Lanka economic recovery strengthens in Q1

Sri Lanka’s economy grew 5.3% year-on-year in the first three months of 2024, official data showed, as the island nation made further progress in emerging from its worst financial crisis in decades.

Sri Lanka’s agriculture sector grew 1.1% from a year earlier, industrial output expanded by 11.8%, and services grew by 2.6%, Sri Lanka’s Census and Statistics Department said in a statement.

A strong rebound was attributed to a lower base effect, increased foreign currency liquidity, reduced import restrictions, and improved tourism.

Struck by a severe dollar shortfall, Sri Lanka’s economy fell in 2022, contracting 7.3% as it grappled with soaring inflation, a steeply weaker currency, and a historic foreign debt default.

It fared better last year after securing a $2.9 billion bailout from the International Monetary Fund but still shrank 2.3%.

The fragile economy made tentative steps to recovery in 2023 after six quarters of contraction, posting 4.5% growth in the fourth quarter and setting the stage for further improvement this year.

According to analysts, Sri Lanka is projected to grow around 3% in 2024 and is likely to continue posting strong performances from the second quarter onwards, which will be helped by lower energy and fuel prices.

“We expect about 3% growth in 2Q, increasing to 4%-5% in the last two quarters, so averaging about 3% for the full year,” said Dimantha Mathew, head of research at First Capital.

Analysts said lower inflation, which reached 0.9% in May, coupled with falling interest rates, would also boost growth.

The Central Bank of Sri Lanka has slashed rates by 700bps since last June as it focuses on improving economic stability and growth. The monetary authority expects inflation to remain within its 5% target for 2024.

The IMF approved the second review of Sri Lanka’s program on Wednesday, taking total funding to $1 billion. Still, the global lender warned the economy remains vulnerable despite signs of recovery and urged Colombo to do more to restructure a hefty debt burden.