Export earnings reversed a recovery in 2022 to contract in the first quarter of 2023 as expectations for a global recession crystalize
Exports are poised to experience diminished demand in the current year and 2024 due to an impending global recession, the Central Bank says.
Although Sri Lanka witnessed a 4.9% growth in exports in 2022, amounting to $13.1 billion, compared to the preceding year, the positive trend has reversed during the first quarter of this year. Merchandise exports, predominantly comprising garments, contracted by 7.9% year-on-year in the first quarter of 2023.
These figures highlight the toll of an approaching recession in Sri Lanka’s export markets, P.K.G. Harischandra, Director of the Economic Research Department at the Central Bank, said last May. “Considering the global scenario, we expect this year and the first half of next year would see stringent monetary and financial conditions, which will dampen our external demand.”
Sri Lanka has relied on its exports to bolster foreign revenue and alleviate its ongoing economic crisis. The Central Bank anticipates exports to grow 7.6% from a year earlier to $14.1 billion by the end of 2023. However, Harischandra acknowledged that while some geopolitical factors could impact exports, not all are bleak. “Although we observe a reduction in exports due to a decline in global demand, this loss will be offset by rising remittances and tourism income, stabilizing the Balance of Payments. Nevertheless, the influence of other geopolitical developments globally remains uncertain.”
Grappling with our economic crisis would only intensify global demand, this loss will be offset by rising remittances and tourism income, stabilizing the Balance of Payments. Nevertheless, the influence of other geopolitical developments globally remains uncertain.”
The global economy will slow down in 2023, the IMF projects, with growth decreasing from 3.4% in 2022 to 2.8% in 2023 and 3% in 2024. The IMF says advanced economies would experience a particularly substantial deceleration in growth, dropping from 2.7% in 2022 to 1.3% in 2023. Global inflation may ease from 8.7% in 2022 to 7% in 2023, driven by a decline in commodity prices. However, core inflation is likely to decrease at a slower pace. It is unlikely that inflation will return to target levels before 2025 in most scenarios, the IMF warns, and its outlook carries significant downside risks, with an increased likelihood of a severe economic downturn.
Global financial sector stress could exacerbate the situation, leading to contagion and weakening the real economy through a sharp deterioration in financing conditions. Sovereign debt problems could spread, becoming more systemic due to higher borrowing costs and lower economic growth. The conflict in Ukraine could intensify, resulting in spikes in food and energy prices, driving inflation higher. Core inflation may persist longer than anticipated, necessitating even more aggressive monetary tightening measures. The potential fragmentation into geopolitical blocs poses a risk of substantial output losses, including the impact on foreign direct investment