Rising from the Rubble: Sri Lanka’s economy roars back to life – fact or fiction?

The World Bank recently held a press briefing to discuss the future of Sri Lanka's economy. World Bank Country Director for Maldives, Nepal, and Sri Lanka Faris Hadad-Zervos stated: "Sri Lanka's economy is on the road to recovery, but sustained efforts to mitigate the impact of the economic crisis on the poor and vulnerable are critical, alongside a continuation of the path of robust and credible structural reforms."

Currently, Sri Lanka's overall recovery path is becoming clearer, especially through policy-level measures and structural reforms, particularly concerning state-owned enterprises (SOEs) that have been incurring losses. The maintenance of loss-making SOEs poses a significant burden on the Government's Balance Sheet. In 2023, the cumulative net losses of SOEs amounted to 1,323 billion rupees, with some showing marginal profits. However, overall, these entities face challenges in overcoming historical cumulative losses.

The International Monetary Fund (IMF) has also urged the Government to restructure these entities and attract foreign investors through capitalisation or changes in management style, including public-private partnerships, to yield greater benefits.

The World Bank is particularly concerned about the welfare of the poor and vulnerable in Sri Lanka. It acknowledges the initiation of the "ASWSUMA" Program by the Sri Lankan Government to support targeted groups in improving their livelihoods on a short-term basis. However, there is a need for the proper implementation of a comprehensive livelihood development program, which not only provides financial assistance but also supports the development of small-scale businesses.

According to World Bank projections, Sri Lanka's economy is expected to experience slow recovery growth of 2.2% in 2024, followed by a moderate increase of 2.5% in the following year. Nevertheless, the poverty rate in Sri Lanka is anticipated to continue rising, reaching an estimated 25.9% by 2023 and projected to remain at 22% until 2026. Simultaneously, there is a need to accelerate the development of small and medium enterprises (SMEs), which have contributed more than 52% to Sri Lanka's GDP in recent years and account for 45% of employability.

Economic risks persist due to ongoing external debt restructuring, high debt servicing, and pressure on fiscal balances. The Sri Lankan Government must finalise the external debt restructuring process within a reasonable timeframe to strengthen the economy and move forward. However, the World Bank report emphasises that the implementation of strong reforms is fundamental to economic recovery and the stability of the macro-fiscal-financial system. Addressing risks associated with state-owned enterprises is also crucial for Sri Lanka's economy.

The Asian Development Bank's (ADB) annual flagship economic publication, the Asian Development Outlook (ADO) April 2024 issue, has highlighted that the Sri Lankan economy is expected to recover with moderate growth of 1.9% in 2024 and is projected to increase to 2.5% in 2025. The report indicates that Sri Lanka is showing signs of recovery, which serves as a positive indication for the international community and investors, prompting them to consider investing in Sri Lanka.

Therefore, the people of Sri Lanka may need to make further sacrifices to facilitate the country's strong economic development trajectory.

The author is an economist and a member of the Sri Lanka Council for Agricultural Research Policy. He is a former Director of the Merchant Bank of Sri Lanka and Finance PLC