Sri Lanka stands at a crossroads, poised between an economic recovery and the pressing need for sustainable growth. As global headwinds intensify, the 2024 HSBC Market Outlook explored the essential policies and reforms needed to solidify the recovery and bring much-needed clarity amidst the prevailing uncertainty on the economic policy trajectory a new government would influence.
The HSBC Market Outlook in Colombo brought together key figures from banking, policy-making, and economic research to explore the complexities of the economic recovery and the strategic direction Sri Lanka needs for sustainable growth.
After enduring a prolonged and severe economic crisis that began with the COVID outbreak in 2020 and a balance of payments crisis, leading to shortages of fuel, food, and other essentials, the country defaulted on its debt in 2022 for the first time. After a brief and unprecedented political uncertainty, Sri Lanka engaged the IMF and began a painful recovery. Sri Lanka is cautiously emerging from this challenging period.
The event provided a forum for reflection on the hard-won gains in stabilization, analysis of ongoing issues, and a roadmap to economic resilience.
Key speakers included HSBC Sri Lanka & Maldives CEO Mark Surgenor, Central Bank Governor Dr Nandalal Weerasinghe, and HSBC Global Research Economist Ines Lam, each offering perspectives on how Sri Lanka can position itself for growth within the context of shifting global economic dynamics.
The journey from crisis to cautious optimism has been arduous, marked by record inflation, depleted foreign reserves, and substantial socio-economic disruption. Yet, the economic reforms, coupled with the 17th IMF programme, have helped Sri Lanka achieve a modicum of stability, with inflation under control and growth projections on the rise. Against this backdrop, the discussions at the HSBC Economic Outlook event in Colombo explored how Sri Lanka can build on these early gains, strengthen policy consistency, and leverage the strengths of its private sector to move towards a resilient and competitive economy.
Commitment to Sri Lanka: Beyond Banking
Opening the session, Mark Surgenor, Chief Executive of HSBC Sri Lanka and the Maldives, underscored HSBC’s long-standing commitment towards Sri Lanka and its economic development.
Mark Surgenor – Chief Executive of HSBC Sri Lanka & Maldives
HSBC, a UK-based Bank, with operations in 60 countries, has been in Sri Lanka for over 130 years, making it a significant investor and leading international bank and together with a Global Service Centre (GSC), employs around 4,000 people. However, Surgenor highlighted that its involvement goes beyond conventional banking, encompassing a broader commitment to social, environmental, and cultural initiatives that support Sri Lanka’s development goals.
HSBC’s initiatives reflect a holistic approach to fostering economic potential. Its Female Entrepreneurs Programme empowers women with resources and support to enhance their business capabilities, bridging local talent with global markets. The Spoken English Programme, another initiative, aims to strengthen language skills among Sri Lankans, facilitating their access to global employment opportunities. These initiatives are integral to its vision of connecting Sri Lankan talent to international networks.
With environmental initiatives, such as reforestation projects, HSBC aims to support biodiversity conservation while mitigating the effects of climate change. Its involvement in cultural initiatives like the Ceylon Literary and Art Festival further underscores its commitment to showcasing a unique heritage on the world stage. “We are here not only to offer banking solutions but to connect Sri Lanka with the world and bring the best of the world to Sri Lanka and showcase the Best of Sri Lanka to the World”, Surgenor said.
A Return to Stability
Delivering the keynote, Central Bank Governor Dr Nandalal Weerasinghe detailed the steps taken to stabilize the economy following the worst economic crisis in recent history, characterized by a staggering 70% inflation rate, dwindling foreign reserves, and debt default.
Dr Nandalal Weerasinghe – Governor of the Central Bank of Sri Lanka
These challenges stemmed from years of unchecked fiscal imbalances and high levels of government borrowing. In response, Sri Lanka turned to the IMF Extended Fund Facility for support, marking its 17th IMF bailout since independence.
