Sri Lanka sinks deeper into recession as IMF bailout hangs

SRI Lanka fell into a deeper recession last quarter as borrowing costs at a two-decade high to rein in inflation took their toll on the US$89 billion economy.

Gross domestic product (GDP) fell 12.4 per cent in the three months to December from a year ago, according to data released by the statistics department on Wednesday (Mar 15). That’s the biggest drop in two years and compares with a median estimate for a 13.4 per cent decline. GDP slumped 11.8 per cent in July-October.

The island nation’s economy has contracted for four straight quarters, with the funds it needed to pull out of its worst crisis in seven decades remaining elusive through last year. Some respite may be in sight.

An International Monetary Fund (IMF) approval of Sri Lanka’s US$2.9 billion bailout at a meeting next week is counted on to help unlock more funding that will steady the nation’s finances.

The bankrupt nation grappled with soaring costs, depleted funds and severe supply shortages for much of 2022 as it pursued a loan programme with the IMF after a debt default in May. While waiting for relief, Sri Lanka repurposed funds, tightened its belt and raised interest rates to the most since 2001.

Demand will stabilise by the second half of 2023 as IMF funds trickle in, said Sanjeewa Fernando, senior vice-president of research at Asia Securities in Colombo. Dollar inflows, a stable currency and an end to power cuts will help manufacturing activity going forward, he added.

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IMF managing director Kristalina Georgieva said last week that “decisive policy actions” by local authorities and financing assurances from major creditors would bolster the nation’s efforts to emerge from the crisis and set it on a “trajectory of strong and inclusive growth”.

To secure IMF’s approval, Sri Lanka had increased taxes, cut energy subsidies, returned to a more flexible exchange rate regime and further boosted its benchmark interest rate to keep a lid on inflation. BLOOMBERG