Sri Lanka's GDP likely plunged amid debt crisis, political turmoil

Sri Lanka’s economy likely shrank the most in two years amid a debt crisis that triggered a default and widespread protests that brought the nation to a standstill leading to the ouster 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 as of Wednesday. That’s 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 at about 3 p.m. local time on Thursday.

“Sri Lanka is likely trapped in a low-growth trajectory that will last decades,” according to Bloomberg Economics’ Ankur Shukla who said the island nation likely fell into a deep recession last quarter. “The debt crisis has tied the government’s hands, making any transformative public investment impossible for now.”

Sri Lanka’s $81 billion economy collapsed after fuel supplies ran dry because of the financial crisis, spurring inflation that has quickened to a fresh high of 64.3% in August and sending the policy rate more than doubling this year to 15.5% from 6% in end-2021.

A resignation by the central bank governor in early April foreshadowed the island nation’s second quarter misery where it grappled with more credit rating downgrades and market rout as it declared a debt default. By late June, citizens were advised to stay home for two weeks as the government restricted fuel use, fanning deeper discontent.

The economic meltdown, the most dire in its independent history, spiraled into political chaos that led to a 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 indicated at about 30 cents on the dollar from nearly 50 cents at the start of the year.

Road Ahead

Earlier this month, authorities sealed an agreement with the International Monetary Fund for a $2.9 billion loan that will be crucial to rebuild reserves, unlock more funding and start a debt recast. Sri Lanka is also preparing for talks with India, Japan and China, its largest bilateral creditor, on restructuring nearly $13 billion worth of debt.

“We are not factoring considerable inflows in the near term on the back of the IMF program,” said Lakshini Fernando, senior vice president of research at Asia Securities in Colombo. 

Sri Lanka needs about $5 billion for essential imports to tide it over for six months, and nearly $1 billion to strengthen its currency, Wickremesinghe said in June. On the demand side, sky-high inflation and plunging consumer confidence kept consumption subdued, Shukla said.

“We seem to have come out of the absolute bottom with activity picking up, but a crucial factor in the recovery would be continuous fuel supply,” Fernando said.

--With assistance from Tomoko Sato and Ronojoy Mazumdar.