The Asian Development Bank (ADB) says Sri Lanka’s growth is forecast to contract by 7.6% in 2022 and economic activity will remain subdued in 2023.In its latest Asian Development Outlook Supplement, the ADB said the island nation is beset with multifaceted and deepening challenges emanating from long-standing fiscal and current account deficits that have led to the sovereign debt and balance-of-payment crises.

According to the report, the scarcity of foreign exchange has triggered an acute energy crisis, affecting economic activity in all sectors of the economy, threatened food security, created shortages of other essentials, and hit consumer and investor confidence.The detrimental effects of a chemical fertilizer ban on agriculture compounded the effects of the balance-of-payments crisis and double-digit inflation is squeezing disposable income and discouraging investment, the ADB said further.

It added that the tight monetary policy to rein in inflation, revenue-based fiscal consolidation, and expenditure rationalization are also slowing the economy.

“Because of these factors, Sri Lanka’s growth is forecast to contract by 7.6% in 2022 and economic activity will remain subdued in 2023. Risks to the forecast are significant and stem from delays in securing external financing, rising commodity prices, a weaker global economy, and spillovers from the debt crisis on the banking industry.”

The ADB also mentioned that the economic conditions in Sri Lanka have deteriorated drastically since Asian Development Outlook 2022 (ADO 2022) published this April, on a sharp fall in usable reserves, causing the government to suspend external public debt servicing (excluding multilateral debt) on April 12 and default on its sovereign debt on May 18 – the country’s first sovereign debt default.

In Sri Lanka, inflationary pressures have been dramatic, the bank pointed out, adding that “CPI headline inflation averaged 28.6% in the first half of 2022 on multiple fuel price hikes, higher food prices because of poor harvests, supply chain disruptions, shortages caused by a foreign exchange squeeze, and a depreciating exchange rate. Core inflation increased from 9.9% in January to 39.9% in June, averaging 20.7% in the first half—an indication that underlying inflationary pressures are high. Because of this, the inflation forecast is revised up to 33.6% for 2022 and another year of double-digit inflation is expected in 2023.”

The ADB meanwhile lowered South Asia’s growth forecast from 7% to 6.5% for the year 2022, and from 7.4% to 7.1% for the year 2023 mainly due to the economic crisis in Sri Lanka and the high inflation and associated monetary tightening in India.The ADB said the economic fallout from Russia’s invasion of Ukraine on the most of developing Asia has increased, although the impact of Covid-19 has declined across the region.According to ADB’s report, war-induced supply disruptions and escalating sanctions imposed on the Russian Federation have led to global commodity prices spiking and remaining higher than 2021’s already elevated levels.

“As a result, inflationary pressures have increased in many regional economies. Headline inflation is at double-digit levels in most of the Caucasus and Central Asia, in Mongolia in East Asia, in Pakistan and Sri Lanka in South Asia, and in the Lao People’s Democratic Republic (Lao DPR) and Myanmar in Southeast Asia. Although inflation in India, at 7%, is above the 2% – 6% target range of the Reserve Bank of India (RBI), headline and core inflation in the rest of developing Asia’s large economies remain manageable. So, for the region as a whole, inflation remains moderate on average and much lower than elsewhere in the world.”