Courtesy Hiru News

Sri Lanka’s economy grew by 1.6% in the quarter from July to September, official data showed on Friday, as the country claws its way back from its worst financial crisis in more than seven decades following a record fall in foreign exchange reserves.

The expansion was the first since the end of 2021, with the upturn driven by a lower base, moderating inflation, a strengthening currency and lower interest rates, Sri Lanka’s Census and Statistics Department said in a statement.

Sri Lanka’s agriculture sector grew 3% from a year earlier, with an increase of 0.3% in industrial output, while services grew by 1.3%, the department said.

Helped by a $2.9 billion IMF bailout in March, Sri Lanka’s economy began a painful path towards growth. It locked down a second tranche of $337 million this week, although the IMF has warned the island is not yet out of the woods.

Sri Lanka’s economy is expected to contract by 3.6% this year, the IMF says, after shrinking 7.8% in 2022.

Full-year growth will return next year, with the Sri Lankan economy projected to grow 1.8%, but challenging reforms lie ahead, such as higher taxes, reforms to loss-making state enterprises and a complete restructuring of its foreign debt.

The Central Bank of Sri Lanka has slashed interest rates by 650 bps since June to boost growth, in parallel with inflation shrinking to 3.4% in November from a high of 70% last September.

The country’s Gross Domestic Product (GDP) at constant prices rose to Rs. 2,946.1 billion in Q3 2023, marking an increase from Rs. 2,900.6 billion in the same period in 2022. The year-on-year GDP growth rate for this quarter is reported as a positive 1.6%, showcasing a positive trend in economic performance.

At current prices, Sri Lanka’s GDP for Q3 2023 reached Rs. 6,906.8 billion, reflecting a 4.9% positive change from the previous year. The three major economic activities; agricultural, industrial, and services sectors; contributed 7.8%, 28.1%, and 57.5%, respectively, to the GDP at current prices during this period.

The DCS highlighted the favorable changes in uncertainties in foreign exchange, a positive economic outlook, and reduced interest rates as contributing factors to the economic expansion in Q3 2023. Notably, the tourism sector showed positive impacts, with service exports, accommodation, food, and beverage services recording notable growth.

While the economy has rebounded, challenges remain. Sri Lanka is projected to experience a contraction of 3.6% in 2023, following a 7.8% shrinkage in 2022. The International Monetary Fund (IMF) has emphasized the need for challenging reforms, including higher taxes, restructuring loss-making state enterprises, and addressing foreign debt issues.

Despite these challenges, the recent growth indicates a positive trajectory, driven by factors such as a lower base, moderating inflation, a strengthening currency, and lower interest rates. The country’s economic recovery is further supported by the recent USD 2.9 billion IMF bailout, signaling a step towards stabilizing the economy amid ongoing challenges