ABBOT'S WICK

Sri Lanka’s government has revealed its fiscal strategy for 2021-2025. The plan aims to tackle the growing deficit and stabilize public finance. The Medium Term Macro Fiscal Framework sets key goals for the country.

The strategy focuses on tax increases and reforms to boost government revenue. It aims to raise the revenue-to-GDP ratio to over 14% by 2025. This will be done through tax policy changes and improved revenue administration.

The government targets 6% economic growth and low unemployment. It also wants to keep inflation under 5%. Public investment will focus on vital infrastructure projects like roads and water supply.

Despite COVID-19 challenges, the government is committed to its fiscal strategy. The plan seeks to address the deficit and promote sustainable growth for Sri Lanka.

Government’s Fiscal Strategy for 2021-2025

Sri Lanka’s government has outlined its fiscal strategy for 2021-2025 in the Medium Term Macro Fiscal Framework (MTMFF). Key objectives include achieving a primary surplus by 2025 and reducing the budget deficit. The plan aims to cut unproductive spending and create a sustainable budget.

Medium Term Macro Fiscal Framework Objectives

The MTMFF focuses on reforming state-owned enterprises to boost efficiency. Qualified professionals will be appointed to management boards to improve productivity. These changes aim to reduce the burden on the government’s budget.

Public Investment Focus and Financing

Public investment will prioritize road projects and increase access to pipe-borne water. These investments will boost productivity in agriculture and industries. They’ll also improve citizens’ quality of life.

Domestic financing will cover 75% of public investment. This approach complements private sector investments and stimulates economic activity.

Rationalizing Recurrent Expenditure

The government plans to reduce recurrent expenditure from 14.2% of GDP in 2021 to 12.3% by 2025. This strategy includes freezing spending on vehicles, buildings, and other assets.

Digitalizing key systems like e-procurement and e-National Identity Card will boost efficiency. These measures will help streamline government operations and cut costs.

Government Implements Tax Hikes to Boost Revenue Amid Fiscal Deficit

Sri Lanka’s government has launched a plan to tackle the fiscal deficit. They’re using tax policy reforms and revenue administration to increase income. These changes aim to improve tax collection and support fiscal consolidation efforts.

Comprehensive Strategy Linking Tax Policy and Revenue Administration Reforms

The government has made several tax policy changes. These include raising the PAL rate and removing the NBT rate. They’ve also simplified the tax system to make it more efficient.

These reforms are paired with improvements in revenue administration. The goal is to make tax collection more effective. These measures are expected to boost revenue and support fiscal consolidation.

Simplification of the Taxation System

The government has made the tax system simpler and more user-friendly. They’ve cut down the number of taxes people need to pay. This includes removing taxes like NBT, PAYE, and WHT.

These changes should make it easier for people to pay their taxes. The government hopes this will lead to better compliance and more revenue.

Capacity Enhancing Measures in Revenue Administration

New measures have been put in place to improve tax collection. The Inland Revenue Department now has a Large Taxpayers Unit. They’ve also introduced risk-based audits and improved their information system.

Sri Lanka Customs has launched a Single Window System. They’re also working on a National Single Window platform. These changes aim to make trade easier and improve revenue collection.

Despite the economic crisis, the government is investing in education. They’ve set aside Rs. 465 billion for education in 2024. This shows their commitment to creating a better education system for all students.

These reforms and investments are part of a larger plan. The government hopes to improve the economy and promote long-term growth.

Conclusion

Sri Lanka’s government aims to tackle its fiscal deficit and boost economic stability. They’re focusing on tax reforms and better revenue collection to increase income. Simplifying taxes and improving administration should help achieve this goal. The strong performance of the Colombo Stock shows investor faith in the economy.

Expenditure management is crucial for fiscal consolidation. The government plans to cut recurring costs while investing in key sectors. This approach should optimize resources and support growth.

