The Sri Lankan Economic Crisis: Has It Recovered?

Sri Lanka is a country renowned for its beautiful beaches, natural beauty, and delicious food - no wonder it is one of the most popular tourist destinations worldwide. Yet in the last two years, it has been making news headlines for different reasons: the nation has suffered a severe economic crisis, which led to it defaulting on debt interest payments for the first time in March 2022. For its citizens, this meant that they had to deal with power cuts, 13-hour fuel queues, and spiralling inflation, with little help available from a government refusing to take responsibility. This all culminated in devastating riots, which forced the sitting president Gotabaya Rajapaksa to flee the country.

Since then, Sri Lanka has not made those same headlines, as it has quietly gone about attempting to stabilise the economy and return to normality. What I seek to explore is how Sri Lanka has attempted to do so and how effective it has been.

This crisis, like most economic crises, did not root from one specific problem or action. It shocked the global community, yet in hindsight it was years in the making. The general narrative is that Sri Lanka’s trade deficit had been widening, and government revenue was smaller than its expenditure. This led to foreign currency reserves dwindling and forced Sri Lanka to borrow money from other countries and on domestic markets, which fuelled interest rate rises and a significant currency devaluation.

Eventually, the foreign currency reserves became so low that they could not make debt repayments. Sri Lanka lost their unblemished record of debt repayments and defaulted on their debt in May 2022.

Sri Lanka had a few key problems to tackle: it needed to restructure its $36 billion of debt to avoid further defaults, it needed to control inflation and return prices of goods to pre-crisis levels, and it needed to help the poorest people survive this crisis.

In March 2023, new president Ranil Wickremesinghe negotiated a $2.9 billion bailout from the International Monetary Fund (IMF), easing short-term concerns. Furthermore, the government planned to roll out monthly direct cash transfers to over two million of the poorest families. This short-term scheme, aimed to assist citizens with their daily lives, cost $680 million annually. There have been critics on both sides of the spectrum, with some saying that the payments are not enough and others saying that the scheme is too expensive for a country with debt totalling more than 100% of GDP.

On the other hand, there have been some positives. In 2023, booming tourism and increasing remittances have led to foreign currency reserves increasing significantly to $5.5 billion in April 2024.

After six quarters of negative growth, in the third quarter of 2023, the economy experienced positive growth. This is just one example of the positive outlook of the Sri Lankan economy. The World Bank forecasts that the GDP of Sri Lanka will grow by 2.2% in 2024 and 2.5% in 2025.

On the debt restructuring front, Sri Lanka has made significant progress, particularly in 2024. In June, officials concluded negotiations with key international countries, restructuring over $10 billion of its debt. Furthermore, they agreed restructuring plans with commercial creditors. All of this provides Sri Lanka with a clear, sustainable pathway to pay off its debt without jeopardising the basic needs of the nation’s inhabitants.

The message is clear: Sri Lanka is recovering at its own pace and is slowly rebuilding the foundations of its economy. By leaning on its booming tourism industry and the foreign currency that it brings, I believe it can erase the last 4 years of economic turmoil and look towards a better future for its citizens. However, it is important to not ignore the impacts of the economic crisis and how they will shape the future. Inequality has widened significantly as the rich rode the crisis, whereas the majority of daily wage workers struggled. With an election upcoming on September 26, 2024, there is a real chance of political turmoil when all that is needed is stability.

Writer: Avinash Ehathasan

Editor: Ritisha Baidyaray