Economic situation in Sri Lanka improving

Sri Lanka was officially declared bankrupt for the first time in its history in April 2022 after its foreign currency reserves plunged to less than $50m. Sri Lankan Prime Minister Ranil Wickremesinghe announced in parliament that the country was facing an extreme economic crisis and had gone bankrupt. The island nation was experiencing over 50 percent inflation and food shortages. Its foreign debt alone had reached around $51bn, approximately 10 percent of which came from China.

According to international news reports, long-standing structural weaknesses, external pressures and policy flaws drove the country towards economic crisis. A World Bank report cited weak governance, a restricted trade regime, poor investment climate and a lack of monetary discipline as additional contributors. Amid high inflation and a sharp currency depreciation, the economy contracted by 7.3 percent. Poverty, which Sri Lanka had succeeded in reducing after the civil war, quadrupled from 2019 onwards.

After Sri Lanka went bankrupt, many in Nepal argued that Nepal too was heading down Sri Lanka’s path, citing Nepal’s declining foreign exchange reserves and rising trade deficit. In the first six months of fiscal year 2021/22, the foreign exchange reserves of the country were enough to cover merchandise imports of 7.4 months and merchandise and services imports of 6.7 months. Reserves sufficient for less than six months are considered a sign of moving towards an economic crisis. Similarly, Nepal’s balance of payments situation was at its lowest in history, with a deficit of Rs 247.03bn during the review period, compared to a surplus of Rs. 97.36bn in the previous year.

Sri Lanka, which was officially declared bankrupt, is now recovering. According to the latest World Bank data, Sri Lanka’s economic growth is expected to be positive in 2024. The Asian Development Bank (ADB) expects moderate positive growth in the medium term. The lingering effects of the crisis, high taxes, low real incomes and high emigration of skilled workers are cited as factors behind moderate growth.

External and financial balances of Sri Lanka showed signs of stabilization in 2023 as foreign exchange and liquidity pressures started easing significantly. Usable official foreign exchange reserves increased to cover 8-9 weeks of imports, up from just 1-2 weeks at the peak of the crisis. The Sri Lankan rupee also appreciated by 10.8 percent against the US dollar in 2023, after depreciating by 81.2 percent in 2022. According to the ADB, inflation has fallen faster than expected to single digits after peaking above 50 percent. According to the Sri Lankan finance ministry, annual inflation is at around 5.7 percent only.

After nearly two years of monetary tightening, the Central Bank of Sri Lanka allowed a gradual return to an easing cycle in mid-2023. Policy rates were cut by 650 basis points in June and Nov 2023, with the Standing Deposit Facility Rate at nine percent and the Standing Lending Facility Rate at 10 percent. The Statutory Reserve Ratio was also lowered by 200 basis points to two percent in August 2023. With monetary easing and clarity on domestic debt restructuring, market interest rates have fallen, with 91-day Treasury bill rates declining by 20 percentage points between March 2023 and March 2024.

The Sri Lankan government has undertaken crucial structural and policy actions to achieve economic stability. The implementation of many important reforms under the Extended Fund Facility program with the International Monetary Fund (IMF), cost-reflective utility pricing, and new revenue measures appear to have contributed to macroeconomic stability.

Tourism recovery

In 2018, tourist arrivals in Sri Lanka reached around 2.3m which generated a total expenditure of $5.6bn. However, due to the Covid-19 pandemic, tourist arrivals declined by 92 percent in 2020. During the peak of the economic crisis in 2021/22, around 100,000 tourists visited Sri Lanka, compared to around 2.3m in 2018.

Despite the challenges of the severe economic crisis, Sri Lanka achieved significant progress in tourist arrivals in 2023. According to the Sri Lanka Tourism Development Authority, tourist arrivals doubled from 719,000 in 2022 to 1.48m in 2023. Europe contributed 50.9 percent of total tourist arrivals, while Asia and the Pacific region emerged as the second major source market, contributing 40.1 percent.

Sri Lanka has welcomed 784,651 tourists over the first four months of 2024.

Eager to attract Nepali tourists

Sri Lanka is rebranding and offering various packages to attract tourists from all over the world. Sri Lankan Airlines, the national carrier, operates direct and network flights to 113 destinations in 59 countries.

The airline has been operating direct flights between Kathmandu and Colombo for the past three years. Nilina Pathirana, the country manager for Nepal, said that the airline currently operates five flights a week from Sunday to Friday. She believes Sri Lanka could become an affordable destination for Nepali tourists. “Nepalis have increased spending capacity. Since they are traveling to destinations like the Maldives, Malaysia, Thailand, Dubai and Indonesia, Sri Lanka can also be a destination for them,” she added.

Pathirana suggests that a package of around Rs 90,000 per person for a 4-night, 5-day stay could be attractive for Nepali tourists. This package includes round-trip airfare on Sri Lankan Airlines, sightseeing, meals, and accommodation.

Around 5,000 Nepali tourists visited Sri Lanka in 2018. The number fell to 1,500 in 2023.