Sri Lanka is on the precipice of both opportunity and risk and it is crucial that the government charts a path that balances growth with debt sustainability.

Sri Lanka’s New Economic Path Under New Government

• Transition to Stability: Sri Lanka’s economy, after its worst crisis in 2022-2023, is stabilizing with support from the IMF and India, and through strategic debt restructuring.
• Government’s Challenge: The NPP government, led by Anura Kumara Dissanayake, now faces the critical task of balancing growth with sustainable debt management.
• Optimism Amid Caution: While there is cautious optimism, the economy is still grappling with the long-term effects of past crises. Forecasts predict a slowdown in growth from 4.4% in 2024 to 3.5% in 2025.
• Recovery Drivers: Key factors such as prudent monetary policy, international aid, debt restructuring, and tourism recovery are central to Sri Lanka’s ongoing stabilization.

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Internal Challenges for Sri Lanka’s New Government

• Brain Drain: A significant challenge is the migration of skilled professionals, with 300,000 leaving in 2024 alone, including experts from IT, banking, healthcare, and marketing. This exacerbates the talent gap, hindering growth prospects.
• Inexperienced Parliament: With over 150 first-time MPs, many from the NPP, the government faces challenges in legislative capacity. 
  • To address this, the focus should be on improving public sector services, training MPs in economic reform processes, and enhancing governance through public policy education.
• Tourism Potential: Tourism is growing, with over 2 million visitors in 2024, but its benefits need to be more widely spread across the country. 
  • A more sustainable, decentralized tourism strategy that includes the northern and eastern regions can further boost the economy.
• Fiscal Sustainability: While revenue has risen, government spending remains high due to the extensive role of the state. 
  • The government must address the financial burden of state-owned enterprises, particularly those that are loss-making, such as SriLankan Airlines and Ceylon Petroleum Corporation, considering privatisation or restructuring to safeguard fiscal stability.

External Factors Impacting Sri Lanka’s Future

• Geopolitical Shifts: With the re-election of President Donald Trump in the U.S., the Indo-Pacific region will undergo significant changes, which may affect Sri Lanka’s foreign policy. 
  • Sri Lanka must navigate these shifting dynamics carefully to safeguard its interests.
• Strengthening Ties with India: India is emerging as a vital partner for Sri Lanka’s economic future. 
  • The government must focus on deepening economic collaboration with India, ensuring that Sri Lanka benefits from Indian investments, particularly in cross-border projects, energy, and trade.
• Managing Security Concerns: The Sri Lankan government must honor its commitment to avoid actions that might exacerbate India’s security concerns, such as halting visits from Chinese spy ships. 
  • This requires careful diplomacy and clear signaling to strengthen regional trust.
• Bilateral Engagement: The President’s visit to India in late 2024 lays the foundation for stronger bilateral relations. 
  • Sri Lanka should prioritize progress on economic cooperation, particularly through digital identity systems, energy projects, and negotiations for a deeper bilateral free trade agreement.

Way Forward

• Boosting Exports: Starting in mid-2027, Sri Lanka faces the risk of capital repayments on its external debt. If the country cannot generate sufficient foreign exchange through trade-led growth, this could threaten fiscal stability.
  •  The government needs to focus on boosting exports and trade to avert this looming crisis.
• Support from International Partners: In partnership with the IMF and World Bank, India must be prepared to provide assistance if Sri Lanka encounters economic difficulties once again. 
  • The historical relationship between Sri Lanka and India makes this collaboration critical in ensuring Sri Lanka’s economic resilience.
• Comprehensive Growth Plan: To address both immediate and long-term challenges, Sri Lanka must devise a comprehensive growth strategy. 
  • This plan should aim at balancing short-term stabilization with long-term economic opportunities, ensuring the country’s sustained prosperity.

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Conclusion

Navigating these choppy waters will require pragmatic leadership, bold policy decisions, and a clear vision for Sri Lanka’s future prosperity. The National Budget in February offers an opportunity to make a start.

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