2023: The World This Year

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2023: The World This Year
Sri Lanka in 2023: A troubling economy and an unstable polity

  Sethuraman Nadarajan

TWTW#200, 29 January 2023, Vol. 5, No. 4

Sri Lanka in 2023: A troubling economy and an unstable polity

In April 2022, Sri Lanka’s inflation rate was more than 50 per cent. Sri Lankan citizens were struggling with long power blackouts and shortages of food, medicines and fuel. Protests across the country demanded basic needs, leading to Gotabaya Rajapaksa stepping down in July 2022

Prime Minister Ranil Wickremesinghe was sworn in as Sri Lanka’s acting President. He declared a state emergency across the country and imposed curfews while trying to stabilize the situation. The country owes more than USD 51 billion to foreign lenders, including USD 7.4 billion to China. Countries all around the world started helping Sri Lanka escape from the crisis. India has lent USD 4 billion to Sri Lanka between January to July of 2022. China provided essentials like rice, medicines and also grants.

In December 2022, Sri Lanka’s headline inflation based on the National Consumer Price Index (NCPI) decreased to 59.2 per cent in December 2022 from 65 per cent in November 2022. Food Inflation decreased to 59.3 per cent in December 2022 from 69.8 per cent in November 2022. The government has accepted using fertilizers for agriculture, and Sri Lanka had a good yield with surplus paddy compared to last season.

Four Forecasts for 2023
First, Sri Lanka’s IMF bailout deal will keep the economy floating. In September 2022, the IMF approved a USD 2.9 billion Sri Lanka bailout package over four years until Sri Lanka can restructure its debt to creditors (bilateral and government bondholders). The USD 2.9 billion facility could be approved by the IMF Executive Board, by the first quarter of 2023. To obtain loan from IMF, Sri Lanka has introduced painful economic measures, including a hike in tax and utility rates. The IMF facility allows Sri Lanka to obtain bridge loans from other lending institutions, such as the Asian Development Bank and the World Bank. China, Japan and India have completed their debt restructuring talks with Sri Lanka. India and China have supported Sri Lanka and provided letters to the IMF guaranteeing USD 2.9 billion loan.

Second, growth in the tourism industry. Sri Lanka Tourism Development Authority said that 47,385 tourists visited Sri Lanka till 15 January 2023. Authorities have predicted around 1.55 million arrivals and revenue of USD 2.8 billion by the end of 2023. Compared to 2021, only 194,495 tourists visited Sri Lanka. Sri Lanka projects a positive trend in tourism since December 2022. Tourism was and is the key industry for Sri Lanka, which injects foreign reserves into the economy.

Third, persistent unemployment will hurt the economy. The central bank of Sri Lanka’s monthly business survey showed steady job losses in both manufacturing and services as a result of job freezes, layoffs and retirements. According to the official data, Sri Lanka’s unemployment rate rose to 5 per cent by the end of September last year, and the economy shrank by 12 per cent. Adding to the challenges, finding skilled workers for industries was tough after people left for other countries to support living back home. Over 300,000 working people in Sri Lanka went overseas for employment in 2022. Sri Lanka’s workforce, both employed and unemployed looking for work, is just over 8.5 million people, one-third of Sri Lanka’s population. 

Fourth, the energy crisis in Sri Lanka. Rising international oil and gas prices heightened the economic crisis in some emerging markets, particularly those heavily dependent on energy imports with little foreign exchange reserves, which also affected Sri Lanka. The energy crisis is a major factor which affects the economy.. Logistics and transport businesses are highly affected by fuel shortages, and owners pay high prices to get fuel illegally. As a chain reaction has evolved and overall prices of every commodity will not reduce.. Constant power cut in Sri Lanka will effect every person in the country, from large industries to small home.

Politics and the economy are interconnected. When people protest for political reasons, it affects the economy. When the economy is down, people protest. The protest can be stopped when Sri Lanka attains economic stability. However, even with the IMF bailout and direct investment from India  to Sri Lanka, the above-mentioned factors will keep Sri Lanka struggling to attain its economic goal as per the plan of 2023. 

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