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Sri Lankan economy shrinks by 3.1% in second quarter as financial crisis hits


Sep 15, 2023

Sri Lanka’s economy experienced a growth rate of 3.1% in the period between April and June, according to official data released on Friday. However, the country continues to struggle to recover from its worst financial crisis in decades. The economic downturn was primarily caused by high inflation, which led to a contraction of the GDP by 7.8% in 2022. The agricultural sector managed to grow by 3.6% year-on-year due to factors such as a weaker currency and lower purchasing power. However, the industrial output fell by 11.5% and the services sector by 0.8%, as reported by the Census and Statistics Department.

Despite the challenging circumstances, economic activity has gradually stabilized since the government secured a $2.9 billion bailout from the International Monetary Fund (IMF) in March. Dimantha Mathew, the head of research at First Capital, expressed optimism about the situation, stating that the economic contraction is slowing down. He even suggested the possibility of Sri Lanka recording positive growth for the first time in six quarters. The Central Bank of Sri Lanka has also taken measures to support the economy, such as cutting interest rates by 450 basis points in June and July.

Looking ahead, it is expected that 2022 will be a weaker year for the Sri Lankan economy, with a lower inflation rate and a support package from the Central Bank. Mathew added that the growth rate could potentially rebound due to efforts to artificially reverse the recovery. Currently, an IMF delegation is in Sri Lanka for the first review of the Extended Fund Facility (EFF) program, which aims to rebuild the island’s economy. Negotiations with international bondholders are also progressing, with an agreement in principle likely to be reached by next month.

Overall, while Sri Lanka’s economy continues to face challenges, there are signs of stabilization and potential for future growth. The government’s efforts to secure bailout funds, implement supportive measures, and engage in negotiations with international partners are all working towards navigating the country out of its financial crisis and towards a path of recovery.

By Editor

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