DEBT RESTRUCTURING: SL could still face foreign debt stock above 70% of GDP

The Asian Development Bank (ADB) has warned that even after completing debt restructuring, Sri Lanka may still face external debt exceeding 70% of its GDP unless it implements debt management laws. The bank's April Development Report underscores the critical importance of reforms for resuming growth in Sri Lanka. Key reforms such as the enactment of the Public Financial Management Act and a debt management law, expected in 2024, aim to strengthen fiscal discipline and mitigate medium-term refinancing risks.

Despite the anticipated reforms, ADB projects modest growth for Sri Lanka, forecasting a rebound to 1.9% in 2024 and 2.5% in 2025, driven by increased output in services, industrial projects resumption, and ongoing business climate improvement efforts. However, tax hikes may dampen the recovery in private consumption and investment.

Inflation is expected to return to single-digit figures, with a forecast of 7.5% in 2024 and 5.5% in 2025 after two years of high inflation. While Sri Lanka maintained a primary surplus in 2023, the widening fiscal deficit is a concern, fueled by anticipated increases in recurrent expenditure. Potential divestment of state-owned assets could help balance the fiscal books.

However, the report highlights several risks to Sri Lanka's recovery. Upcoming elections may impact fiscal policy and reform implementation. Balancing public sentiment with IMF program implementation and potential delays in debt restructuring and legislation passage could hamper growth. Additionally, high outmigration, particularly among the youth, could worsen skills mismatch, impacting forecasts if prolonged. Weaknesses in the finance sector may also delay full recovery, while weather fluctuations could harm agriculture and food security. Geopolitical uncertainties could further impinge on growth, reflecting a complex and challenging outlook for Sri Lanka's economic recovery.

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