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Sri Lanka crisis

Sri Lanka GDP shrinks 8.4% in Q2 amid fertilizer, fuel shortages

Manufacturing hit hard as central bank expects 8% economic contraction in 2022

Farmers line up for fuel during Sri Lanka's worst economic crisis in decades.    © Reuters

COLOMBO (Reuters) -- Sri Lanka's economy shrank 8.4% in the quarter through June from a year ago in one of the steepest declines seen in a three-month period, amid fertilizer and fuel shortages during the nation's most severe financial crisis in more than seven decades.

A acute dollar shortage, caused by economic mismanagement and the impact of the COVID-19 pandemic, has left residents struggling to pay for essential imports including food, fuel, fertilizer and medicine.

The state-run Census and Statistics Department said agriculture shrank 8.4% in the second quarter and industries by 10%, while services dropped 2.2%, compared to a year ago.

A shortage of chemical fertilizers during the quarter impacted agriculture production, especially the country's staple rice, while restrictions imposed on fuel imports reduced manufacturing activity, the government said.

In the first quarter, the island of 22 million people saw its growth contract by 1.6%. Sri Lanka's central bank estimates the economy to contract by about 8% in 2022.

"This is the second steepest contraction we have ever seen. The last was when Sri Lanka posted negative growth of 16% in the Q2 of 2020 due to COVID-19 pandemic lockdowns," said Dimantha Mathew, head of research at First Capital.

"We are expecting Q3 and Q4 growth to be negative as well and for overall growth to contract by 10%-12%. Inflation has continued to grow in the Q3 and has hit private sector consumption, which will likely spill over into the fourth quarter."

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