Queue in front of a gas station to refuel in Colombo on August 1, 2022 (AFP/Archives/ISHARA S. KODIKARA)
Sri Lanka expects a record economic contraction of at least 8% in 2022, but soaring inflation is expected to gradually ease, the central bank governor said on Thursday.
“We were estimating a contraction of 7 to 7.5 percent, but now we think it will be over 8 percent,” Governor Nandalal Weerasinghe told reporters in Colombo.
Inflation, which hit 60.8% in July, will peak at “around 65%” next month, he said. He added that a gradual decline in prices is expected to occur due to decreasing demand and improving supply.
Sri Lanka, a country of 22 million people, is devastated by a historic economic crisis, marked by severe shortages of food, fuel and medicine, due to a lack of foreign currency to finance imports.
Demonstration in Colombo against the government, August 9, 2022 (AFP/Archives/ISHARA S. KODIKARA)
Fuel and power shortages this year have affected economic growth, leading to a record contraction, Weerasinghe said, adding, however, that foreign exchange reserves had improved thanks to better inflows and slowing imports. .
“We are now able to finance the most essential imports such as petrol and diesel as well as medicines,” Weerasinghe said, noting that economic activity is expected to pick up next year.
At the height of the fuel shortage in Sri Lanka, motorists had to wait days and sometimes weeks to fill up, but strict fuel rationing shortened queues.
The South Asian island defaulted on its $51 billion foreign debt in mid-April and is negotiating with the International Monetary Fund (IMF) for a possible bailout.
The governor expressed the hope of reaching a technocratic level agreement with the IMF later this month, before a formal agreement can be reached.
The restructuring of this debt is a precondition for the IMF’s approval of a rescue plan.
An IMF delegation is expected in Colombo before the end of the month, according to the governor.
Months of protests culminated in the resignation of President Gotabaya Rajapaksa, accused of mismanagement, in July.
Forced to flee abroad, first to the Maldives and then to Singapore, he is currently in Thailand. Close associates said he was keen to return to Sri Lanka.
© 2022 AFP
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