SRI Lanka’s economy likely shrank at a slower pace last quarter as a rebound in tourism and some industrial activity were the bright spots in a country grappling with still-elevated borrowing costs and higher taxes.

The gross domestic product probably contracted 8.9 per cent in the three months to March from a year ago, according to a median estimate of economists in a Bloomberg survey. That’s better than a 12.4 per cent contraction in the previous quarter, the most in two years. The statistics department will issue the data around 3.00 pm on Thursday (Jun 15).

“The recovery in tourism and remittances likely have helped offset some of the consumption weakness,” said Thilina Panduwala, head of research at Frontier Research in Colombo. “Since the start of the year, most of the new taxes have begun to be collected, especially income taxes, putting further downward pressure on consumption.”

The island nation’s economy that saw its worst crisis in seven decades is turning a corner. Visitors to the Asian nation have risen, with tourism receipts estimated to have gained 18 per cent to US$696 million in January to April from a year ago, according to central bank data.  

“A rebound in tourism, on the back of an easing of border controls in China, has provided a boost,” said Gareth Leather, an economist at Capital Economics.

He said arrivals should continue to grow over the coming months, forecasting the economy to expand by 2.5 per cent in 2023 following a 7.8 per cent fall in 2022. Tourism generally accounted for 5 per cent of Sri Lanka’s GDP before the pandemic.

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The Purchasing Managers’ Indices showed an expansion in March due to increased new orders and production in the food and beverage sector ahead of the local new year festival.

Imports of fuel and fertiliser have rebounded after Sri Lanka clinched a US$3 billion International Monetary Fund (IMF) bailout in March this year. While the inflows helped to reduce the widespread food and petrol shortages, it has come at a bit of a cost as Sri Lanka had to increase income taxes and interest rates to clinch the funds.

Debt talks

Inflation has cooled for four straight months as a result, giving the monetary authority the space to unexpectedly cut its benchmark rate in June for the first time since July 2020 to support the nation’s recovery.

Sri Lanka’s currency is one of the best performers so far this year with the influx of tourists and still-elevated interest rates, but this may not be enough. Investors want to see whether the government can effectively restructure its debt in line with IMF criteria to keep unlocking funds under the programme.

The IMF sees Sri Lanka’s economy returning to growth next year as fresh funding is received and local authorities implement reforms to strengthen its fiscal health and price stability.

The nation is yet to finalise its debt overhaul strategy that would be a blueprint to advance negotiations with creditors. Analysts are also predicting tough times ahead for the rupee as the government eases import restrictions and debt repayments loom. BLOOMBERG