Sri Lanka’s economy grew by 5% in 2024, the highest since 2017, marking a strong recovery after years of economic struggles. The growth was driven by improvements in industries and services, as the country bounced back from a severe crisis in 2022, which included a debt default and a 7.3% economic contraction.
Despite the growth, Sri Lanka’s gross official reserves dropped to $6.09 billion by the end of 2024, down $360 million from the previous month. This marks the third month in a row of declining reserves. Central Bank Governor Nandalal Weerasinghe explained that the drop was due to debt repayments at the end of the year. However, overall reserves for the year are still up by $1.6 billion.
The Central Bank has been following deflationary policies since 2022, including reducing its Treasury bill holdings and allowing the currency to strengthen. These steps helped lower prices for imported energy like coal and oil, supporting the economy’s recovery.
However, concerns remain. Towards the end of 2024, the Central Bank shifted to policies that increased the money supply, encouraging banks to give out loans without enough deposits. This practice risks draining reserves further, especially when the money is used for imports. Experts warn that this approach could lead to inflation and destabilize the currency, repeating problems seen in the past.
To maintain its recovery, Sri Lanka needs to carefully manage its policies. Balancing growth with reserve stability will be key to ensuring the country avoids future economic crises while continuing its path toward stability
