By: Isuru Parakrama
October 03, Colombo (LNW): Sri Lanka’s economy has shown stronger-than-expected growth in the first quarter of 2024, with GDP expanding by 5.3 per cent year-on-year, according to the latest Asian Development Outlook from the Asian Development Bank.
This performance has been driven by a combination of factors, including decelerating inflation, improved supply chains, and better raw material availability.
Industry saw the most significant expansion, growing by 11.8 per cent—a rise attributed to the low base effect, and easing inflationary pressures. Services and agriculture sectors also contributed to the overall growth, albeit at more modest rates of 2.6 per cent and 1.1 per cent, respectively.
Investments surged by 17.6 per cent, becoming the primary driver of this growth, while consumer spending remained subdued, rising only by 0.5 per cent, largely due to ongoing fiscal austerity measures, such as increases in value-added and income taxes.
Despite easing import restrictions and improved foreign exchange liquidity, net exports remained a positive contributor to growth.
Indicators for the first half of 2024 suggest continued economic recovery, bolstered by the relaxation of monetary policy, improved fiscal management, and progress in restructuring external debt.
Key sectors such as manufacturing, services, and construction remained in expansionary territory, with the Index of Industrial Production posting a 7.3 per cent rise in the first quarter, followed by an 8.4 per cent increase in April and May.
Inflation trends have also shown improvement. The Colombo consumer price index rose to 6.4 per cent in January following a tax hike but settled at 5.9 per cent in February, before stabilising at around 2 per cent in the subsequent months.
This easing of inflation has been supported by increased hydropower generation, a 6 per cent appreciation of the Sri Lankan rupee against the US dollar, and weak consumer demand.
Despite the Central Bank of Sri Lanka lowering policy rates by 75 basis points during the first half of the year, inflationary pressures are expected to remain manageable in 2025, though growth is forecast to accelerate.
The current account balance continues to improve, with a 6.4 per cent rise in imports in the first half of 2024, outpacing a 4.7 per cent increase in exports. The widening trade deficit was counterbalanced by a surge in tourism revenues, which grew by 77.9 per cent year-on-year, alongside an 11.4 per cent increase in remittance inflows.
Gross official reserves saw a boost of $1.2 billion, now covering 3.9 months of imports, up from 3.1 months at the close of 2023. This improvement stems from the current account surplus, IMF disbursements, a $1.4 billion swap agreement with the People’s Bank of China, and foreign exchange purchases by the central bank.
On the debt front, Sri Lanka has made headway in restructuring its external obligations. Agreements with the Official Creditor Committee and the Exim Bank of China, as well as discussions with major bondholders, have led to significant progress.
A 28 per cent principal haircut for sovereign bonds has been agreed upon, while ongoing negotiations with commercial lenders continue. Final approval from the IMF, ensuring that debt sustainability targets are met, is anticipated as a crucial next step in finalising the restructuring process.
Additionally, Sri Lanka has met critical IMF benchmarks, including achieving a primary surplus of 0.6 per cent of GDP in 2023 and submitting a new public financial management bill to Parliament to enhance fiscal discipline.
Despite this positive momentum, the upcoming presidential election on 21 September, followed by parliamentary elections in early 2025, pose a potential risk to Sri Lanka’s reform agenda.
Delays in key reforms, particularly regarding state-owned enterprises and taxation, could undermine investor confidence, slow growth, and delay further IMF support.
Additionally, geopolitical tensions and unpredictable weather patterns remain potential downside risks to the economic outlook.