COVID-19 has created significant challenges for Sri Lanka’s fiscal targets. The pandemic caused job losses and economic shrinkage. Sri Lanka’s economy shrank by 7.8 percent in 2022 and 7.9 percent in early 2023.

Despite setbacks, the government remains committed to reforms. The IMF’s approval of a US$3 billion Extended Fund Facility demonstrates this commitment. Success depends on implementing reforms and managing debt restructuring effectively.

The government must stay alert and flexible to achieve its fiscal goals. By doing so, they can work towards sustainable economic growth in the coming years.

Sri Lanka’s foreign reserves have bounced back to $5.5 billion by April 2024. This signals a positive trend for the nation’s economic stabilization efforts. The recovery in currency reserves is expected to boost the country’s financial stability.

The World Bank and Asian Development Bank predict positive growth for Sri Lanka in 2024. They project a moderately optimistic outlook over the medium term. The current account may show a slight surplus.

This surplus is likely due to controlled import growth. The revival of tourism and remittances inflows also plays a key role. These factors are vital for strengthening foreign reserves and improving import coverage.

The International Monetary Fund (IMF) has supported Sri Lanka’s economic recovery. Their Extended Fund Facility has helped build up foreign reserves. The government’s debt restructuring efforts have also been crucial.

These actions have created a more stable financial environment. They have boosted confidence among investors and international partners.

Economic Recovery and Stabilization

Sri Lanka’s economy is showing signs of recovery. GDP growth is projected to turn positive in 2024. The World Bank forecasts a 2.2% growth rate for 2024.

This recovery is backed by the IMF’s $2.9 billion bailout package. The package aims to stabilize the economy and promote reforms.

Inflation Expected to Remain Benign in Medium Term

Inflation in Sri Lanka has dropped significantly. Year-on-year headline inflation fell to 1.3% in September 2023. It rose to 4.0% by the end of 2023 due to supply factors.

Core inflation also decreased, showing low demand pressures. Inflation may change due to new VAT rules in January 2024. However, it should stay low as demand remains weak.

Current Account Surplus Driven by Tourism and Remittances

Sri Lanka’s current account surplus is growing. This is due to strong tourism and remittance inflows. Tourism arrivals topped 700,000 in the first 14 weeks of 2024.

Remittances increased to $572 million in March 2024. These inflows are vital for the country’s balance of payments and foreign reserves.

The boost in tourism and remittances helps offset the economic damage. The long crisis has hurt household finances and business activity. As the economy stabilizes, confidence is expected to grow.

Indicator	2023	2024 (Projected)
GDP Growth	-3.5%	2.2%
Inflation (Year-end)	4.0%	4.5%
Tourism Arrivals (Jan-Mar)	270,000	700,000
Remittances (March)	$475 million	$572 million

Foreign Reserves Rebound to $5.5 Billion by April 2024

Sri Lanka’s official reserves have shown a remarkable recovery. They rose from $1.9 billion in late 2022 to $5.5 billion by April 2024. This excludes a swap facility from the People’s Bank of China.

The IMF Extended Fund Facility of $2.9 billion has played a key role. Approved in March 2023, it has greatly boosted the country’s reserve position.

Improved Balance of Payments Position

Sri Lanka faces a growing trade deficit due to rising import spending. However, net inflows from the services sector, especially tourism, have helped offset this.

A new e-visa system and the Pekoe Trail are set to boost tourism. These initiatives, backed by the EU and USAID, should improve the balance of payments.

IMF Extended Fund Facility Supporting Reserve Buildup

The IMF Extended Fund Facility has been crucial for Sri Lanka’s reserve buildup. The country’s commitment to economic reforms has secured this vital support.

Sri Lanka continues to work with the IMF and other partners. This collaboration is expected to strengthen its reserve position and enhance economic stability.

Debt Restructuring Efforts Paving Way for Financial Stability

Sri Lanka is negotiating debt restructuring with international bondholders. These talks are key to restoring debt sustainability and regaining market access.

