Analysis-A year on, Sri Lanka’s attempted economic recovery is eluding the poor

By Uditha Jayasinghe

COLOMBO (Reuters) – A year after angry Sri Lankans stormed the president’s residence and forced his ouster during a slump in the economy, the island’s streets are calm, there are no There were no winding queues at gas stations and hour-long power cuts ended.

The central bank expects the economy to resume growth this quarter after six quarters of contraction – faster than expected by many economists – as overseas remittances rise and tourist numbers increase .

While economists say the country is past the worst of the crisis, its problems are far from over. Costs for food, healthcare and renting homes are high and still rising, the poverty rate doubled last year and is expected to rise further, while negotiations to reorganize the debt burden overwhelming government face some uncertainty.

“The stability is somewhat there, but that means there are no extreme shortages, no fuel queues and no 1 p.m. power outages,” said Rehana Thowfeek, an economist at the group. think tank Advocata Institute based in Colombo.

“Inflation is coming down, but compared to pre-crisis levels, the cost of living is very high and incomes have not kept pace. The bulk of the poor in Sri Lanka are daily wage earners, and they are among the hardest hit.”

Sri Lanka has descended into a financial crisis after the COVID-19 pandemic decimated tourism and remittances from citizens working abroad plummeted. The war in Ukraine has pushed the prices of imports, especially fuel, soaring.

In March last year, thousands of people took to the streets to express their anger at the long power cuts and soaring prices, and to call out the Rajapaksa family who dominated the country’s politics for a great part of the last 20 years to leave power.

After weeks of protests and a steadily worsening crisis, President Gotabaya Rajapaksa fled abroad, officially stepping down on July 13. He was replaced as president by his prime minister, Ranil Wickremesinghe, who introduced reforms and negotiated a $2.9 billion bailout from the International Monetary Fund (IMF) in March.

Although price increases are easing, they remain high. Electricity costs, which jumped 65% in February, remain difficult for low-income families despite a 14.2% reduction in July.

The headline inflation index was 12% in June and is expected to hit single digits in July after peaking at 70% in September and rebasing in February. But the costs of food, clothing, health care and housing remain high.

Food inflation hit a record high of 95% in September and although it has come down, June’s reading of 4.1% means prices are still rising. Clothing prices rose 44% year on year in June, housing 26% and medical 16%.

Rising costs are having an impact on poverty, which almost doubled to 25% of the population last year and could climb to 27.4% this year, according to the World Bank. Last week, the multilateral lender to developing countries approved a $700 million loan for Sri Lanka, including $200 million for the poor.


In a new initiative to help the poor, the government announced it would introduce a direct cash transfer program to around 2.3 million families later this month and pledged to spend 680 million dollars a year for their well-being. But critics say the monthly distribution of 2,500 rupees ($8) to 15,000 rupees, based on poverty levels, is insufficient.

Kamal Padmasiri, a board member of the state-run Welfare Benefits Board, estimated the need at 13,800 rupees per person per month, but said the Treasury could not pay the full amount.

“We are in a default situation in Sri Lanka,” Padmasiri told Reuters. “The cash transfers will be given for three years and people need to grow and move forward during that time. The payments are not permanent…we can’t afford it.”

There have been some gains though.

A 30% increase in tourism revenue this year and a 76% increase in remittances have funneled $3.2 billion into Sri Lanka’s coffers, helping reserves hit a 14-month high of 3.5 billion in May, and the currency appreciates about 18% this year.

Sri Lanka still needs to rework much of its $36 billion external debt, which includes $12.5 billion in international sovereign bonds and $11.3 billion in bilateral credits owed mainly to China, Japan and to India.

Wickremesinghe has set a goal of finalizing debt negotiations by September, which, if successful, would facilitate the release of a second tranche of IMF funding due by October.

But China, Sri Lanka’s largest bilateral lender with around $7.4 billion in outstanding bilateral and commercial loans, has so far refused to join a so-called joint framework led by Japan and the Club. Paris to renegotiate Sri Lanka’s debt.

Moreover, despite growth projections from the July quarter, Sri Lanka’s export-driven economy is expected to contract by 2% for the year as a whole, after shrinking by 7.8% in 2022. Exports fell 11% this year through May, mainly due to a 16.5% drop in apparel sales to the European Union and the United States.

“We really need our exports to pick up speed, we need real investors and we need to advance market access through free trade agreements and other measures,” said Shiran Fernando, chief economist of the largest industrial entity in Sri Lanka. Ceylon Chamber of Commerce. .

“The IMF program will only allow us to continue for one to two years, but beyond that we need stronger reforms regarding land, labor and loss-making state enterprises.”

($1 = 307.5000 Sri Lankan rupees)

(Reporting by Uditha Jayasinghe; Editing by Krishna N. Das)

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