opposed to pre-COVID levels of 11.3% in 2019.

According to the research, households have become destitute as a result of rising prices, declines in earnings, income, and employment, and a decline in remittances.

The island country in the Indian Ocean obtained a principled agreement to restructure its debt with China, India, and the Paris Club countries in November. However, agreements with each bilateral creditor are now required, as they are a crucial requirement for the island nation’s IMF rescue.

Sri Lanka will have to finish the debt restructuring before the following IMF assessment since it is scheduled to hold presidential elections in the second half of 2024. Because of the small primary account and reserve buffers—especially in light of upcoming elections and policy fatigue—downside risks are still quite significant. The other is a debt restructure that is not sufficiently extensive,” Walker stated.

With the exception of Afghanistan, South Asia was predicted to increase 6.1% in 2025, making it the fastest-growing area in the globe for the following two years. Leading the way would be India, with 6.6% growth predicted for the fiscal year 2025. The State Bank of Pakistan has projected a growth rate of 2%–3% for Pakistan’s fiscal year 2024, however the World Bank anticipates 1.8% growth. According to the research, real GDP is expected to grow by 2.3% in fiscal year 2025.

Despite the fact that moderate growth of 2.2% is anticipated in Sri Lanka’s GDP in 2024, yet, the most recent bi-annual report from the World Bank indicates that the nation continues to struggle with high rates of poverty, economic inequality, and labor market issues.

The Sri Lanka Development Update, Bridge to Recovery, which was released today, notes that the country experienced decreasing inflation, higher revenues as a result of new fiscal policies being put in place, and a current account surplus for the first time in almost fifty years, helped along by a rise in remittances and tourism.

Nonetheless, for the fourth consecutive year, poverty rates increased, with an estimated 25.9% of Sri Lankans projected to fall below the poverty line in 2023. Additionally, there has been a decrease in labor force participation, especially among women and in metropolitan areas, which has been made worse by the closure of micro, small, and medium-sized businesses (MSMEs).
A number of challenges, including underemployment, declining income, and excessive costs, are affecting households. As a result, households are now going on debt in order to keep spending on health and education as well as to satisfy their dietary needs.

Sri Lanka’s economy is beginning to recover, but Faris Hadad-Zervos, the World Bank’s Country Director for the Maldives, Nepal, and Sri Lanka, stressed the need for ongoing efforts to lessen the impact of the economic crisis on the country’s most vulnerable citizens.

The report’s forecast for 2025 is for a moderate 2.5% increase in GDP, a steady rise in inflation, and a tiny current account surplus. On the other hand, significant debt servicing demands are anticipated to put strain on fiscal balances. It is projected that poverty rates will be higher than 22% until 2026.