The government is working hard to reach agreements with creditors. These efforts are creating a better environment for economic growth and investment.

Indicator	Value
Foreign Reserves (April 2024)	$5.5 billion
IMF Extended Fund Facility	$2.9 billion
GDP Growth Forecast (2024)	2.6%

Conclusion

Sri Lanka’s economy is looking up. Foreign reserves are expected to reach $5.5 billion by April 2024. This signals a positive shift in the nation’s economic outlook.

The country’s GDP growth forecast for 2024 has been revised to 2.6%. This contributes to the South Asian subregion’s expansion. The subregion is projected to grow by 6.3% in 2024 and 6.5% in 2025.

However, risks remain. These include the need for deep debt restructuring and potential reform fatigue. Upcoming elections and the recent economic crisis also pose challenges.

These risks are high in Sri Lanka and other South Asian economies. They face high public debt, weak external reserves, and geopolitical tensions.

Implementing the IMF’s structural reform program is crucial. It will boost investor confidence and attract fresh capital inflows. This will support a stronger economic recovery in the medium term.

The Central Bank of Sri Lanka has kept the policy rate at 6 percent. Their medium-term inflation target is 5 percent. Private sector credit growth and lower non-performing loans show a stabilizing financial sector.

The current account deficit is narrowing. Foreign exchange reserves now cover over 4 months of projected imports. Sri Lanka’s economic prospects are improving, despite challenges on the road to recovery.

Sri Lanka’s economy is bouncing back after the 2022 economic crisis. Inflation has dropped from 69.8% in September 2022 to single digits by mid-2023. This shows a positive change in the country’s finances.

Smart money policies and reforms have helped stabilize the exchange rate. The IMF program has also supported the economic recovery. As a result, the economy grew in the last two quarters of 2023.

Official reserves increased to US$3.0 billion by the end of 2023. This is a big jump from US$500 million at the end of 2022. The Sri Lankan rupee also gained 10.8% in value during 2023.

The economy is stabilizing faster than expected. This has improved the short-term growth outlook. Experts now predict 4.4% growth in 2024.

These trends show the Sri Lankan economy’s strength. They also prove that government and central bank measures are working well.

Sri Lanka’s Economic Crisis and Inflation Peak in 2022

Sri Lanka faced a severe economic crisis in 2022. The country defaulted on its debt due to unsustainable levels and depleted reserves. Multiple factors caused this crisis, including poor economic management and structural weaknesses.

The economy shrank by 7.8% in 2022 and 7.9% in early 2023. Tourism, a key industry, collapsed during the crisis. This led to widespread job losses and shortages of essential goods.

The country experienced power cuts lasting up to 15 hours daily. This further strained the already struggling economy and affected daily life.

Factors Contributing to the Economic Crisis

Several factors contributed to Sri Lanka’s economic crisis, including:

• Macroeconomic mismanagement
• Long-standing structural weaknesses
• Exogenous shocks
• Unsustainable debt levels
• Depleted reserves

The Ceylon Electricity Board and Petroleum Corporation faced huge losses. They needed government help and loans from state banks to survive. The government had to support state banks with increased tax revenue.

Inflation Reaching Record Highs in 2022

Inflation in Sri Lanka peaked at 69.8% in September 2022. This caused the rupee to lose 81.2% of its value against the US dollar. Household budgets suffered due to tax hikes, price increases, and income losses.

Real wages fell by 16.9% in the private sector between 2021 and 2024. In the public sector, they dropped by 22% during the same period.

Year	Inflation Rate	Currency Depreciation
2022	69.8%	81.2%
2023 (August)	4%	11% appreciation

Rising fuel and electricity prices hurt households. Higher taxes affected individuals and businesses, increasing production costs. The government suspended imports to stabilize the economy. However, key sectors still lacked cost-reflective pricing.

