Sri Lanka faced a severe economic crisis in 2022. Inflation hit 70% in September, the highest since independence. This was due to monetary financing, currency depreciation, and rising global commodity prices.

The cost-of-living crisis hit the nation hard. The government introduced austerity policies and fiscal tightening to stabilize the economy. They also implemented price controls and raised interest rates to curb inflation.

Despite these efforts, GDP was expected to shrink by 2.3% in FY2023. A recovery of 4.4% was projected for FY2024. The agricultural sector showed strength, with exports rising in early 2024.

The crisis deeply affected the population. In 2024, 23.4% lived below $3.65 per day. Another 64.3% lived on less than $6.85 per day. Unemployment stayed around 4.7% in 2022 and 2023.

The government worked to boost exports and attract foreign investment. They also managed external debt, which was 43% of GDP in 2024.

Key Takeaways

• Inflation in Sri Lanka peaked at 70% in September 2022, the highest since independence.
• The government implemented austerity measures, fiscal tightening, and price controls to address the economic crisis.
• GDP growth was forecasted to contract by 2.3% in FY2023, with a projected recovery of 4.4% in FY2024.
• The agricultural sector showed resilience, with exports surging in the first half of 2024.
• Poverty rates remained high, with 64.3% of the population living on less than $6.85 per day in 2024.

Sri Lanka’s Economic Crisis and Record-High Inflation

In 2022, Sri Lanka faced a severe economic crisis. Inflation peaked at an alarming 70%. The nation’s vulnerabilities worsened due to policy mistakes and global shocks.

Foreign exchange reserves depleted rapidly. This led to widespread social unrest and political instability. Citizens struggled with shortages of essential goods and services.

Preexisting Vulnerabilities and Policy Missteps

Sri Lanka’s economy was already fragile. Droughts, political crises, and terrorist attacks had taken their toll. Unsustainable policies, like significant tax cuts, made things worse.

The country entered the pandemic unprepared. It had thin reserves, high debt, and limited fiscal space. These factors left Sri Lanka vulnerable to economic shocks.

Impact of Global Shocks and Depleted Reserves

The war in Ukraine in early 2022 devastated Sri Lanka’s economy. With empty reserves, the nation faced a debt default. Importing essential goods became difficult, causing fuel shortages and power cuts.

Despite challenges, Sri Lankans united during Vesak celebrations. They found hope and unity amid the crisis.

Social Unrest and Political Instability

Economic hardships led to social unrest and political instability. Protests erupted, demanding solutions to shortages and government accountability. These events resulted in leadership changes.

Some sectors showed resilience amid the crisis. Apparel, textiles, and coconut-based products grew in September 2024. OMP Sri Lanka reported this positive trend.

Inflation Peaks at 70% in 2022; Government Implements Austerity Measures

Sri Lanka faced a severe economic crisis in 2022. Inflation skyrocketed to 70%, driven by monetary financing and rupee depreciation. Global commodity prices surged, followed by administrative price hikes.

Essential goods became scarce, and many lost their jobs. The tourism industry was hit particularly hard. Schools closed, and a food crisis loomed due to fertilizer shortages.

Causes of Hyperinflation: Monetary Financing and Currency Depreciation

Sri Lanka’s high public debt exceeded 70% of GDP. Low fiscal revenue made the country vulnerable to external shocks. Decreased government spending and poor financial management led to lower productivity.

Government’s Response: Fiscal Tightening and Price Controls

The government introduced austerity measures to tackle the crisis. These included tax increases and spending cuts. The central bank tightened monetary policy to curb inflation.

Temporary import suspensions were used to stabilize the economy. However, these actions increased the tax burden on individuals and businesses. State-owned enterprises suffered substantial losses, requiring government intervention.

The government’s response aimed to restore financial stability. It faced challenges from strikes and protests over salary demands. The goal was to start a disinflation process and economic recovery.