Sri Lanka has stabilised. But stabilisation is not the same as resilience.
There is an understandable temptation to breathe a sigh of relief.
The queues have disappeared. Power cuts have become a memory. Foreign exchange reserves have strengthened, inflation has retreated from its frightening highs and confidence has gradually returned to businesses and consumers alike. By almost every conventional measure, Sri Lanka is in a considerably healthier position than it was just a few years ago.
That progress deserves recognition.
Yet one of the dangers of recovery is that it can create the illusion that the crisis has passed permanently. Economics, regrettably, has never been quite so accommodating.
This week provided a timely reminder.
As conflict in the Middle East intensified once again, Brent crude oil climbed above USD 85 per barrel, its highest level in more than a month. Markets across Asia immediately reacted. Currencies weakened, bond yields edged higher and investors began reassessing the inflation outlook.
Sri Lanka was not immune.
The rupee has continued to trade around the Rs. 336 mark against the US dollar. That is by no means a crisis, nor should every movement in the exchange rate become cause for alarm. Exchange rates fluctuate every day. The more important question is what lies behind those movements and whether the economy is capable of absorbing external shocks without losing its balance.
That is the distinction between recovery and resilience.
Recovery is the process of climbing back onto one’s feet after a fall. Resilience is the ability to remain standing when the next push inevitably comes.
Sri Lanka has made genuine progress in the first task.
Recovery’s Quiet…
The second remains unfinished.
The country still imports almost all of its petroleum requirements. A sustained increase in oil prices therefore affects virtually every sector of the economy. Transport costs rise.
Electricity generation becomes more expensive. Manufacturing margins narrow. Food distribution costs increase. Inflation, which had finally begun behaving itself, finds another reason to reappear.
This is precisely why international developments matter so much for small open economies.
There is very little that policymakers in Colombo can do to influence events in Washington, Tehran or the Strait of Hormuz. What they can do is continue strengthening the domestic foundations that make Sri Lanka less vulnerable when those events occur.
That means maintaining fiscal discipline even when political pressure argues otherwise. It means encouraging exports rather than merely celebrating them. It means diversifying energy sources so that every geopolitical crisis does not immediately translate into higher domestic costs.
Above all, it means continuing reforms not because the IMF requires them, but because Sri Lanka requires them.
There is another lesson that deserves equal attention.
During the years preceding the 2022 collapse, too many warning signs were dismissed as temporary inconveniences. Currency pressures were explained away. Fiscal deficits were rationalised. External risks were underestimated until they became internal emergencies.
One hopes those lessons have now been learnt.
The encouraging news is that today’s Sri Lanka is better prepared than yesterday’s.
Foreign reserves are stronger, institutions are more disciplined and economic management is considerably more predictable than during the country’s darkest financial days.
The less encouraging news is that no amount of prudent management can entirely insulate a nation from global instability.
The world remains uncertain. Oil markets remain volatile. Shipping costs can rise overnight. Inflation can return with surprising speed.
Be that as it may, Sri Lanka’s greatest achievement will not be escaping the last crisis. It will be ensuring that the next global shock becomes an inconvenience rather than another national emergency.