Dr Weerasinghe acknowledged that the economic recovery relied on prompt, coordinated policy measures and a focused structural reform agenda. Since then, these policies have led to notable successes, including a significant drop in inflation, which now hovers between 3-4%, a critical achievement that has helped stabilize household finances and create a more predictable business environment.
These reforms have also revised the 2024 GDP growth projections upward to approximately 4%, compared to the initial estimate of 2%. This growth marks a departure from six consecutive quarters of economic contraction, positioning Sri Lanka on a path toward recovery.
One of the most impactful reforms has been the enactment of the Central Bank of Sri Lanka Act in 2023, which grants the Central Bank increased autonomy. This legislation eliminates the possibility of direct government financing, allowing the Central Bank to operate with a focus on economic objectives rather than political agendas. Under this new mandate, the Central Bank has implemented a flexible inflation-targeting framework, which includes setting specific inflation targets and managing exchange rate stability.
Central Bank Independence
Dr Weerasinghe emphasized that the newfound independence of the Central Bank was a turning point in economic management, allowing the monetary authority to approach monetary policy with a scientific and transparent framework, anchoring inflation expectations and stabilizing exchange rates. With these mechanisms, the Central Bank can intervene in the foreign exchange market, particularly during periods of high volatility, without being subject to political pressures.
Over the past year, these policies helped increase foreign reserves to $6.4 billion and stabilize the exchange rate at around 300 Sri Lankan rupees to a dollar.
Addressing recent public concerns over money printing, Dr Weerasinghe clarified that the Central Bank no longer engages in direct monetary financing. Instead, it has adopted open-market operations to manage liquidity. This approach enables the Central Bank to stabilize short-term interest rates and maintain economic stability without compromising long-term fiscal discipline. Dr Weerasinghe also hinted at the gradual relaxation of import restrictions, acknowledging that while these were initially necessary to conserve reserves, they could now be adjusted to encourage industrial growth.
Global Economic Dynamics
Economist Ines Lam from HSBC Global Research provided a nuanced analysis of global economic conditions and their potential effects on Sri Lanka. In her remarks, Lam focused on how developments in major economies like the U.S., Europe, and China influence emerging markets, including Sri Lanka. Despite global efforts to curb inflation, persistent inflationary pressures remain, driven by strong U.S. consumer demand and a robust labour market. High interest rates in the U.S. contribute to a strong dollar, making debt servicing and foreign investment costs higher for countries like Sri Lanka.
Ines Lam – HSBC Global Research Economist
However, Lam pointed out that the great tightening appears to be easing, with global inflation gradually declining. This shift could create a more favourable environment for emerging markets, potentially reducing the pressure on the Sri Lankan economy. Lam recommended that Sri Lanka consider diversifying its trade partnerships, looking beyond traditional Western markets to the rapidly growing Asian consumer base.
Lam also highlighted the economic slowdown in China, driven by a downturn in property investments and rising household debt, which has reduced global demand for commodities. This decline in demand could benefit economies like Sri Lanka, as it may keep commodity prices low and reduce import costs. Additionally, waning growth in China presents opportunities for countries like Sri Lanka to position themselves as alternative manufacturing hubs for companies seeking affordable production sites.
In Europe, Lam noted that recession concerns have risen, particularly in manufacturing sectors strained by energy price shocks and geopolitical tensions. A European downturn could limit import demand in Asia, potentially affecting Sri Lankan exports. However, this could also prompt European companies to seek cost-effective production hubs, presenting an opportunity for Sri Lanka to attract investment with its competitive labour market and advantageous geographic location.
Attracting Foreign Direct Investment
Lam emphasized that while attracting Foreign Direct Investment (FDI) is highly competitive, Sri Lanka has a unique opportunity to position itself as an attractive destination by implementing investor-friendly policies.
Citing Singapore as a model, Lam highlighted the importance of policy consistency, clear regulatory frameworks, and efficient processes in creating an investment-friendly environment. She stressed that while Sri Lanka has made progress, more extensive reforms are needed in digitization, customs efficiency, and streamlined trade regulations to meet global standards and appeal to international investors.