Government Reforms and Policy Adjustments

Sri Lanka’s government has taken action to stabilize the economy amid a severe crisis. They’ve implemented reforms focusing on fiscal consolidation, revenue measures, and expenditure control. These efforts aim to set the stage for economic recovery.

Key measures include prudent monetary policy, domestic debt restructuring, and structural reforms. The government has also prioritized revenue measures to address the country’s fiscal challenges.

Fiscal Consolidation Measures

The budget deficit grew from Rs. 1,244 billion to Rs. 1,614 billion from January to September. To address this, the government introduced cost-reflective utility pricing and new revenue measures.

These efforts have shown positive results. Total revenue increased from Rs. 1,448 billion to Rs. 2,110 billion in the same period.

Monetary Policy Stance and Interest Rates

The Central Bank of Sri Lanka has adopted a prudent monetary policy. The Standing Deposit Facility Rate decreased from 14.50% to 10.00% by October’s end.

These adjustments have helped moderate inflation. The Consumer Price Index dropped from 66.0% in 2022 to 1.5% in 2023.

The commercial bank average weighted new lending rate was 12.67% at April’s end. This indicates a gradual transmission of monetary policy changes.

Structural Reforms in Key Sectors

The government has started reforms to boost long-term growth and resilience. These focus on improving the business environment and strengthening the financial sector.

Infrastructure development is also a key area of investment. The IMF’s $2.9 billion bailout package has been crucial in supporting these reforms.

Indicator	2022	2023
Inflation (Point to Point) – Consumer Price Index (2013=100)	66.0%	1.5%
Unemployment Rate	4.6% (Q2)	5.2% (Q2)
Budget Deficit (Jan-Sep)	Rs. 1,244 billion	Rs. 1,614 billion
Total Revenue (Jan-Sep)	Rs. 1,448 billion	Rs. 2,110 billion

Inflation Drops to Single Digits by Mid-2024 After Peaking in 2022

Sri Lanka’s inflation rate has steadily declined since its record highs in 2022. By mid-2024, it dropped to single digits. This decrease is due to government reforms, monetary policy changes, and improved supply conditions.

The World Bank projects Sri Lanka’s economy to grow by 4.4% in 2024. This growth is expected to be driven by industrial and tourism sectors.

Gradual Decline in Inflation Rates

Headline inflation in Sri Lanka stayed low throughout 2024. This was helped by price adjustments and currency appreciation. Overall PCE inflation was 2.3% year-over-year in August 2024.

Core PCE inflation stood at 2.7%. CPI inflation data showed 2.6% growth in August 2024. This was a big drop from the 8.9% peak in 2022.

Factors Contributing to the Moderation of Inflation

Several factors have helped moderate inflation in Sri Lanka. Improved supply conditions have greatly impacted inflation outcomes. Weak private consumption has also kept inflation in check.

Currency appreciation has played a role in reducing inflationary pressures. Household disposable incomes remained low, contributing to subdued demand.

Inflation Measure	August 2024	Peak (Year)
Overall PCE	2.3%	6.5% (2022)
Core PCE	2.7%	3.7% (2023)
CPI	2.6%	8.9% (Peak)
Housing	5.4%	–
Core (ex-housing)	2.1%	–

Impact on Cost of Living and Consumer Spending

The drop in inflation rates has positively affected Sri Lanka’s cost of living. As prices stabilize, households should see improved purchasing power. However, private consumption recovery is likely to be slow.

Disposable incomes are still affected by the economic crisis. The government’s ongoing reforms and efforts to attract foreign investment should support growth.

These measures are expected to improve living standards in the coming years. Economic growth and stability remain key goals for Sri Lanka’s future.

Conclusion

Sri Lanka’s economic recovery depends on implementing crucial policies. Recent progress is encouraging, but the country’s stability remains fragile. Limited buffers leave Sri Lanka vulnerable to risks like insufficient debt restructuring and policy uncertainty.

