IMF states that Sri Lanka faces “Mounting Challenges”

COVID-19 severely hit the economy, causing a loss of tourism receipts and necessitating several strict lockdowns. With the loss of tourism receipts and necessary lockdown measures, the real GDP contracted by 3.6% in 2020. The authorities deployed some relief measures to cope with the impact of the pandemic. These measures were complemented by a strong vaccination drive while the GDP growth is projected to have recovered to 3.6% in 2021. Pre-pandemic tax cuts and the impact of COVID-19 led to fiscal deficits larger than 10% of GDP in 2020 and 2021 and a rapid increase in public debt to 119% of GDP in 2021. 

Inflation recently accelerated to 14 % (y/y) in January 2022 while GDP growth is projected to be negatively affected by the impact of the foreign exchange shortage and macroeconomic imbalances on economic activities and business confidence. As strong inflationary pressures have built up from both supply and demand sides since mid of 2021, inflation rate is projected to remain double-digit in the coming quarters. Fiscal deficit is projected to remain large over 2022–26 raising public debt further over the medium term, under current policies and the authorities’ commitment to preserve the tax cuts.  

As the IMF report states, the country could experience significant contractions in imports and private credit growth or monetary instability if the fiscal and balance of payments financing needs aren’t met.