Sri Lanka has faced a turbulent economic journey in recent years, with 2022 witnessing an unprecedented crisis marked by a staggering 8.7% GDP contraction. The economy slowly but steadily pulled back from the abyss over the course of 2023. These positive developments are a result of the implementation of economic stabilisation measures and groundwork for institutional and regulatory reforms to support future growth. But there are concerns about the impact on the most vulnerable groups. As a country that faces years of weak growth, IPS’ ‘Sri Lanka: State of the Economy 2023’ report, explores the complex policy choices Sri Lanka faces as it navigates the path to economic recovery.
Sri Lanka’s recently gazetted domestic debt restructuring (DDR) exercise has drawn expressions of both support and criticism. Overall, negotiations have to be framed within certain desired outcomes to minimise costs to the economy. To this end, Sri Lanka’s negotiating stance dovetails neatly with crucial research evidence.
In response to the economic crisis, Sri Lanka implemented import controls that expanded significantly by the end of 2022, accounting for approximately 30% of the country’s total import value. But were they necessary or the easiest option? Were they applied optimally to limit damage on growth? Did they distort incentives, thereby promoting domestic production of substitutable products? To shed light on these questions, a comprehensive analysis was conducted using eight waves of import controls. The government’s objectives varied, ranging from curbing currency outflows to promoting domestic production as import substitutes. It is crucial to assess the long-term impact on incentive structures. In this blog, the authors delve into the complexities of Sri Lanka’s import controls, providing insights into their necessity, optimal application, and unintended consequences.
Sri Lanka was once considered a development success story. But within the last few decades, this legacy was lost to governance failures and economic mismanagement. In recent years, the country has been characterised by a glaring lack of fiscal discipline reflected in the inability to raise sufficient revenue even to cover current spending. In this context, institutions have a major role to play in ensuring that governments do not fail. Effective institutions can (1) assure the provision of quality services which is essential for eradicating poverty and promote shared prosperity; (2) guarantee high-quality public spending and minimise corruption; and (3) ensure that all citizens benefit from economic growth and that development is not lop-sided. With this understanding, this blog discusses how a Fiscal Council (FC) can help Sri Lanka regain fiscal credibility and improve its overall economic performance.
The emergence of a low-growth international environment together with a significant rise in inflation has raised concerns of stagflation; a period of low growth combined with high inflation. A global stagflationary environment can worsen Sri Lanka’s current economic crisis restricting growth and increasing inflation. Increased policy rates to combat inflation will result in lower investments. These factors, combined with political instability, lower-than-expected remittances, and lower productivity due to acute shortages of essential items will further constrict the Sri Lankan economy, pushing it into stagflation. Due to a global economic downturn, rising commodity prices and high rates of borrowing, Sri Lanka can expect a challenging external sector environment next year. Policymakers will need to understand these global challenges and make pragmatic economic decisions to minimise further damage to the economy.