Sri Lanka Struggles To Deliver A New Era Of Post-Crisis Growth – Analysis

By Ganeshan Wignaraja

Sri Lanka’s National People’s Power (NPP) government, led by the charismatic President Anura Kumara Dissanayake, entered office in late 2024 at a turning point in the country’s economic history. Sri Lanka experienced its worst post-independence economic crisis in 2022–23. While the economy is now stabilising, the challenges are far from over. The new government is struggling to balance economic growth with debt sustainability.

Sri Lanka’s economic outlook offers cause for cautious optimism. The combination of prudent monetary and financial stability policy by the Central Bank of Sri Lanka, fiscal policy reforms, a US$3 billion International Monetary Fund program and US$4 billion of Indian assistance appears to have steadied the economy after severe macroeconomic turbulence. A debt restructuring deal of US$17.5 billion reached with private bondholders and China gave Sri Lanka the breathing room it desperately needed, while earnings from tourism have accelerated, contributing to the recovery of foreign exchange reserves.

The October 2024 World Bank growth forecasts point to growth slowing from a forecast 4.4 per cent in 2024 to 3.5 per cent in 2025. Despite a stabilising economy, over half the country’s population is experiencing what the UNDP terms multidimensional vulnerability to their standard of living.

While the economic outlook is positive, there are risks that the new government will need to tackle head-on. One of the most pressing issues is the outflow of skilled professionals. Sri Lanka has seen a significant brain drain with over 300,000 people leaving Sri Lanka for foreign employment in 2024 alone. The country faces an ever-shrinking talent pool — talent which is desperately needed to propel growth.

The newly elected parliament has little experience, as the country struggles with the repercussions of the brain drain. Of the 225 members of parliament, about 150 are untested first-term representatives. This raises questions about whether Sri Lanka’s politicians have the legislative and technical capacity needed to enact the economic reforms Sri Lanka so desperately needs.

The government will need to focus on improving service delivery, retaining key talent within the state sector and developing expertise in governance and public administration. Sri Lanka will have to rejuvenate the elite cadre of the civil service by establishing a top-quality public policy school akin to The Australian National University’s Crawford School of Public Policy or France’s Sciences Po.

Tourism — which has long been a critical sector for Sri Lanka — is showing strong recovery, with significant potential to boost foreign exchange reserves and spur growth. Over 2 million touristsvisited Sri Lanka in 2024, a 38 per cent increase over 2023.

But the government has to do more to ensure that the tourism industry is sustainable and its economic benefits extend beyond the capital, Colombo. Marketing Sri Lanka as a multicultural destination, coupled with targeted development of less-visited regions in the north and east of the country and small tourism businesses, will help create a more balanced and decentralised tourism industry.

Fiscal sustainability is one of the most contentious issues facing the new government. While revenue has increased due to higher taxation, further reducing government spending and exposure to corruption risks are powerful means of reducing fiscal imbalances. Despite ruling out privatisation, the government plans to turn around state-owned enterprises through better management.

But some of the larger loss-making state-owned enterprises — such as SriLankan Airlines and Ceylon Petroleum Corporation — should be reconsidered for privatisation or restructuring, as their drain on public funds threatens Sri Lanka’s long-term fiscal stability. With the support of international financial institutions, the government should pursue a strategy that right-sizes the state, encourages private-sector growth and ensures fiscal health in the coming years.

Sri Lanka’s foreign policy choices are vexed. The geopolitics of the Indo-Pacific are dramatically changing after US President Donald Trump resumed office, with India emerging as a key player in Sri Lanka’s economic future. The government must strengthen economic ties with India and its southern states, ensuring that Sri Lanka benefits from Indian investments and partnerships. President Dissanayake will have to live up to his promises of non-interference in India’s security concerns, particularly given China’s increasing commercial presence in Sri Lanka.

President Dissanayake’s visit to India in December 2024 was a promising foundation for stronger bilateral relations. The government must now focus on making concrete progress, particularly in business-to-business links, digitisation, cross-border energy projects and the deeper bilateral free trade agreement now under negotiation.

Sri Lanka faces a serious risk of having to make capital repayments on its external debt in mid-2027 if it cannot increase its foreign exchange reserves through trade-led growth. In partnership with the International Monetary Fund and the World Bank, India should stand ready to help if Sri Lanka falters a second time.

The new Sri Lankan government will need a comprehensive growth plan that addresses both immediate risks and long-term opportunities. Navigating these choppy waters will require pragmatic leadership, bold policy decisions and a clear vision for Sri Lanka’s future prosperity. The publication of the national budget in mid-February 2025 will provide important insights into the NPP administration’s economic plans.

• About the author: Ganeshan Wignaraja is the Professorial Fellow in Economics and Trade at Gateway House and a Visiting Senior Fellow at ODI Global. Formerly, he was the Director of Research at the ADB Institute and the Sri Lankan Presidential Advisor on Strategic Trade Policy. His research interests span macroeconomics, trade and regional integration, and economic development.
• Source: This article is part of an EAF special feature series on 2024 in review and the year ahead.