Sri Lanka’s economy probably shrank the most in two years amid a debt crisis that triggered a default and widespread protests that brought the nation to a standstill and led to the impeachment of the president.
Gross domestic product probably fell 10% in the three months to June from a year ago, according to a Bloomberg survey of economists on Wednesday. That is the slowest reading since the corresponding quarter of 2020 and compares with a 1.6% contraction in January-March.
The statistics department is due to release the data around 3 pm local time on Thursday.
“Sri Lanka is likely to be stuck on a low-growth trajectory that will last for decades,” according to Ankur Shukla of Bloomberg Economics, who said the island nation likely slipped into a deep recession last quarter. “The debt crisis has tied the hands of government, making any transformative public investment impossible for now.”
Sri Lanka’s $81 billion economy collapsed after fuel supplies dried up due to the financial crisis, spurring inflation that accelerated to a new high of 64.3% in August and sent the rate policy more than doubled this year to 15.5% from 6% at the end. 2021
The central bank governor’s resignation in early April heralded second-quarter misery for the island nation, where it grappled with more credit rating downgrades and a market crash by declaring a debt default. In late June, he advised citizens to stay home for two weeks as the government restricted fuel use, stoking deeper discontent.
The economic collapse, the most terrible in its independent history, turned into political chaos that led to the formation of a new government. President Ranil Wickremesinghe, who was elected by parliament after his predecessor Gotabaya Rajapaksa fled the country, is now trying to push through economic and constitutional reforms to help turn the tide.
The currency has plunged more than 40% this year and stocks are down almost 20%, while the nation’s 7.55% 2030 dollar bond is listed at about 30 cents on the dollar from nearly 50 cents. at the beginning of the year.
Earlier this month, the authorities sealed an agreement with the International Monetary Fund for a $2.9 billion loan that will be crucial to rebuilding reserves, unlocking more funds and beginning a debt restructuring. Sri Lanka is also preparing for talks with India, Japan and China, its biggest bilateral creditor, on restructuring nearly $13 billion in debt.
“We’re not looking at big inflows in the short term thanks to the IMF program,” said Lakshini Fernando, senior vice president for research at Asia Securities in Colombo.
Sri Lanka needs about $5 billion for essential imports to get by for six months, and nearly $1 billion to strengthen its currency, Wickremesinghe said in June. On the demand side, soaring inflation and falling consumer confidence kept consumption subdued, Shukla said.
“It seems that we have come out of the absolute bottom with a recovery in activity, but a crucial factor in the recovery would be the continued supply of fuel,” Fernando said.
–With the assistance of Tomoko Sato and Ronojoy Mazumdar.