Due to its economic woes, Sri Lanka has entered a severe crisis characterized by a shortage of dollars needed to import essential goods like food, fuel, and medicine. This has resulted in a sharp depreciation of the rupee and rampant inflation, exacerbating the country's financial turmoil.
Sri Lanka's Economic Downturn Prompts Low-Income Status Approval for Funding
In response to this dire situation, the cabinet of Sri Lanka has endorsed a proposal to downgrade the nation's economic classification to that of a "low-income country." This decision aims to facilitate access to concessional funding from international organizations, as disclosed by cabinet spokesperson Bandula Gunawardane on Tuesday.
The economic downturn has been starkly reflected in the country's shrinking GDP, which contracted by a significant 8.4 percent annually in the June quarter, representing one of the steepest quarterly declines recorded. Sri Lanka's per capita GDP stood at $3,815 in 2021, previously categorizing it as a lower-middle-income economy according to World Bank standards.
Gunawardane emphasized that the move to downgrade Sri Lanka's economic status to "low income" on the World Bank's list was prompted by the urgent need for financial assistance. Representatives of international organizations have indicated that such a classification would streamline access to funding, acknowledging the gravity of the financial crisis faced by the country.
Sri Lanka, with its population of 22 million, confronts its most severe economic downturn since gaining independence in 1948. Multiple factors have contributed to this predicament, including the devastating impact of the COVID-19 pandemic on its tourism-dependent economy, reduced remittances from overseas workers, escalating oil prices, populist tax reductions, and a blanket ban on the import of chemical fertilizers last year, which inflicted significant damage on the agriculture sector.
The Central Bank of Sri Lanka, having maintained policy rates unchanged recently, foresees a substantial 8.7 percent contraction in GDP for the year 2022. However, the World Bank has yet to offer a response to queries regarding this development.
