Sri Lanka’s devastating economic collapse of 2022 has become more than a national tragedy. It is increasingly being viewed as a warning to developing economies worldwide about the dangers of weak institutions, shrinking fiscal space, and delayed policymaking in an era of relentless global instability. Speaking at the International Conference on “Poverty and Development in Times of Crisis” in Colombo, Deputy Governor of the Central Bank of Sri Lanka Dr. Chandranath Amarasekara delivered a stark message: economic crises are no longer isolated financial events, but direct assaults on social stability, poverty reduction, and national resilience.
Addressing policymakers, researchers, and international delegates at the 25th anniversary of the Centre for Poverty Analysis (CEPA), Amarasekara described Sri Lanka’s collapse as the culmination of years of weakening policy buffers, deteriorating macroeconomic fundamentals, and institutional vulnerabilities that left the country exposed when external shocks intensified. His remarks framed the crisis not as the result of a single mistake, but as the inevitable outcome of overlapping failures compounded by global turbulence.
Sri Lanka’s collapse in 2022 triggered one of the worst economic contractions in the country’s post-independence history. Inflation surged to 70% in September of that year, wiping out household purchasing power and devastating savings. The Sri Lankan rupee sharply depreciated beyond Rs. 360 per US dollar from around Rs. 200, while foreign reserves fell to near-zero levels. The economy contracted by 7.3%, public debt soared, and government revenues dropped to among the lowest levels relative to GDP in the world.
Amarasekara warned that such crises disproportionately punish the poor and vulnerable, who are least capable of absorbing economic shocks. Rising prices, collapsing incomes, job insecurity, and disruptions to education and healthcare deepened long-standing inequalities across Sri Lankan society. Small businesses, daily wage earners, and low-income households were among the hardest hit, while many skilled workers left the country amid worsening uncertainty.
At the center of his speech was a strong defense of macroeconomic stability as a social protection mechanism rather than merely a technical policy objective. Amarasekara argued that inflation functions as a “regressive tax,” disproportionately hurting the poor because food, transport, energy, and other essentials consume a larger share of low-income household budgets. While wealthier groups may absorb rising costs or protect themselves through assets, vulnerable communities face immediate declines in living standards.
The Central Bank’s aggressive measures to restore price stability became one of the defining elements of Sri Lanka’s post-crisis recovery strategy. Within ten months of inflation peaking at 70%, inflation was brought back to single digits. By 2024 and 2025, average inflation had stabilized around the Central Bank’s target range, even briefly entering deflationary territory. Amarasekara emphasized that these achievements were made possible through decisive monetary tightening and reforms under Sri Lanka’s new Central Bank Act, which strengthened institutional independence, transparency, and accountability.
Despite stabilizing inflation, however, the social scars of the crisis remain visible. Average monthly household consumption expenditure nearly doubled between 2021 and 2023, reflecting the severe rise in the cost of living. Although inflation has cooled, prices remain permanently elevated compared to pre-crisis levels, leaving many families struggling to recover financially.
Amarasekara also highlighted the importance of maintaining financial system stability during periods of economic collapse. Sri Lanka managed to avoid a systemic banking crisis despite severe economic stress, preventing the destruction of public savings and preserving confidence in the financial system. He warned that a collapse of the domestic banking sector would have had catastrophic consequences, particularly for pensioners, small depositors, and vulnerable households dependent on limited savings.
The speech underscored the painful trade-offs governments face during economic stabilization programmes. Sri Lanka was forced to raise taxes, reduce broad subsidies, and implement cost-reflective pricing for utilities in order to restore fiscal sustainability. These reforms, while economically necessary, intensified pressure on household incomes and triggered widespread public hardship. Amarasekara acknowledged that macroeconomic adjustment without social protections risks deepening poverty and undermining public trust in reform itself.
As part of Sri Lanka’s IMF-supported stabilization programme, authorities expanded social safety nets and introduced mandatory social spending protections to shield vulnerable populations from the worst impacts of adjustment policies. According to Amarasekara, the crisis has also generated greater public demand for transparency, accountability, and stronger governance, particularly as taxpayers increasingly scrutinize how public funds are spent.
By the end of 2025, Sri Lanka’s economy had begun showing signs of a remarkable rebound. Real economic growth reached 5% in both 2024 and 2025, while per capita GDP surpassed USD 5,000 for the first time. Gross official reserves climbed above USD 6.8 billion, the external current account recorded consecutive surpluses, and public finances improved significantly, with primary deficits transformed into fiscal surpluses. Government debt levels also began stabilizing after years of deterioration.
Yet Amarasekara cautioned against complacency. He argued that modern economies now operate in an environment defined by recurring and overlapping crises, including pandemics, geopolitical conflicts, supply chain disruptions, climate-related disasters, and volatile capital markets. In such a world, policy credibility and institutional resilience become as important as growth itself.
One of the central themes of the speech was the need to build not only national economic buffers, but also “buffers for the poor.” Amarasekara called for stronger financial literacy programmes, expanded inclusive finance, contributory pension systems, and broader insurance coverage to improve household resilience against future shocks. He stressed that millions of workers in Sri Lanka’s informal sector remain highly exposed because they lack access to formal social protection mechanisms.
He also emphasized that sustainable poverty reduction ultimately depends on economic growth driven by productivity, investment, and institutional quality. Quoting economist William Easterly, Amarasekara argued that while redistribution has a role, long-term improvements in living standards are more effectively achieved through sustained growth that raises incomes across society.
Beyond economic reforms, the Deputy Governor delivered a broader warning about governance and policymaking in fragile economies. He argued that policy space cannot be created during crises but must be built beforehand through disciplined fiscal management, credible institutions, and long-term planning. Delayed action, he said, often becomes the most expensive decision governments can make.
Amarasekara also criticized the disconnect that often exists between research institutions and policymakers. He noted that inadequate poverty data and fragmented warning systems contributed to Sri Lanka’s inability to respond effectively before the crisis escalated. He called for stronger collaboration between researchers and governments, including real-time poverty monitoring systems and evidence-based policy design capable of identifying risks before they become systemic failures.
As global economic uncertainty intensifies, Sri Lanka’s experience is increasingly resonating far beyond its borders. Amarasekara’s speech framed the country’s crisis not merely as a domestic economic collapse, but as a case study in how vulnerable modern economies have become when institutional credibility weakens and policy buffers disappear. His message to policymakers and researchers was blunt: the absence of crisis should never be mistaken for genuine stability. In a world of permanent volatility, resilience must be built long before the next shock arrives.
