Within the sectors, the agriculture sector experienced a modest growth of 0.8% compared to 2023. In comparison, industries witnessed a significant contraction of 23.4%, and services declined by 5%, as reported by the department.

The central bank of Sri Lanka projects a GDP contraction of 2% for 2023, while the International Monetary Fund (IMF) estimates a more substantial contraction of 3%.

“Sri Lanka’s economy is showing tentative signs of improvement, in part due to the implementation of critical policy actions. But the economic recovery remains challenging. Now, more than ever, it is essential to continue the reform momentum under strong ownership by both the authorities and the Sri Lankan people,” IMF’s Deputy Managing Director Kenji Okamura said, during his two-day visit to the debt-ridden South Asian island nation.

Okamura’s visit came after the IMF’s March 2023, 2023 approval, which ensured 48-Month arrangements of about USD 3 billion under the Extended Fund Facility (EFF) with Sri Lanka. The official also noted that the island nation’s current economic crisis had its genesis in policy missteps aggravated by external shocks.

The first-quarter contraction was slightly higher than anticipated, ranging between 9% and 10%. However, experts, such as Shehan Cooray, the head of research at Acuity Stockbrokers, predict a return to positive growth in the year’s second half.

To stimulate the economy, Sri Lanka’s central bank recently cut its first interest rate in three years, reducing speeds by 250 basis points. Cooray believes that an increase in private-sector credit, expected to occur within the next six to nine months, will positively impact economic growth.

In 2022, Sri Lanka’s economy contracted by a record 7.8%, resulting in a severe financial crisis due to plummeting foreign exchange reserves. The country’s situation began to improve after securing a USD 2.9 billion bailout from the IMF in March 2023, along with enhanced dollar inflows and some reduction in inflation. However, completing debt restructuring talks before September remains crucial for the first IMF review.

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Nandalal Weerasinghe recently said that he thought inflation had reached its peak, even though the crisis-hit country still needed to fix its economy and finances.

In September, a key indicator of Sri Lanka’s consumer inflation rose to 69.8%. This shows the central bank’s problem as the South Asian country deals with an unprecedented financial crisis.

Nandalal Weerasinghe, however, asserted in the interview that “it will be turning around, and if that is lower in October, as we anticipate, then we can see that trend will continue.”

It is still being determined whether the central bank will stop raising interest rates for a long time.

Nandalal Weerasinghe said that, in addition to the inflation rate, “We need to evaluate the forecast, expectations, monetary expansion, the growth forecast, the level of reserves, and the policy on the exchange rate.”

Even though price increases were expected to slow down in December and January, the governor said the bank must keep rates high this month to fight inflation.

Sri Lanka started talking with its creditors about reorganising its debt last month, and officials are hopeful that a deal with the International Monetary Fund could be reached before the end of the year.

The International Monetary Fund and the government have agreed that the administration will give the legislature the budget for 2023 in the middle of November. This budget is expected to feature increased taxes and broader reforms of state-owned firms.

Sri Lanka had a financial crisis in 2019 because of several rating downgrades caused by the epidemic and the effects of significant tax cuts. This made it impossible for Sri Lanka to access global financial markets.

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The country is in dire need of help as it is still planning to hold talks with the International Monetary Fund (IMF) for additional credit.

The PM told the Parliament that the country is going through a far more serious problem than the shortages alone and he warned of “a possible fall to rock bottom”.

Not citing any new developments, he stated the ongoing crisis that the island nation of 22 million is currently facing is to be considered its worst in recent memory.

By giving out all these comments, PM Ranil tried to emphasize that he was handling the most difficult task which was nearly impossible to fix quickly.

Considering all the factors such as the Russia-Ukraine crisis which has led to the surge in prices for the commodities, and lost tourism revenue, the after-effects of the pandemic have made the country stumble under the heavyweights of a huge debt.

This is slowly forcing the country to move towards bankruptcy with close to no money to import even basic commodities such as cooking gas, fuel, milk, etc.

Even lawmakers from the two prominent opposition parties had boycotted Parliament this week to protest against the recently elected Prime Minister who is also the Finance Minister, as he is unable to deliver the promises he had made.

Recently, the government officials have been given every Friday off for the next three months to save on fuel and grow their own fruits and vegetables in their backyards.

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When the 30-day grace period for missed coupons on dollar bonds expires, it might be declared defaulting. It would be the country’s first default on foreign debt.

Sri Lanka’s government stated in mid-April that it had stopped repaying its foreign debt to save money for food and fuel imports as the country struggled with a dollar shortage. It prompted officials to impose financial controls and import restrictions.

Carlos de Sousa, a money manager at Vontobel Asset Management in Zurich, said that without an agreement there would be a formal default. He also said that for the markets, Sri Lanka is already de facto in default. So, the price impact of such an event is unlikely to be considerable.

Sri Lanka is going through widespread power cuts, food, medicine & oil shortages, and a depreciating currency, which fuelled protests and pushed Prime Minister Mahinda Rajapaksa to resign.

Last week, his brother, President Gotabaya Rajapaksa, appointed a long-time opponent to run the government, hoping to bring a modicum of stability amid bailout talks with the International Monetary Fund.

On May 16, Prime Minister Ranil Wickremesinghe, who has just been in office for a week, announced that the government intends to sell the national airline and promised to propose a new relief budget.

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Out of the promised $600 million promised by Word Bank, $400 million will be released shortly, said a media statement by the Sri Lanka president’s office. This development has proved to be a breather for the markets. The Colombo All-Share Index appreciated by 4.1% on the back of the aid, news reports said.

The country was forced to default on some of its foreign debt commitments on account of paucity of foreign currency reserves recently. This has been touted as the worst financial crisis for the nation since its Independence in 1948.

The crisis has unfolded as a result of a combination of factors. Sri Lanka which is highly dependent on international tourism for 10% of its GDP had suffered due to the pandemic over the last two years. In addition, an unsuccessful hard pivot towards organic farming, natural calamities, and a low tax regime contributed to the draining of the government coffers.

Other than international financing organizations like the World Bank and International Monetary Fund, Sri Lanka is taking from countries like neighbours India and China.

So far, India has provided $1.9 billion with another $1.5 billion expected as part of an extended credit line. The Sri Lankan government is also in talks with China for a $1 billion loan.

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Amid the ongoing economic crisis in Sri Lanka, Air India has said that it would soon reduce its India- Sri Lanka flights from 16 to 13 per week starting due to poor demand in the country. The decision will come into effect from April 9.

Sri Lanka is currently going through its worst crisis where there are long lines for fuel, cooking gas, and essentials are in short supply followed by long hours of power cuts for the past several weeks.

Air India spokesperson said, “Currently Air India is operating 16 flights a week — daily flights from Delhi, which will reduce from seven to four per week, and nine flights a week from Chennai which will remain unchanged.”

The schedule will be as follows:

AI 283 on the Delhi-Colombo sector will operate on Monday, Tuesday, Thursdays, and Saturdays, starting from April 9 till May 31.

AI 284 on the Colombo-Delhi sector will be flying on Mondays, Tuesdays, Thursdays, and Saturdays from April 9 to May 31.

Amid the ongoing violent protests, the Sri Lankan government has blocked several social media websites such as WhatsApp, Twitter, Facebook, and Instagram. The government even introduced a 36-hour curfew ahead of its planned anti-government rally.

The objective behind this move is to prevent mass gatherings in Colombo in order to protest against the government and its failure towards not fulfilling its promise.

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