Sri Lanka’s Gross Domestic Product (GDP) is about 25% below the pre-pandemic trend as the country’s economy remains in a bad state with downside risk despite the recent improvements, UK-based advisory firm Oxford Economics said.
According to their latest forecast on Sri Lanka, macroeconomic stabilisation is starting to bear fruit in the island nation, a healthy dose of caution is still warranted as the economy remains in a bad state.
“While the economy is improving gradually, it remains in a bad state. GDP is about 25% below its pre-pandemic trend and downside risks to the outlook remain high,” Oxford Economics said.
Moreover, it said that meeting the terms of the IMF programme, especially governance reforms and fiscal consolidation will be challenging while the presidential election planned in the fourth quarter of 2024 also raises risks from the political side.
However, it said that economic stabilisation appears to be increasingly flowing through to a pick-up in economic activity as tourism continues to rebound and buoy services activity while easing shortages and renewed confidence help to attract back dissuaded travellers.
It also added that while still weak in Q4 of 2023, PMIs suggest the manufacturing and construction sectors started improving in recent months, likely due to an increase in firms’ ability and willingness to produce and invest.
Oxford Economics expects Sri Lanka’s GDP to reach the pre-pandemic level by 2025 and expects 1.5% economic growth in 2024.
It said that a debt restructuring deal was struck with official creditors late last year, talks with private creditors are ongoing and support from the IMF and other multilateral institutions should continue, with a staff-level agreement on the second review of the IMF support package successfully reached on March 20.
“Reserves have been rebuilt and the currency has appreciated, signifying a lower risk premium,” Oxford Economics said.