Sri Lanka’s Financial Crisis

January 3, 2022

According to World Bank’s Sri Lanka Development Update (SLDU), Sri Lanka is facing an acute economic crisis because of job & earning losses, and high food inflation.

Key Facts

Inflation has been increased due to printing of money by government to pay off foreign bons and domestic loans.
As per World Bank, share of people living under poverty line is expected to increase by 11.7 per cent since the onset of covid-19 pandemic.
Its impact was disproportionately large among people working in more urbanised areas like Western province, due to impact on industry.
Highly rural districts like Kandy and Ratnapura also account for a large share of new poor after COVID-19 pandemic.
Vulnerability among the workforce was very high on weak safety and high informality nets.

World Bank on Sectoral Inequality

The COVID-19 pandemic has not impacted all the economic sectors equally. As per sectoral GDP data and discussion in Chapter 1, industries have been affected more than services and agriculture. But subsectors witnessed large variations. Weak external demand has impacted export-oriented subsectors. Among industrial subsectors, textile manufacturing and construction suffered the largest decline because these sectors are sensitive to demand shocks and require workers to be physically present.

Sovereign Ratings

Because of financial crisis, rating agencies such as Moody’s, S&P and Fitch have downgraded their sovereign ratings for Sri Lanka. Moody’s downgraded its rating by two notches to Caa1, on the other hand, S&P downgraded its rating down to B- in September and CCC+ in December.

World Bank’s suggestion

World Bank has suggested to focus on four priorities for Sri Lanka to transform its economy, achieve a sustainable trajectory and create more jobs in order to reduce poverty and recover from the impact of covid-19. The four priorities are:

Increase agricultural productivity & earnings by transitioning farmers towards higher-value, export-oriented crop mixes.
Address the constraints for accessing remunerative non-farm jobs in rural areas. This is because they are important and potentially productive source of livelihoods.
Support broader reforms for increasing labour productivity and create jobs, in order to improve the quality of jobs.
Promote spatial transformation and strengthen inclusion.

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