Asain Development Bank (ADB) highlighted that Sri Lanka’s economic conditions have deteriorated drastically on a sharp fall in usable reserves, causing the government to suspend external public debt servicing (excluding multilateral debt) on 12 April and default on its sovereign debt on 18 May—the country’s first sovereign debt default.
“Sri Lanka’s growth is forecast to contract by 7.6% in 2022 and economic activity will remain subdued in 2023. Risks to the forecast are significant and stem from delays in securing external financing, rising commodity prices, a weaker global economy, and spillovers from the debt crisis on the banking industry,” it projected.
Sri Lanka is beset with multifaceted and deepening challenges emanating from long-standing fiscal and current account deficits that have led to the sovereign debt and balance-of-payment crises.
The scarcity of foreign exchange has triggered an acute energy crisis, affecting economic activity in all sectors of the economy, threatened food security, created shortages of other essentials, and hit consumer and investor confidence. The detrimental effects of a chemical fertilizer ban on agriculture compounded the effects of the balance-of-payments crisis. Double-digit inflation is squeezing disposable income and
discouraging investment. The tight monetary policy to rein in inflation, revenue-based fiscal consolidation, and expenditure rationalization are also slowing the economy.