Output growth of South Asian countries, except Sri Lanka, is projected to remain stronger than in other regions of the world in the coming years, as per the World Bank’s latest South Asia Development Update, ‘Toward Faster, Cleaner Growth’.

Growth in the region is stronger than elsewhere in the world, but it is nonetheless not strong enough for Sri Lanka to reach high-income status within a generation, the report says.

At just under 6 percent, output growth in South Asia is expected to remain stronger than in other regions in 2023-25, even with weak growth in the countries recovering from recent balance of payments crises.

While other economies in the region are growing fast Afghanistan, Pakistan and Sri Lanka are in acute crisis

Sri Lanka has continued to suffer from the aftermaths of recent balance-of-payments crises. It has recently begun to implement IMF-supported policy programmes to stem capital outflows and improve debt sustainability. Activity has continued to be hampered by input shortages related partly to higher import costs and supply disruptions associated with remaining import restrictions as fiscal deficits remain large, while current account deficits have improved amid sharp import compressions.

Sri Lanka’s economy has suffered the most severe contraction but appears to be past the worst of its crisis, with shortages of essential inputs easing and tourism recovering. The services PMI (Purchasing Managers Index) has been in expansionary territory since May 2023. Industrial production has been contracting since late 2021, but more slowly recently.

In Sri Lanka, inflation peaked around 70 percent year-on-year in September 2022 but has since slowed sharply as the effects of last year’s currency depreciation have faded. Unlike other central banks in the region, the Central Bank of Sri Lanka has been cutting its policy rates since June, in response to steep disinflation and economic contraction.

Among the south Asian nations, financial stresses were most severe in Pakistan and Sri Lanka. In Pakistan, the rupee depreciated sharply between early 2022 and early 2023, and has been broadly stable since. Last year’s attempts to limit capital outflows through import and capital controls diverted remittance inflows from formal channels, contributing to shortages of foreign currency. In Sri Lanka, the rupee has appreciated modestly since the beginning of the year, partially reversing last year’s depreciation of more than 40 percent against the U.S. dollar. Remittances have rebounded as the economy has stabilized, although they remain well below 2019 levels. There has also been a recovery in tourism earnings. In both Pakistan and Sri Lanka, foreign reserve coverage is low, asset quality is weak in both the bank and non-bank financial sectors, and buffers against future shocks are thin.

“In Sri Lanka, the economy appears to have bottomed out after its severe recession and is showing signs of recovery. Support from the IMF and other external lenders has helped stabilize the currency and ease import shortages. The economy is also being supported by the recovery of tourism. After contracting by 3.8 percent in 2023, the economy is expected to grow by 1.7 percent in 2024 and 2.4 percent in 2025. The country’s path to recovery is very narrow, however. Its limited fiscal and reserve buffers leave little room for error as it implements a broad set of reforms and restructures its external debt,” the report says.