Shiran Fernando – Chief Economic Policy Advisor of the Ceylon Chamber of Commerce
“Sri Lanka should focus on anchor investments—substantial projects that bring in foreign capital and encourage ancillary investment from suppliers and service providers,” Lam suggested. “Rather than relying solely on tax holidays, she recommended offering a broader value proposition that includes transparent processes and ease of business operations to attract long-term investors. This approach would allow Sri Lanka to benefit from spillover investments that anchor projects can generate,” Lam noted.
Beyond foreign investment, Lam pointed to the untapped potential within domestic investment, particularly in sectors where Sri Lanka holds a natural advantage. She identified value-added agriculture, IT services, and eco-tourism as promising industries that could bolster the Sri Lankan export base. With an educated, English-speaking workforce and competitive wage levels, Sri Lanka is well-positioned to attract investments into IT and professional services. This diversification would strengthen the economy and build resilience against external market shifts.
Catalyst for Private Sector Growth
Sharing their insights at the HSBC Outlook session, Shiran Fernando, Chief Economic Policy Advisor of the Ceylon Chamber of Commerce, and Chayu Damsinghe, Head of Macroeconomic Advisory at Frontier Research, underscored the critical role of policy consistency in improving investor confidence. They argued that a stable regulatory environment, particularly regarding trade and customs, could amplify private sector resilience in navigating recent economic shocks.
Fernando highlighted the need for customs reform to modernize trade processes, streamline logistics, and facilitate faster movement of goods. “Outdated customs regulations and bureaucratic hurdles currently stifle trade, deterring domestic and foreign businesses. By aligning customs processes with international standards and embracing digitization, Sri Lanka could enhance its logistical competitiveness, positioning itself as a viable production base within global supply chains,” Fernando said.
Chayu Damsinghe, Head of Macroeconomic Advisory at Frontier Research
Damsinghe pointed out that progress in reducing the primary deficit from 6% of GDP to a surplus of approximately 3% within three years reflects one of the strongest fiscal adjustments globally, helping to stabilize the currency and reduce interest rates, creating a supportive backdrop for private sector growth. “However, balancing fiscal strength with policies that enable growth will be crucial, especially as Sri Lanka approaches debt refinancing periods in the coming years,” Damsinghe cautioned.
Groundwork for Sustainable Growth
As Sri Lanka shifts its focus from crisis recovery to long-term growth, the event highlighted the need for strategic reforms that create an enabling environment for sustainable development. Governor Weerasinghe emphasized that policy stability and structural reforms are essential for creating a predictable economic landscape. The flexible inflation-targeting framework of the Central Bank and its foreign reserve management strategies laid a foundation that allows businesses to plan in a low policy-risk environment.
To support growth-oriented sectors, the government eased import restrictions, except for vehicle imports, initially imposed to conserve foreign reserves during the post-COVID currency crisis. As economic conditions improve, Sri Lanka could attract more investment in manufacturing and production, building a foundation for export-driven growth. Investment in infrastructure, particularly in ports and digital capabilities, is also essential to enhancing competitiveness in regional and global markets.
A Path Forward for Sri Lanka
The 2024 HSBC Economic Outlook event closed with a cautiously optimistic outlook, recognizing the strides made in stabilization and structural reform while acknowledging the challenges ahead. By prioritizing policy consistency, aligning with global standards, and fostering private sector growth, Sri Lanka can build a resilient economy ready to face domestic challenges and global headwinds. The incumbent administration faces critical tasks of capitalizing on the recovery, fostering stability, driving sustainable growth and positioning Sri Lanka as a competitive player in the global economy.
Amesh Dissanayake – Interim Head of Wholesale Banking, HSBC Sri Lanka & Maldives
Wrapping up the informative session, the Interim Head of Wholesale Banking, HSBC Amesh Dissanayake, extended his thanks to the clients who participated and the speakers at the session and highlighted how the Bank is ready to support the banking needs of clients and is committed to partner with clients as they connect globally and look for global banking solutions.