Sri Lanka avoids recession, but outlook remains clouded

People stand in a queue to buy diesel at a Ceylon Petroleum Corporation fuel station in Colombo on Tuesday. Sri Lanka has been facing shortages of food and fuel amid a dollar squeeze, with queues seen outside gasoline stations and power cuts of as long as seven hours in certain parts of the island.

Sri Lanka avoided a recession in the December quarter, a trend that may not hold for long as the island nation faces depleting foreign currency reserves and a spillover from the war in Ukraine dims recovery prospects. Gross domestic product in the fourth quarter grew 1.8% from a year earlier, the Department of Census and Statistics said in a statement on its website on Tuesday. That’s mostly in line with the median estimate for a 2% expansion in a Bloomberg survey of economists and reverses a 1.5% contraction in the previous quarter. While an easing of nationwide pandemic restrictions in October helped the economy gain momentum, geopolitical concerns and Asia’s fastest inflation may thwart efforts to sustain growth. The country has been facing shortages of food and fuel amid a dollar squeeze, with queues seen outside gasoline stations and power cuts of as long as seven hours in certain parts of the island. Authorities have taken a series of steps including currency devaluation, import restrictions, fuel price hikes and raising policy rates to weather the crisis. The International Monetary Fund sees the island nation’s GDP expanding 2.6% this year. In its Article IV consultation report released on Friday, the IMF said Sri Lanka faces “solvency” issues and that its “debt overhang” will impede growth and threaten macroeconomic stability. President Gotabaya Rajapaksa is eyeing support from the multilateral institution to tide over the crisis. Negotiations on a possible aid package are expected to start in April, when Finance Minister Basil Rajapaksa, a brother of the president, travels to Washington.