Colombo, economy slows again: down11.5 per cent in the first quarter of 2023

Only the agricultural sector is holding up, growing by 0.8%. Industry and services show a significant decline (-23.4% and -5%). Targeted measures are needed to revitalise industry and services. High interest rates and the high cost of electricity weigh heavily. Talks with the IMF on debt restructuring by September.

Colombo (AsiaNews) - A sharp slowdown for the island's economy, confirmed by the latest figures for the Gross Domestic Product (GDP) for the first quarter of January-March 2023: official statistics show a contraction of 11.5%.

Analysing the various sectors, the agricultural sector experienced a modest growth of 0.8%, which shows a certain degree of resilience. It is a different story for the industrial and services sectors, which show a significant decline with the former showing a minus sign of 23.4% and the latter of 5%, according to data released by the Department of Statistics and Census.

In addition, the component 'taxes minus subsidies on products' contributed about 5.1% to GDP during the same period. These figures reflect the challenges faced by these sectors and highlight the need for targeted interventions to revitalise economic growth, while the government is hoping for a return to positive growth indices for the last quarter of this year.

Economic analyst Mahesh Kariyawasam explains to AsiaNews that 'the negative growth rate in this period shows the full extent of the economic recession'. Overall, the economy got off to a difficult start in 2023, with a significant GDP contraction and negative trends in key sectors. Policymakers and stakeholders must closely monitor these developments and implement effective measures to mitigate the downturn and foster a sustainable recovery."

According to scholar Shehan Thalpavila, 'the economic environment has not encouraged investment during this period, due to high interest rates and the high cost of electricity. As a result, many public and private construction sites were halted due to rising prices in construction, while government restrictions on imports, including raw materials, had a negative effect on manufacturing and services. Due to high prices, there was a drop in output in manufacturing and some agricultural activities. In addition, there was a drop in exports in clothing this quarter,' the expert concluded.

According to authoritative sources at the Central Bank of Sri Lanka (Cbsl), "a GDP contraction of 2% is expected for the current year, while the International Monetary Fund (IMF) estimates a 3% contraction. This is slightly higher (in the first quarter) than our expectations of 9-10%. However, we expect growth to return positive in the second half" of 2023. Meanwhile, earlier this month the CBSS cut interest rates by 250 basis points, the first reduction in three years, with the aim of stimulating the economy.

In March, the Colombo government reached an agreement with the IMF for a bailout of about three billion dollars, pending debt restructuring with creditors. Before Sri Lanka received the Fund facility, the island's economy benefited from a four billion dollar aid package from India. Sri Lanka also activated credit lines from India for fuel and imports of basic necessities, which provided relief to the population protesting bad governance.

Sri Lanka is facing its worst economic crisis in the post-independence period. Last year saw a contraction of more than seven percentage points, and the difficulties prompted the population to take to the streets, with widespread demonstrations across the island.

The Rajapaksa family, later ousted from politics, was in the crosshairs, including former president Gotabaya and his brother, former prime minister Mahinda. Currently, signs of economic recovery are visible thanks to the IMF bailout, improved dollar inflows and some reduction in inflation. However, the country still has to complete debt restructuring talks by September, before the Fund's expert review.