The government can boost the economy by implementing comprehensive structural reforms. These should focus on fiscal management, financial sector, and social assistance. Reforms in state-owned enterprises and trade can also help attract investment.

Policymakers must balance short-term measures with long-term changes. Building resilience through robust buffers is crucial. This can help Sri Lanka withstand future shocks and create a more stable economy.

By addressing these issues, Sri Lanka can increase investor confidence. This can lead to fresh capital inflows and sustainable growth. Ultimately, these efforts can help reduce poverty in the medium term.

Sri Lanka has unveiled a domestic debt restructuring plan to tackle its economic crisis. The strategy aims to meet IMF bailout conditions and restore stability. The goal is to reduce overall debt to 95% of GDP by 2032.

Sri Lanka is implementing major economic reforms as part of the IMF program. The plan includes a 30% haircut for local dollar-denominated bonds. These bonds will have a six-year maturity at 4% interest.

Bilateral dollar creditors have a different option. They can choose no principal haircut with a 15-year maturity. This option includes a nine-year grace period at 1.5% interest.

The restructuring also covers local currency bonds held by superannuation funds. These will be swapped for longer maturity bonds with 9% interest. CBSL-held Treasury bills will become bonds maturing between 2029-2038.

Sri Lanka’s economy faces severe challenges. The country’s GDP shrank by 7.8% in 2022 and 11.5% in Q1 2023. Real wages fell by 30-50% in 2022. Nearly 43% of children under five suffer from malnutrition.

The government aims to finalize debt restructuring talks by September. This aligns with the first review of its IMF program. The goal is to address pressing issues and pave the way for economic recovery.

Overview of Sri Lanka’s Domestic Debt Restructuring Plan

Sri Lanka’s Central Bank has unveiled a new debt restructuring strategy. This plan aims to restore economic stability and meet IMF bailout conditions. It’s a vital step towards debt sustainability and improved fiscal policy.

The plan covers part of Sri Lanka’s $42bn domestic debt. It’s crucial for reaching the IMF’s target of reducing overall debt to 95% of GDP by 2032. Local currency bonds will be exchanged for longer-term bonds with 9% interest.

Impact on Retirement Funds

Sri Lanka’s retirement funds, worth Rs 4,354 billion, are greatly affected by this plan. The real value of these funds dropped by over 40% in 2022. This was due to currency depreciation and price increases.

Retirement Fund	Total Asset Value (Rs billion)	Accounts (millions)
Employees’ Provident Fund (EPF)	3,919	19.2
Other Retirement Funds	435	–
Total	4,354	–

The debt restructuring could cause retirement funds to lose 29% of their value over 10 years. By 2038, they might lose 47% of their value. These funds’ value is expected to drop from 17.7% to 9.4% of GDP.

Importance for External Debt Renegotiations

The success of this plan is vital for Sri Lanka’s $36bn external debt talks. This includes $24bn held by bondholders and creditors like China, Japan, and India. By showing commitment to reforms, Sri Lanka can improve its chances for favorable external debt terms.

Government Launches Domestic Debt Restructuring Plan

Sri Lanka’s government has unveiled a domestic debt restructuring plan to address the country’s economic crisis. The plan targets $42.1 billion of Sri Lanka’s $83 billion total debt. It’s supported by 122 lawmakers in the 225-member parliament.

This plan is part of the conditions for the IMF bailout package. It aims to tackle the domestic portion of Sri Lanka’s debt.

Options for Holders of Locally Issued Dollar-Denominated Bonds

The restructuring plan offers three options for holders of locally issued dollar-denominated bonds. These bonds include Sri Lanka Development Bonds (SLDBs).

