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Debt Restructuring and Implementation of Deep Reforms Critical for Sri Lanka’s Economic Stabilization

7 October 2022 08:16 am - 7     - {{hitsCtrl.values.hits}}

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Debt Restructuring and Implementation of Deep Reforms Critical for Sri Lanka’s Economic Stabilization

Sri Lanka’s economic crisis is deepening with unsustainable debt and a severe balance of payment crisis on top of lingering scars of the COVID-19 pandemic.

Debt restructuring and the implementation of a deep reform program are critical for Sri Lanka’s economic stabilization, says the World Bank in its twice-a-year update, underscoring the need for Sri Lanka to build resilience.

Released today, the latest South Asia Economic Focus, Coping with Shocks: Migration and the Road to Resilience, projects regional growth to average 5.8 percent this year - a downward revision of 1 percentage point from the forecast made in June. This follows growth of 7.8 percent in 2021, when most countries were rebounding from the pandemic slump.

While economic distress is weighing down all South Asian countries, some are coping better than others. Exports and the services sector in India, the region’s largest economy, have recovered more strongly than the world average while its ample foreign reserves served as a buffer to external shocks. The return of tourism is helping to drive growth in Maldives, and to a lesser extent in Nepal—both of which have dynamic services sectors. The combined effects of COVID-19 and the record-high commodity prices due to the war in Ukraine took a heavier toll on Sri Lanka, exacerbating its debt woes and depleting foreign reserves. Plunged into its worst-ever economic crisis, Sri Lanka’s real GDP is expected to fall by 9.2 percent this year and a further 4.2 percent in 2023. High commodity prices also worsened Pakistan’s external imbalances, bringing down its reserves. After devastating climate-change-fueled floods submerged one-third of the country this year, its outlook remains subject to significant uncertainty.

Also released today as a companion piece is the latest Sri Lanka Development Update, which highlights the poverty and welfare impacts of the crisis and the role of social protection in protecting the vulnerable populations.

“Protecting the vulnerable is critical as Sri Lanka fast tracks deep reforms to navigate the deepening economic crisis.The crisis calls for immediate action to protect the poorest and most in need while also focusing on strengthening the social protection system,” said Faris H. Hadad-Zervos, World Bank Country Director for Maldives, Nepal and Sri Lanka. “In the face of the economic crisis, poverty estimates doubled to 25.6 percent between 2021 and 2022, increasing the number of people living in poverty by 2.7 million. Sri Lanka will need to expand employment in industry and services and recover real value of incomes to mitigate the impacts of the crisis, and build long-term resilience of its people. ” added Hadad-Zervos underscoring the need for a coordinated approach to support the poor and vulnerable.  

The South Asia Economic Focus also put a spotlight on Sri Lanka’s economic crisis, drawing lessons from the Asian Financial Crisis of 1997.

“As Sri Lanka goes through the historically largest contraction in its economy, looking at global experiences such as the crisis in Latin America in the 1980s and the Asian Financial Crisis of 1997 can help chart solutions,” said Hans Timmer, World Bank Chief Economist for South Asia. “The East and Southeast Asian countries regained momentum by implementing sound reforms, which provide lessons for Sri Lanka to build back better.”

To this end, the spotlight highlights two key experiences of the Asian financial crisis as lessons for Sri Lanka. Firstly, the short-term measures needed to address structural weaknesses, buffers to mitigate external shocks and build resilience to future shocks. Secondly, critical policies to promote future growth. (World Bank)


  Comments - 7

  • Ram Friday, 07 October 2022 09:16 AM

    Debt restructuring is a requirement by IMF. Our Bosses are slow on that as the old Boss MR like the Chinese help and not IMF who keep an eye on us. MR made lots of money from Chinese loans obtained for unprofitable projects and wants more from them

    Observer Friday, 07 October 2022 09:53 AM

    How can the Financial Crisis in SriLanka be solved when those in Government are Crooks and Fraudsters and more such rogues are appointed as Ministers and State Ministers by the President in order for him to remain in Power ?

    Reformist Friday, 07 October 2022 10:34 AM

    Yes, they are implementing very deep reforms. They have already appointed thousand Ministers and one million public servants. Apparently, many more to come. Isn't that a deep reform? They are now in the process of ordering new luxury motor vehicles for them. Very deep reforms indeed!

    Sunil Friday, 07 October 2022 11:06 AM

    To all these countries and organizations we say, do not restructure the country's debts until these crooks and rogues are in power and until constructive measures are taken to restore democracy and fundamental rights in this country.

    Against subsidy for religion Friday, 07 October 2022 12:37 PM

    Parliament MPs, and current President and past Presidents must take cuts to their allowances and entitlements. The money should go to Samudri recipients who don't get enough. Even mother of Sajith Premadasa getting V8 and other luxury allowance. It is unfair for that, as no one wants to give her or any past president such lavish lifestyle anymore. SJB is for money waste as they don't want to talk about cutting back allowances for past Presidents and past MPs either. Giving such excessive allowances would make any creditor hold out until everyone else is starving because the hunger will drive us to face any danger and topple the 300,000 military guarding the wasters.

    Mama rata yanva Friday, 07 October 2022 01:15 PM

    While the dollar peg is in place we are too far away from any reforms!

    Prasanna Friday, 07 October 2022 04:58 PM

    Sri Lanka cannot hope to get much assistance from the global community, even from those friendly countries, due to mistrust on those who are presently ruling the country as they are notorious for fraud and corruption.


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