Sri Lanka Economic Outlook
After shrinking 4.8% in H1 2022, GDP plummeted 11.8% in Q3 in annual terms. Consumer spending and fixed investment fell more rapidly, while government consumption and exports grew at a weaker pace. The economy also likely contracted in Q4, as the factors which caused Q3’s plummet—out-of-control inflation and goods shortages—persisted. Industrial production sank 24% and the manufacturing and services PMIs averaged in contractionary territory in the quarter. For a sustained economic recovery to take hold, Sri Lanka’s creditors need to agree to a debt restructuring plan, which would pave the way for a USD 2.9 billion loan from the IMF. India said it backed Sri Lanka’s plan in January, as did the Paris Club in February. The only major holdout now is China.
Sri Lanka Inflation
Inflation in Colombo eased further to 54.2% in January (December: 57.2%). Core inflation in Colombo also fell slightly. Inflation should decelerate this year due to softer domestic demand. The key outlook risks are commodity prices and fiscal and monetary policy. On 25 January, the Central Bank kept its standing lending facility rate unchanged at 15.50%.