S
ri Lanka’s electricity generation increased by 9.6 percent in the first quarter of 2024, reaching 1,469 GigaWatt hours, with industrial sales up by 14.3 percent, according to central bank data.
Electricity sales in Sri Lanka have historically been an indicator of economic activity and GDP growth. In Q1 2024, the statistics office reported a 5.3 percent increase in real GDP and an 8.3 percent rise in nominal GDP.
Typically, Q1 sees lower GDP contributions from electricity due to higher import content and dry weather. In contrast, electricity generation had dropped by 12.1 percent to 3,748 GWh in Q1 2023.
Provisional data shows that Q1 2024 electricity generation has rebounded to pre-crisis and pre-pandemic levels, though it remains below the revised 4,203 GWh recorded during the crisis year of 2022.
In 2021 and early 2022, domestic demand in Sri Lanka surged due to macro-economists printing money to suppress interest rates in pursuit of flexible inflation targeting and potential output goals. This led to significant balance of payments deficits, including a $1.4 billion deficit in Q4 2021 and an $853 million deficit in Q1 2022, partly due to the sterilization of deferred payments from India via the Asian Clearing Union.
In 2022, Sri Lanka defaulted on its external debt, a significant event given the country’s resilience during a 30-year civil war. The default occurred as money printing aimed at potential output and inflation targeting, without a clean float, led to economic instability.
The first wave of sovereign defaults in the 1980s similarly followed the IMF’s Second Amendment, which left countries without a credible anchor. Reserve-collecting central banks attempted money supply targeting without a clean float, leading to economic disruptions.
Classical economists and analysts have criticized the potential output targeting conducted by economic bureaucrats, claiming it violated the then monetary law with a stability mandate. However, a new monetary law supported by the IMF has since legalized money printing for growth and inflation.
In Q1 2024, the central bank allowed the exchange rate to appreciate and undershot its 5 percent inflation target, providing a stable foundation for economic recovery. However, analysts caution that if money is printed to boost inflation as private credit recovers, it could lead to currency instability and set the stage for a second default.
