The Central Bank expects the economy to grow by 3% this year as the benefits of the eased monetary policy stance and low inflation environment continue to be gradually channelled into the economy.

The outlook comes on the back of the economy recording a positive performance in the second half of 2023 following six quarters of year-on-year contractions.

“A sustained recovery is expected in the period ahead,” said CBSL in its Annual Economic Review 2023 released last week.

It said the faster than expected recovery of the tourism sector is expected to support the growth momentum in the near term with positive spillover effects on other related sectors. The industry sector is expected to benefit from recent positive developments such as the lifting of import restrictions, declining cost of credit and raw material prices. Leading indicators also show a revival in construction sector activities in light of the aforementioned developments coupled with the resumption of several previously halted infrastructure development projects of the Government.

The recently concluded 2023/24 Maha season is expected to have recorded positive yields across major crops highlighting the improved performance of the agriculture sector and based on available information, this positive trend is expected to sustain during the remainder of the year, unless disrupted by adverse weather conditions.

The noteworthy rise in remittances also may support in boosting aggregate demand. The near term economic growth trajectory is expected to be supported by the improved fiscal space that is envisaged with the completion of debt restructuring.

CBSL also said expected gradual adjustment in wages would also help improve demand. “Notwithstanding the renewed sense of macroeconomic stability, policy certainty and continuity will remain vital to the growth trajectory of the economy during 2024, amid expected elections,” it said.

External demand for domestic services, particularly through tourism, is expected to remain elevated and some renewed demand for exports may emerge if ongoing initiatives to strengthen exports materialise amid the improved growth prospects of Sri Lanka’s key trading partners in the medium term.

The economy’s positive growth trajectory in the near and medium term continues to hinge on Sri Lanka’s continuation of the IMF-EFF program, timely completion of debt restructuring, and the Government’s commitment to forge ahead with the structural reform agenda. Freeing up resources through these reforms, especially in relation to State Owned Business Enterprises (SOBEs) and re-channelling them into productive sectors can help induce the long overdue improvements to productivity and further strengthen the potential of the economy.

However, CBSL said, a key fragility in the economic recovery process is the notable continued outflow of human capital, especially highly skilled professionals, amidst adverse demographic developments with ageing.

The rapidly materialising impact of climate change may also take a larger than expected toll in the near to medium term through frequent supply shocks, not only on agricultural production but also on other aspects of the economy such as power generation, construction, and tourism, among others. The lack of economic diversification continues to be not only a drag on economic potential but also a source of economic vulnerability, especially considering the rapidly evolving global environment.

Further, focused initiatives to improve overall productivity and efficiency across all key economic sectors are imperative at this juncture. At the micro level, ongoing initiatives to strengthen social safety nets, by improving efficiency and adequate budgetary allocations, must be expedited to build near term resilience and enable individuals to seize opportunities for economic empowerment and sustainable development in the period ahead.

While expenditure rationalisation is vital for fiscal sustainability, effectiveness of Government spending on key social infrastructure, such as health and education, should be enhanced to ensure equitable provision of such services with the aim of sustaining long term growth. Further, timely implementation of identified measures to address governance weaknesses and corruption vulnerabilities are macro-critical for the progress of both the economy and its people.

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