According to First Capital Research (FCR), Sri Lanka’s economic indicators exhibited positive signs of recovery in February 2024. One significant indicator is the rise in gross official reserves, which reached USD 4.5 billion in January 2024. This growth can be attributed to two factors: an inflow of USD 700 million from multilateral organizations in December 2023 and foreign exchange purchases made by the Central Bank of Sri Lanka (CBSL). FCR projects these reserves to reach USD 5 billion by the end of 2024 and USD 6 billion in 2025, supported by continued positive current account balances and sustained inflows from multilateral agencies.
Another positive indicator is the improvement in private sector credit. December 2023 saw a 1.3% month-on-month growth, bringing the total credit to LKR 7.4 billion. This growth can be partially attributed to the successful completion of Sri Lanka’s debt restructuring negotiations with bilateral creditors, including the EXIM Bank of China and the Official Creditor Committee (OCC) co-chaired by India, Japan, and France. This successful negotiation paved the way for Sri Lanka to receive the second tranche of its USD 337 million extended fund facility from the International Monetary Fund (IMF). Additionally, official sources anticipate the signing of a Memorandum of Understanding (MoU) with the Paris Club within the coming weeks.
However, Sri Lanka is still engaged in debt restructuring discussions with private creditors, including ISB bond holders and the China Development Bank, aiming to restructure USD 16.5 billion of debt. These negotiations are expected to be completed within the next six months.
On the inflation front, Sri Lanka witnessed a decrease in the Colombo Consumer Price Index (CCPI) in February 2024. The CCPI fell from 6.4% in January to 5.9% in February, primarily due to a decline in non-food inflation. While food inflation saw a slight increase, FCR expects the CCPI to remain within single digits by the end of 2024, mitigating significant concerns about future price levels.
Finally, the Business Cycle Indicators (BCI) also displayed positive signs, experiencing a 27-point surge in December 2023, reaching a closing score of 85. This improvement in business confidence is primarily attributed to securing the second tranche from the IMF and progress made on debt restructuring efforts.