Economic Performance Report: Sri Lanka (May 2025) and Sustainable Development Goal Implications

Overview of External Sector Performance

Key Trade and Inflow Metrics

• Total goods imports for May 2025 were recorded at 1,507 million US dollars, a decrease of 179 million US dollars from the previous month.
• Gross inflows, comprising goods exports, remittances, and services, amounted to 2,140 million US dollars.
• A surplus of 633 million US dollars was observed when comparing gross inflows to goods imports.
• Services inflows experienced a decline, falling to 464.6 million US dollars from 602 million US dollars in April.

Analysis of Economic Policies and their Impact on Sustainable Development

Monetary Policy and Macroeconomic Stability (SDG 8)

The current economic framework presents several challenges to achieving SDG 8 (Decent Work and Economic Growth) by undermining macroeconomic stability. Key concerns include:

1. The practice of implementing ad hoc taxation under IMF programs, such as the new tax on foreign-earned dollar income, creates an unpredictable policy environment that can deter foreign investment and service exports.
2. Monetary policy decisions, particularly those involving money printing to maintain low interest rates, risk fueling unsustainable import levels and creating currency crises, which are detrimental to stable economic growth.
3. There are significant concerns that current interest rates are insufficient to manage debt repayments and build foreign reserves, potentially jeopardizing long-term financial stability and progress towards the SDGs.
4. A history of missing IMF program reserve targets highlights systemic weaknesses in monetary management, which directly conflicts with the goal of fostering a stable environment for sustainable development.

Sectoral Performance and SDG Alignment

• Services Sector and Decent Work (SDG 8)

  The decline in service sector revenue, including a fall in tourism earnings to 164 million US dollars and IT/BPO services to 61.6 million US dollars, poses a direct threat to employment and economic growth under SDG 8. The recent introduction of taxes on foreign currency earnings may be a contributing factor to this downturn, discouraging vital inflows that support decent work.

• Investment, Infrastructure, and Innovation (SDG 9)

  Imports of investment goods stood at 344.3 million US dollars. While investment is critical for SDG 9 (Industry, Innovation, and Infrastructure), financing these imports through central bank credit or printed money creates a mismatch with real economic inflows. This practice leads to unsustainable construction booms and industrial activity that are not aligned with long-term development goals and can precipitate economic instability.

• Consumption Patterns and Sustainable Communities (SDG 11 & SDG 12)

  The import of personal vehicles, valued at 118 million US dollars in May, points to consumption patterns that challenge SDG 11 (Sustainable Cities and Communities) and SDG 12 (Responsible Consumption and Production). A reliance on imported vehicles, often financed by credit, contributes to urban congestion and environmental degradation, while diverting foreign exchange from more productive, sustainable investments.

Conclusion: Challenges to Achieving Sustainable Development Goals

Key Challenges Identified

1. Policy Instability: The prevailing framework of flawed exchange controls and reactive monetary policy undermines the stable macroeconomic environment required for SDG 8 and discourages the global partnerships essential for SDG 17 (Partnerships for the Goals).
2. Unsustainable Economic Cycles: The cycle of financing consumption and investment through money creation leads to recurring currency crises and import controls, hindering progress towards responsible consumption and production (SDG 12) and the development of sustainable infrastructure (SDG 9).
3. Vulnerability in Growth Sectors: The decline in key service sectors like tourism and IT/BPO, exacerbated by unpredictable tax policies, weakens the foundation for achieving decent work and sustained economic growth as outlined in SDG 8.

Analysis of Sustainable Development Goals (SDGs) in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

1. SDG 8: Decent Work and Economic Growth
   • The article’s core focus is on Sri Lanka’s economic performance, discussing key components like imports, exports, and services income (tourism, IT/BPO). It also covers macroeconomic policies, such as money printing and interest rates, which directly impact economic stability and growth. The mention of remittances (labour exports) also connects to this goal.
2. SDG 9: Industry, Innovation and Infrastructure
   • The article references imports of investment goods, vehicle imports, and construction activities. These are directly related to the state of a country’s infrastructure and industrial base. The mention of the IT/BPO sector also touches upon the innovation aspect of this goal.
3. SDG 17: Partnerships for the Goals
   • This goal is addressed through discussions on macroeconomic policy coherence, domestic resource mobilization (new taxes), debt sustainability (external default, loan payments), and international financial frameworks (IMF programs). The article highlights the challenges in maintaining policy coherence and financial stability.

2. What specific targets under those SDGs can be identified based on the article’s content?

1. Under SDG 8: Decent Work and Economic Growth
   • Target 8.1: Sustain per capita economic growth. The article provides data on key economic activities like trade and services income, which are fundamental components for measuring economic growth.
   • Target 8.10: Strengthen the capacity of domestic financial institutions. The text extensively discusses the central bank’s policies, interest rates, credit financing for imports, and the overall stability of the financial system, which are central to this target.
2. Under SDG 9: Industry, Innovation and Infrastructure
   • Target 9.a: Facilitate sustainable and resilient infrastructure development. The article discusses financing for “investment goods” and “construction,” but highlights the unsustainable nature of this financing when based on “printed money,” which leads to economic instability rather than resilient development.
3. Under SDG 17: Partnerships for the Goals
   • Target 17.1: Strengthen domestic resource mobilization. The article explicitly mentions that “Sri Lanka started taxing foreign earned dollars income from April,” which is a direct measure aimed at improving domestic revenue collection.
   • Target 17.4: Assist developing countries in attaining long-term debt sustainability. The article points to a failure in this area by mentioning an “external default,” the difficulty in making “interest and loan payments,” and the need for IMF programs to manage the crisis.
   • Target 17.13: Enhance global macroeconomic stability. The entire article serves as a case study on the lack of macroeconomic stability, detailing how “money printing,” “inflationary rate cuts,” and “flawed” central bank frameworks lead to a “full-blown currency crisis.”

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

1. Yes, several quantitative and qualitative indicators are present:
   • Value of monthly imports: Mentioned as “$1,507 million US dollars in May 2025.” This is an indicator for economic activity (Target 8.1).
   • Value of monthly gross inflows: Stated as “$2,140 million US dollars in May 2025” from goods, labour, and services, indicating the country’s earning capacity (Target 8.1).
   • Value of services income: The article specifies tourism earnings (“$164 million US dollars in May”) and IT/BPO services income (“$61.6 million US dollars”), which are indicators of economic diversification and growth (Target 8.1).
   • Value of investment goods imports: Reported as “$344.3 million US dollars,” serving as an indicator for infrastructure investment (Target 9.a).
   • Implementation of new tax policies: The article notes that “Sri Lanka started taxing foreign earned dollars income,” which is a qualitative indicator of domestic resource mobilization efforts (Target 17.1).
   • Status of external debt: The mention of an “external default” and difficulty in making “interest or debt repayments” are critical qualitative indicators for debt sustainability (Target 17.4).
   • Macroeconomic stability indicators: The references to a “currency crisis,” the need to meet “reserve targets,” and the existence of “exchange controls” are all indicators related to macroeconomic stability (Target 17.13).

4. Table of SDGs, Targets, and Indicators

Source: economynext.com