Much has changed since the economic crisis hit Sri Lanka in 2021 following the COVID outbreak.
The Central Bank reported that gross foreign reserves rose by $474 million in October 2024 to reach $6.4 billion, and overseas worker remittances climbed by 13.9% year-on-year to $587.7 million.
Reserves have gradually improved since reaching barely $2 billion in October 2021.
Total remittances in the first ten months of 2024 surpassed $5.4 billion, an 11.7% increase over the same period last year, indicating sustained growth in foreign exchange inflows through official banking channels.
These gains in remittances and foreign reserves mark a shift for the country, which defaulted its foreign-currency obligations. Recent restructuring negotiations with private external creditors have shown progress, with a preliminary debt agreement reached with the Ad Hoc Group of Bondholders and the China Development Bank. Since suspending debt payments in April 2022, the government has restructured its local-currency debt and is working to stabilize foreign-currency metrics to restore economic credibility.
However, trade and services data indicate ongoing vulnerabilities. The trade deficit widened to $634 million in September, driven by static import spending at $1,645 million and export earnings declining to $1,011 million. Service inflows, including tourism, also fell to $492 million, down from $609 million in August, with total gross inflows from exports, remittances, and services exceeding imports by $414 million before accounting for service outflows.
Economic and policy challenges remain following the elections, and much-needed clarity will only come from the next budget.
According to Fitch, despite the recent challenges, Sri Lanka has managed to bolster revenue through tax reforms, with government revenue rising by 42% year-on-year in the first half of 2024. The IMF projects a gradual reduction in government debt relative to GDP, though it remains elevated, underscoring the need for sustained fiscal discipline. Meanwhile, inflationary pressures have eased, with inflation down to 0.6% in August 2024, allowing for monetary policy adjustments that may further support economic recovery.
In the banking sector, signs of stabilization have emerged, helped by the recent completion of the local-currency debt restructuring. Non-performing loans remain a concern, but Fitch expects the broader banking environment to improve in line with the ongoing economic recovery.