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Sri Lanka is on the path to recovery from its economic crisis, though it faces risks from a global slowdown and potential setbacks in its International Monetary Fund (IMF) program, according to the central bank's Monetary Policy Report from February. The continuation of the IMF's Extended Fund Facility (EFF) and structural reforms are critical to the country's economic outlook, with disruptions posing significant risks, including growth derailment and negative investor sentiments. The central bank acknowledges the stabilization and recovery of economic activity but anticipates subdued growth in the near term.
The nation has experienced severe monetary instability, particularly in 2022, attributed to aggressive macro-economic policies aimed at targeting potential output through money printing under flexible inflation targeting. This approach has been criticized for contributing to successive currency crises post-civil war, escalating foreign and domestic debt, and undermining growth. The current recovery is also threatened by the global economic environment, notably the Federal Reserve's pullback from monetary expansion, which has affected global inflation and economic stability.
The central bank's report highlights that economic growth will likely remain subdued short-term but should gradually recover. However, risks to growth include global adversities impacting exports, productivity losses due to skilled labor outmigration, and structural growth impediments. The budget deficit may increase due to bank recapitalization, and while inflation is expected to align with a 5 percent target, tax hikes could cause spikes. The central bank's recent monetary policy has been cautious, with an appreciation of the exchange rate amid deflationary measures, contrasting with past practices that led to currency crises.
