Sri Lanka, once at the centre of one of Asia’s deepest financial crises in decades, is pushing through sweeping reforms aimed at stabilising its battered economy and regaining investor confidence. The government’s decision to embrace market-driven changes marks a dramatic pivot for a nation that only three years ago defaulted on its sovereign debt and endured crippling shortages of food, fuel, and medicines.

The shift comes under President Anura Kumara Dissanayake, who took office pledging to renegotiate the $2.9 billion IMF bailout but has instead chosen to work within the programme while pursuing targeted concessions to attract foreign investment. The approach reflects both pragmatism and necessity: Sri Lanka has little choice but to integrate with global markets if it hopes to recover from the devastation of its 2022 collapse.

Why the Economy Collapsed

Sri Lanka’s troubles were years in the making. Heavy foreign borrowing to finance ambitious infrastructure projects, coupled with weak export performance and falling remittances, left the country exposed to external shocks. When the COVID-19 pandemic decimated tourism, one of the island’s biggest sources of foreign exchange, reserves quickly dried up.

By 2021, policy missteps worsened the situation. A ban on chemical fertilisers crippled agriculture, inflation surged, and the government resorted to money printing to cover deficits. By April 2022, Sri Lanka defaulted on its foreign debt, the first such instance in its history. Queues stretched for kilometres outside fuel stations, power cuts lasted up to 13 hours a day, and mass protests forced then-President Gotabaya Rajapaksa to resign.

The IMF rescue deal stabilised the situation, but at a heavy cost: higher taxes, subsidy cuts, and steep hikes in electricity and fuel tariffs. The adjustment triggered anger among citizens already reeling from high living costs, yet it laid the groundwork for fiscal discipline and debt restructuring talks with key creditors, including China, India, and private bondholders.

Policy Shifts Under the New Administration

Dissanayake’s government has moved swiftly to consolidate these gains. Rather than walking away from IMF conditions, it has honoured most commitments, including reducing losses at state-owned enterprises and adjusting energy prices to reflect costs.

One major change has been in the energy sector. The debt-ridden Ceylon Electricity Board is being unbundled into six separate companies to improve efficiency, despite fierce resistance from trade unions. Power tariffs, cut earlier in the year, have since been raised again to stabilise finances. The government is also pursuing investment to quadruple capacity at its main oil refinery and accelerate renewable energy projects, aiming to reduce dependence on costly fuel imports.

Another significant step is the reform of investment rules. Colombo has negotiated flexibility with the IMF to grant tax concessions and duty exemptions for large-scale projects above $50 million. Officials argue this is essential to double foreign direct investment, which currently hovers around $1 billion annually.

The reforms extend beyond traditional sectors. Nearly $100 million has been committed to cannabis cultivation projects aimed at medical oil exports, signalling a willingness to tap unconventional revenue sources. Additionally, the government is reviewing opportunities in ports, logistics, and IT services as it seeks to diversify the economic base.

Reforms are not without pain. More than 70 percent of Sri Lankans still struggle to meet basic needs, and inflation, while easing, continues to weigh heavily on households. Unemployment has risen, and poverty levels remain higher than before the crisis.

To mitigate discontent, the government has expanded targeted welfare schemes and kept certain food subsidies in place. Yet ministers admit trade-offs are unavoidable. “We have to balance between offering fair prices to consumers and ensuring energy producers stay profitable,” Energy Minister Kumara Jayakody recently said, reflecting the broader challenge of sustaining reforms while preserving public support.

Sri Lanka’s recovery strategy is also shaped by its delicate geopolitical balancing act. The island sits at a crucial point in the Indian Ocean, attracting competing interest from China, India, Japan, and Gulf states. Colombo is courting all sides for investment, from Sinopec’s proposed $3.7 billion refinery in Hambantota to renewable energy ventures backed by Indian firms.

The government hopes this diversification will prevent over-reliance on any single partner — a vulnerability that exacerbated the earlier debt crisis when Chinese loans became a political flashpoint.

Prospects for Growth

Officials forecast GDP growth of 4.5 percent this year, with the potential to accelerate to 6–8 percent in the coming years if reforms hold and investment flows increase. Tourism, which has rebounded strongly with over 2 million arrivals projected for 2025, provides a vital cushion, while remittances have recovered as workers return abroad.

Still, risks loom large. Debt restructuring talks are not yet complete, global oil prices remain volatile, and social resistance to privatisation could derail progress. Analysts caution that the government’s parliamentary majority gives it room to manoeuvre now, but sustained recovery will require consistent execution and broader consensus.

For Sri Lanka, the choice to embrace market-oriented reforms is less ideological than existential. After years of inward-looking economic management and populist policy reversals, the country’s leadership appears committed to building credibility with investors and institutions.

If successful, the reforms could transform Sri Lanka from a cautionary tale into a model of resilience. By reconfiguring its power sector, liberalising investment rules, and stabilising its finances, the island has an opportunity to reposition itself as a competitive hub in South Asia.

The path forward is fraught with political and social challenges, but the stakes could not be higher. For a nation that has endured empty shelves, mass protests, and political upheaval, the opening of its economy is not just an economic choice — it is the foundation of its recovery.

(Adapted from USNews.com)

Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy