Courtesy Hiru News

Sri Lanka’s crisis-hit economy is likely to contract by more than 6% this year as political instability and social unrest hamstring key discussions on financial relief with the International Monetary Fund and bilateral creditors, the country’s central-bank governor has said to wall street journal.

While technical discussions at the central bank and finance ministry level have continued, Nandalal Weerasinghe, who took over as central-bank chief in April, said top-level talks with the IMF on a multibillion-dollar bailout had stalled.

He said the country urgently needed a stable political administration to progress discussions with the IMF on key structural reforms—such as taxation and public expenditure as well as to secure short-term bridge financing from other countries and multilateral agencies to help pay for key imports like fuel, pharmaceuticals and fertilizers.

Without that obviously we’re going to see these shortages continuing, Weerasinghe said in an interview with The Wall Street Journal. A delay means people will be suffering continuously.

Nandalal Weerasinghe said Sri Lanka’s political uncertainty and acute shortages of fuel, had adversely impacted nearly every industry in the country except for some key exports like tea, garments and rubber, which the government had prioritized. Despite a promising recovery in tourist arrivals early in the year before the unrest the economy contracted by 1.6% in the first quarter. With economic contraction accelerating in the second and third quarters, Nandalal Weerasinghe expects this year’s recession to be worse than in the pandemic-affected 2020, when the economy shrank 3.5%.

This year the contraction will be much higher, maybe higher than 6% contraction, he said.

The forecasted contraction underlines the pace of Sri Lanka’s economic backsliding. Prime Minister Ranil Wickremesinghe, who is now acting president, said earlier this month that the economy was expected to contract by 4%-5%, citing the central bank.

While Indian credit lines in recent months have provided a key lifeline enabling Sri Lanka to purchase fuel, Nandalal Weerasinghe said a $500 million extension expected last month hasn’t materialized, exacerbating Sri Lanka’s fuel shortages. Similarly, there had been no progress on a $1 billion currency swap with the Reserve Bank of India, nor has China relaxed conditions to allow Sri Lanka to use a $1.5 billion currency swap.

At the heart of the nation’s economic woes has been a balance-of-payments crisis that has drained its foreign-exchange reserves, leaving it unable to pay for imports or service its external debt. Sri Lanka fell into default in May for the first time in its history.

Sri Lanka builds its foreign reserves through tourism, worker remittances from abroad and government borrowing of foreign debt. Although there were some encouraging signs for the natural growth of reserves at the beginning of 2022, much of that progress has been undone in recent weeks.

Right now there’s hardly any tourists coming, Nandalal Weerasinghe said. He also said remittances of foreign currency from Sri Lankans working overseas were declining. Sri Lanka had tightened government policies for inflows to ensure money makes it into the Sri Lankan banking system instead of gray market channels, but these measures have recently been relaxed again.

He also said the country’s balance of payments deficit, which had seen it bleed $700 million a month, had narrowed considerably because of a sharp drop in import demand due to a deep decline in the local currency, the rupee.