Option	Principal Haircut	Maturity	Interest Rate
1	30%	6 years	4%
2	–	15 years (9-year grace period)	1.5%
3	Exchange for local currency bonds	10 years	SLFR + 1%

Treatment of Local Currency Bonds Held by Superannuation Funds

Superannuation funds’ local currency bonds will be exchanged for longer maturity bonds. These new bonds will mature between 2027 and 2038 with a 9 percent interest rate.

Funds refusing to participate may face a 30 percent tax penalty. This applies to pension funds and other superannuation funds.

Exclusion of Treasury Bills and Bonds Held by Banking Sector

Central Bank governor Nandalal Weerasinghe proposed converting treasury bills into longer-maturity treasury bonds. However, the banking sector’s treasury bills and bonds are excluded from restructuring.

This exclusion considers the significant stress currently faced by the banking sector.

Importance of Domestic Debt Rework for Foreign Debt Renegotiations

The domestic debt restructuring is expected to boost foreign debt renegotiations. Sri Lanka aims to reduce its $36bn foreign debt by $17 billion through restructuring.

The government is engaging with foreign creditors like the Paris Club, India, and China. They plan to finalize debt restructuring talks by September.

This timeline aligns with the first review of Sri Lanka’s IMF programme. The IMF recently approved a nearly $3 billion bailout package for the country.

Conclusion

Sri Lanka’s domestic debt restructuring plan is a key step towards economic recovery. The Central Bank will present the framework to Parliament for approval. They aim to finalize the bond exchange of superannuated funds by July’s end.

The government declared a five-day holiday from June 29 to July 3. This move will help manage market volatility and allow for loss recognition from bond sales. The plan’s success is crucial for creditor negotiations and regaining financial stability.

The debt agreements will reduce the government’s annual fiscal requirement by over 13%. This reduction will occur between 2027-2032, keeping debt payments below 4.5% of GDP. The government plans to clear bilateral loan installments by 2028 and settle concessional loans by 2043.

The President has outlined a four-step plan to boost the economy. It focuses on securing credit, implementing fiscal discipline, and attracting foreign investment. The goal is to transform Sri Lanka into a developed economy by 2048.

The restructuring plan’s execution within two years shows remarkable progress. Moving from near-bankruptcy to positive outcomes is impressive by global standards. This plan will play a vital role in creating a stable, prosperous future for Sri Lanka.

The historic decline of the Sri Lankan rupee against the US Dollar in 2022 marks a crisis. It fell 44.5% against the dollar by August 19, 2022. This drop came amid severe forex shortages and soaring inflation.

The US Dollar hit a high of Rs. 369 between March 7th and May 13th, 2022. This was a big jump from Rs. 304 on March 20th. By November 30th, the rupee had fallen to Rs. 329 against the dollar.

The rupee’s sharp drop of Rs 164.75 against the US Dollar has hurt the economy. It also fell against other major currencies during this time.

The rupee declined against the Indian rupee (40.5%), Euro (37.6%), and pound sterling (37.1%). It also dropped against the Japanese yen (34.3%). These drops made the economic crisis even worse.

Factors Contributing to the Sharp Depreciation of the Sri Lankan Rupee

The Sri Lankan Rupee plummeted against the US Dollar in 2022. Several factors led to this economic crisis. Forex market instability, rising import costs, and inflation put enormous pressure on the currency.

Economic Crisis and Forex Market Volatility

Sri Lanka’s economy faced numerous challenges before the 2022 crisis. The 2018 constitutional crisis and 2019 Easter Sunday attacks weakened the economy. COVID-19 in 2020 and 2021 further destabilized it.

The Rupee lost 40% of its value against the dollar in just three months. This happened from February 2022 onwards. Real GDP shrank by 7.1% year-on-year in 2022’s first three quarters.

Surge in Import Costs and Inflation

Inflation, measured by the Colombo CPI (CCPI), hit 70% in September 2022. It slowed to 54% by January 2023. Rising import costs and currency devaluation heavily burdened businesses and consumers.

