Sri Lanka's economy shrinks 8.4pc amid fertiliser, fuel shortages

Sri Lanka's economy shrank 8.4 per cent in the quarter through June from a year ago in one of the steepest declines seen in a three-month period, amid fertiliser and fuel shortages during the nation's most severe financial crisis in more than seven decades.

An acute dollar shortage, caused by economic mismanagement and the impact of the COVID-19 pandemic, has left residents struggling to pay for essential imports including food, fuel, fertiliser and medicine, reports Reuters. 

The state-run Census and Statistics Department said agriculture shrank 8.4 per cent in the second quarter and industries by 10 per cent, while services dropped 2.2 per cent, compared to a year ago.

A shortage of chemical fertilisers during the quarter impacted agriculture production, especially the country's staple rice, while restrictions imposed on fuel imports reduced manufacturing activity, the government said.

In the first quarter, the island of 22 million people saw its growth contract by 1.6 per cent. Sri Lanka's central bank estimates the economy to contract by about 8 per cent in 2022.

“This is the second steepest contraction we have ever seen. The last was when Sri Lanka posted negative growth of 16 per cent in the Q2 of 2020 due to COVID-19 pandemic lockdowns," said Dimantha Mathew, head of research at First Capital.

"We are expecting Q3 and Q4 growth to be negative as well and for overall growth to contract by 10 per cent-12 per cent. Inflation has continued to grow in the Q3 and has hit private sector consumption, which will likely spill over into the fourth quarter."