Sri Lanka’s Economic Rebound

After one of the worst economic crises in the country’s history, the economy of Sri Lanka has rebounded, growing 5 percent in 2024 and outperforming the International Monetary Fund’s (IMF) projection of 4.5 percent growth.

Crisis: Origins and response

The crisis began in 2022 when the country ran out of foreign exchange reserves to finance imports, including essentials such as food and fuel. Soaring inflation and a historic default on its foreign debt prompted an economic “freefall,” causing the country’s gross domestic product (GDP) to shrink by 7.3 percent in 2022 and 2.3 percent in 2023. Then-President Gotabaya Rajapaksa was ousted after protests and widespread unrest.

Despite these setbacks, Sri Lanka’s economy has managed a turnaround, growing by 5 percent in 2024 and setting the country on the path to recovery and growth.

The recovery process begins

The first step in the recovery process was the negotiation of a bailout. Rajapaksa’s successor, Ranil Wickremesinghe, secured a $2.9 billion four-year bailout from the IMF after cutting certain subsidies, raising prices, and boosting taxes, which allowed Sri Lanka’s government to rework its finances and invest in key growth areas.

The next key step was renegotiation of foreign debt. After several meetings with bondholders and bilateral creditors, including Japan, China, and India, Sri Lanka restructured its $25 billion debt to make repayments less cumbersome on the country’s economy. This eased pressures on consumers and allowed for more spending throughout the economy.

Sectors fueling Sri Lanka’s resurgence

Following the government’s proactive response to the crisis, Sri Lanka saw growth across several sectors of its economy, the first being agriculture, which contributes to about 7 percent of the nation’s GDP, with wheat grain, lentils, and dairy products being some of its primary subsectors. It grew by 8.4 percent in 2024 and contributed nearly $6 billion to Sri Lanka’s economic output.
Industrial output rose 25.5 percent in 2024 compared to the year prior. This growth, primarily in tea, rubber, and textiles, contributed $21.5 billion to Sri Lanka’s economy.

Sri Lanka’s service sector was the most significant contributor to recovery, growing by 57.5 percent in 2024 and contributing $48.5 billion to its GDP as demand increased in digital marketing, hotel management, and software development.

Projections: Optimism amidst challenges

Sri Lanka’s growth and outperformance of projections could indicate that the nation is on the right track in terms of economic recovery, but the nation must overcome several obstacles before the crisis can be declared over.

IMF deputy managing director Kenji Okamura said in an IMF statement in February that he believes the reforms in Sri Lanka are “bearing fruit,” adding that the country’s economic recovery “has been remarkable” and that he expects this growth to continue. Raynal Wickremeratne, co-head of research at Softlogic Stockbrokers, expressed optimism for the Sri Lankan economy, noting its outperformance of projections. The challenges the government must overcome include:

• Boosting tax compliance: After tax increases in 2023, many Sri Lankan citizens have been reluctant to pay these larger amounts as the country’s economy continues its recovery. If Sri Lanka wants to continue along the road to economic recovery and ensure their bailout package from the IMF is secured, it must find ways to ensure that citizens pay taxes to fund future projects and subsidies.
• Restructure finances: Under Rajapaksa, large tax cuts caused government revenue to shrink and the nation’s budget deficit to soar. To combat this, the Sri Lankan government began printing more money, ignoring the IMF’s guidance to reduce spending and raise interest rates and taxes. Sri Lanka needs to heed the advice from the IMF, reorganize its finances, and prioritize spending in areas that will further stimulate economic growth.

While Sri Lanka has a long way to go, if it continues to monitor its economic situation and act responsibly, the country should be able to overcome its economic crisis and could position itself as one of the world’s foremost emerging markets.

About the author

William Sanders ’25 of Shreveport, Louisiana, is an EMI Fellow earning an MPS in Management at the Samuel Curtis Johnson Graduate School of Management. He completed his undergraduate education at the University of Arkansas, majoring in international business economics with a minor in French. Throughout his education, he has had a passion for exploring emerging markets and the impact they have on the global economy. After his graduation from Cornell, he plans to attend law school to explore the intersection of the global legal landscape and the legal challenges that emerging markets face.

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