Sri Lanka’s economy’s contraction persists in this year as well

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Hot on the heels of the worst ever contraction of 7.8% in 2022, the economy’s struggle is persisting and recovery remains most challenging this year as well judging by the latest update from the Purchasing Managers Indices.

The February PMIs for both manufacturing and services activities reflect further contraction reinforcing the view that the confidence factor is far from being restored despite multiple Government efforts to stabilize and spur economic growth.

Other analysts opined that the macro and policy environment in the first two months of the New Year weren’t conducive to stimulating the economy.

The Manufacturing PMI recorded an index value of 42.3 in February its compiler Central Bank (CBSL) said, and added it indicated a continued setback in manufacturing activities on a month-on-month basis.

This setback was driven by subdued performance observed in new orders, production, employment and stock of purchases, CBSL said.

The services sector PMI, CBSL aid, dropped to an index value of 48.7 in February indicating a deterioration across the services sector. This was driven by the declines observed in new businesses, business activities, employment and backlogs of work.

New businesses declined in February compared to January, particularly with the decreases observed in transportation, insurance and postal and courier sub-sectors

The data showed some improvement in Sri Lanka’s fiscal position with inflation moderating to about 50 percent in February, down from a record high of 69.8 percent in September.

President Ranil Wickremesinghe has raised taxes and ended generous subsidies on fuel and electricity to boost government revenue after his predecessor defaulted on Sri Lanka’s $46bn foreign debt last year.

The reforms are a precondition of a $2.9bn rescue package from the IMF, which Sri Lanka expects to finalize next week.

But the tax and price hikes have been roundly unpopular, triggering protests and industrial stoppages around the country.

Sri Lanka aims to announce a debt-restructuring strategy in April and step up talks with commercial creditors ahead of an IMF review of a bailout package in six months, its central bank governor said last week.

Wickremesinghe has said Sri Lanka can expect to remain bankrupt until at least 2026 and insisted his government has no option but to implement the reforms demanded by the IMF.

The census and statistics department said the agriculture sector shrank 4.6 percent last year, while industries contracted 16 percent, and services dropped 2 percent from a year earlier.

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