Sri Lanka Economic Forecast

The economy likely remained weak in Q1 but appeared to improve. Compared to the prior quarter, industrial production fell less, and the manufacturing and services PMIs averaged higher. Furthermore, remittances grew 82% in the quarter, compared to 33% in the fourth quarter, likely supporting private spending. Turning to Q2, the government said in late April that it would delay the publication of a plan to restructure the debt of domestic bondholders until May. Restructuring domestic debt will be key if the government is to receive further tranches of IMF funds as well as debt relief from bilateral creditors—who met formally for the first time to discuss restructuring Sri Lanka’s debt in early May. China sat in as an observer; the country has yet to participate in the talks directly.

Nationwide inflation eased sharply to 33.6% in April from 49.2% in March. A stronger currency likely helped bring down price pressures in the month. Inflation should cool further this year due to lower pressure on the currency. The key factors to monitor are commodity prices plus fiscal and monetary policy.