According to an IMF report, the International Monetary Fund (IMF) expects Sri Lanka’s economy to contract by 3.6% by the end of 2023, exceeding their previous projection of a 3% contraction and the Central Bank’s expectation of a contraction of 1-2%.
According to the IMF Staff Report issued following the approval of the first review of the Extended Fund Facility (EFF), Sri Lanka’s economic growth is expected to be -3.6% in 2023 and 1.8% in 2024, supported by accommodative monetary conditions and the relaxation of import restrictions.
“Constrained bank credit and fiscal consolidation will weigh on the outlook,” the report said.
Moreover, it said that Inflation is expected to edge up to 4.8% by the end-2023 following the 18% electricity tariff hike in October while further increases are projected in 2024 up to 6.6% due to tax policy measures such as the Value Added Tax (VAT) rate increases and removal of several exemptions before gradual convergence to inflation target 5% in the outer years.
Also, the current account is expected to post a surplus of 1.5% of GDP in 2023 and a 0.8% deficit in 2024 due to strong import growth as restrictions are relaxed, despite higher tourism earnings and remittance inflows.
New programme and project financing along with Foreign Direct Investment (FDI) is expected to bring Gross International Reserves up to $ 5.35 billion at end-2024 from $ 3.8 billion at end-2023.
Further, the IMF said that although authorities have adopted a flexible exchange rate regime, the foreign exchange market remains shallow, and the exchange rate has recently displayed relative stability.
It said that beyond the periods in June and August, the Central Bank has only engaged in foreign exchange accumulation to build reserves, with the market settling into a pattern of relative stability without large direct central bank FX sales.
“Banks have managed their foreign exchange positions after the Domestic Debt Optimisation, settling customer inflows and outflows internally without using the interbank FX market in significant amounts. Hence, the market has dried up, leading to a shallow market with low turnover and small movements in the exchange rate.” IMF said.
Source: the morning
