Sri Lanka’s economy shrank 7.8% in 2022 with the financial crisis
Sri Lanka’s economy shrank 7.8% in 2022 from the previous year, government data showed on Wednesday, as the country struggled with its worst financial crisis in more than seven decades.
The island’s fourth-quarter GDP contracted 12.4%, according to the figures.Sri Lanka’s growth is expected to shrink by 3% this year, Moody’s Investors Service said on Monday but growth is expected to rebound in 2024.
Economic mismanagement coupled with the impact of the COVID-19 pandemic left Sri Lanka severely short of dollars for essential imports at the start of last year tipping the country into the worst financial crisis since Independence from the British in 1948.
Sri Lanka is waiting for a US $2.9 billion bailout program from the International Monetary Fund (IMF) to be finalised on March 20.
“These numbers are broadly in line with expectations. In the last three months of 2022 Sri Lanka was hit by very high inflation, fuel shortages and high interest rates,” said Sanjeewa Fernando, Senior Vice President Research at Asia Securities.
“For the rest of this year, with IMF funds expected, the central bank should be able to keep the currency strengthened, eventually reduce interest rates, and continue to see inflation ease.”
The state-run Census and Statistics Department said that the agriculture sector shrank 4.6%, while industries contracted 16%, and services dropped 2%, from a year earlier.
The gradual recovery in economic activities which was observed in the year of 2021 when compared to the year 2020, along with the reducing of the COVID-19 pandemic, reversed the direction of performance of many economic activities and resulted in contraction of the whole economy.
This was mainly caused by the deepening of the economic crisis and youth and social unrest began in early part of the year 2022.
In addition, frequent power disruptions, shortages in fuel, raw materials, foreign currency which affected in making supply chain disruptions, amidst price escalations in both domestic and global markets, affected adversely to the whole production process of agriculture, industry and services.
The Agriculture sector recorded a contraction during 2022, owing to shortages in agricultural inputs, particularly fertilizer and agrochemicals, increased cost of inputs as well as fuel shortages.
As well the industry sector as a whole reported significant contraction due to the subdued performance in manufacturing and construction activities.
Scarcity of raw materials, high input prices, import restrictions, prolonged power disruptions, fuel shortage, foreign currency shortage, deterioration of purchasing power parity of consumers have been caused to this contraction.
Meanwhile, the services sector witnessed a marginal shrinkage in the year of 2022 along with the contraction in the agriculture and industrial activities.
During the year 2022, the depreciation of the Sri Lankan Rupee at a notable rate, increase of interest rate to a high rate, supply side disruptions happened in both locally and globally, administrative price adjustments have been caused to record a high inflation domestically and as a whole the Sri Lankan economy reported a slower performance during the year 2022.