Sri Lanka’s capital releases post-crisis assessment documenting an economic recovery that researchers describe as faster than models predicted, driven by tourism, remittances, and a population that found alternative arrangements when the formal economy was unavailable
Colombo Economic Recovery Study: Rebounded Faster Than Models Predicted, Partly Because No Choice Was Available
COLOMBO — The Sri Lanka Economic Research Institute released a post-crisis assessment Wednesday documenting the island nation’s economic recovery following the 2022 financial crisis — the most severe in its post-independence history, involving sovereign debt default, foreign exchange reserve depletion, fuel and medicine shortages, and what the study’s lead researcher, Dr. Priya Wickramasinghe, described as “a period during which the formal economic infrastructure was not functioning at a level that would support the daily needs of the population, and the population organised daily needs through mechanisms the formal economic infrastructure was not tracking.” She confirmed the word “resilience” appeared fourteen times in the study and that she had used it deliberately each time, “because it is accurate and because the alternative description, which is that people found ways to survive circumstances that the economic models said should not be survivable, is longer.”
“Sri Lanka recovered faster than the IMF’s initial projections suggested,” said Finance Ministry official Sanjaya Perera, at a Colombo briefing attended by economists who confirmed the speed and who had varying theories about what explained it. “The tourism recovery exceeded projections. The remittances from the Sri Lankan diaspora — approximately 3.1 billion dollars in the recovery year — exceeded what the crisis models had assumed would continue. The informal economy absorbed functions that the formal economy was not performing. And the political change following the 2022 protests produced a governance environment that, whatever its other characteristics, was more conducive to the IMF program implementation than the preceding environment had been.” He paused. “We are not endorsing the method. We are documenting the outcome.”
What the Formal Recovery Looks Like
The study’s macroeconomic data confirmed GDP growth returning to positive territory within eighteen months of the crisis nadir, inflation declining from its peak of 70 percent to single digits within two years, and foreign exchange reserves rebuilding to a level sufficient to cover four months of imports by the study’s publication date. The IMF’s Extended Fund Facility program, agreed in 2023, had disbursed its tranches on schedule, a compliance record that the study attributed to “a combination of genuine reform implementation and the specific motivation that comes from having recently experienced what not complying looks like.” Tourism arrivals recovered to 80 percent of pre-crisis levels in year two of recovery, driven significantly by visitor segments that were seeking what travel publications described as “an authentic South Asian destination that had become more affordable in dollar terms as a direct consequence of its economic difficulties,” a description the tourism board found “accurate and complex to use in promotional materials.”
The Asian Development Bank’s regional review of the recovery cited the Sri Lanka case as “evidence that currency crises and sovereign debt defaults, while severely damaging to formal economic metrics, do not necessarily produce the permanent structural damage that worst-case models project, particularly in economies where informal sector activity, remittance flows, and external sector recovery can compensate for formal sector contraction.” The review noted that this finding was “not an argument for allowing crises to occur” and that the recovery’s speed “did not eliminate the human cost of the crisis period, which was significant and should not be reduced to a macro recovery narrative.”
The Population That Did Not Wait for the Formal Economy
Dr. Wickramasinghe’s most detailed research section covered what she calls “the informal resilience mechanisms” — the ways in which Sri Lankans managed fuel shortages, medicine unavailability, and power outages during the crisis peak. The mechanisms included: community fuel-sharing networks whose coordination occurred through WhatsApp groups; informal medicine procurement networks connecting Sri Lankan diaspora pharmacists with specific families; communal cooking arrangements in apartment buildings during extended power cuts; and what she terms “the barter revival” — documented exchanges of goods and services in local communities that the formal economic system was not facilitating. “None of this is economically efficient,” Dr. Wickramasinghe said. “All of it was necessary. The population’s capacity to organise these mechanisms quickly, without institutional support, is the specific form of social capital that the economic models do not measure but that the recovery data implies was present at levels sufficient to matter.”
She said the study’s policy implication was “not that informal mechanisms should replace formal economic infrastructure but that formal economic infrastructure planning should account for the informal mechanisms that will activate when it fails, and that societies with strong informal networks are more resilient to formal system failure than those without.” She confirmed this was “a finding about social capital and crisis recovery that has implications beyond Sri Lanka” and that she was “presenting it in the Sri Lanka context because that is what we studied, not because we believe the finding is unique to Sri Lanka.” She confirmed Colombo was “an excellent city to visit at the current moment” and that she “did not usually add tourism recommendations to economic research briefings but this one felt accurate and relevant.”