The exchange rate settled at about 360 Rupee/Dollar in May 2022. This was under the Central Bank of Sri Lanka’s FX market guidance.

Year	Total Revenue	Tax Revenue	Total Expenditure and Net Lending	Overall Balance	Primary Balance
2022	2,012	1,751	4,473	-2,460	-895

US Dollar Strength and Currency Shortage

The strong US Dollar and low foreign currency reserves worsened the Rupee’s decline. Gross international reserves (GIR) were about $1.9 billion in December 2022.

The government’s decision to use up reserves before seeking IMF help fueled the economic crisis. This choice left the country with almost no reserves in early 2022.

Impact of the Rupee Depreciation on the Sri Lankan Economy

The Sri Lankan rupee’s sharp fall has shaken the country’s economy. It’s affected living costs, inflation, imports, and debt repayment. On June 20, the rupee hit Rs. 170.56 against the US dollar. This drop has worsened Sri Lanka’s economic troubles.

Rise in Cost of Living and Inflation

The weak rupee has made life costlier for Sri Lankans. In September 2022, inflation hit a record 69.8%. Food prices soared even higher, reaching 94.9%.

The National Consumer Price Index rose 58.9% in June 2022. Meanwhile, the Colombo Consumer Price Index jumped 60.8% in July 2022.

Challenges for Importers and Businesses

Sri Lankan importers and businesses face tough times. The weak rupee has made imports pricier. This hurts companies that rely on foreign goods and materials.

Consumers now pay more, while businesses earn less. Fuel price hikes have also increased the country’s oil import costs.

Strain on Foreign Debt Repayment

By March 2022, Sri Lanka’s government debt hit Rs. 21,696.6 billion. This was up from Rs. 17,589.4 billion in late 2021.

The falling rupee makes foreign debt repayment harder. The debt’s value in rupees has grown. This strains the country’s finances further. Sri Lanka’s external debt reached USD 37.5 billion in June 2024.

Sri Lankan Rupee Depreciates Sharply Against US Dollar in 2022

The Sri Lankan Rupee faced major challenges in 2022. It sharply depreciated against the US Dollar and other currencies. The Central Bank reported a 44.5% drop against the US Dollar by August 19, 2022.

This decline stemmed from the country’s economic crisis and forex market instability. The US Dollar’s overall strength also played a role.

Rupee Depreciation by 44.5% Against US Dollar in 2022

The Rupee hit an all-time low of 372.00 against the US Dollar in May 2022. This sharp fall had wide-reaching effects on Sri Lanka’s economy. It led to higher import costs, inflation, and strain on foreign debt repayment.

Businesses and individuals felt the impact too. Many Sri Lankans worried about the rising cost of living.

Cross Currency Exchange Rate Movements

The Rupee’s decline wasn’t limited to the US Dollar. It also fell against other major currencies during this time. The Central Bank reported drops against the Indian Rupee, Euro, Pound Sterling, and Japanese Yen.

These cross currency exchange rate movements further highlighted Sri Lanka’s economic struggles in 2022.

Currency	Depreciation (%)
US Dollar	44.5%
Indian Rupee	40.5%
Euro	37.6%
Pound Sterling	37.1%
Japanese Yen	34.3%

Conclusion

The Sri Lankan Rupee’s fall against the US Dollar in 2022 fueled the country’s economic crisis. Forex shortages, inflation, and currency movements caused this decline. This led to higher living costs and business challenges.

The crisis caused a 7.8% GDP drop in 2023. Hyperinflation hit 73% in September 2022. The government asked the IMF and World Bank for help to stabilize the economy.

Some positive signs emerged. Reserves grew to US$ 2.6 Billion in July 2023. The IMF approved a US$ 3 Billion bailout program. However, recovery will be slow and difficult.

Sri Lanka must focus on helping its most vulnerable citizens. It also needs to boost competitiveness and attract foreign investment. A well-planned approach is key to overcoming this crisis.