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The improvement in economic growth was also present in the sentiment in meetings with Sri Lankan companies. Almost all the companies I met in Colombo were cautiously optimistic about their future outlook, and 1Q24 results for most companies in Sri Lanka have been good, led by the banking sector, which has seen exceptional results on the back of lower provisioning costs.
The Sri Lankan government continues to carry out the hard work of the last two years, which has also resulted in the IMF passing its second review for the country on 12th June 2024, which will result in a disbursement of an additional USD 336 million from the total loan size of USD 3 billion.
Besides continuing with the IMF led reform agenda, one of the last milestones left for the country is to finalize the restructuring of its international sovereign bonds for which talks are ongoing. Whether these negotiations are finalised in the next few months or not, it does not significantly impact the ongoing economic recovery taking place in the country.
One concern that arose a few times, especially among the domestic investors, was the upcoming Presidential election scheduled for September-October 2024. An upcoming election in any country makes investors a bit nervous, but in Sri Lanka’s case, even more so because of the ongoing reforms linked to the IMF program. A concern among investors is that if a new President/party is elected, this could mean renegotiation of the IMF program. However, I doubt that this concern will play out in a significant manner.
Given the economic balance and geopolitical interests in Sri Lanka, any political party that comes to power in the upcoming election does not have room to deviate significantly from the reform path the country has taken. Any major deviation from the reform path will be extremely detrimental not only to Sri Lanka’s IMF program but also to the country’s economic and geopolitical prospects.
I therefore believe that any political rhetoric on the IMF program will likely be toned down once elections are through as the economic reality is that the economic reforms should continue and hopefully all the Sri Lankan political parties adapt to this reality.
Sri Lanka has made huge strides given the economic situation they were in just two years ago, and the country is now seeing some good economic momentum which should not be interrupted with any shortsightedness.
To put things in context, Sri Lanka has not only had a tough last two years, but it has had a challenging time since 2018, when it went through a political crisis, after which its tourism sector was negatively impacted by the Easter Sunday attack in 2019, followed by the pandemic in 2020/2021 and finally the political crisis in 2022. The country did not really get a chance to see a full recovery as there was some setback every year.
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