Managing Macroeconomic Stability While Investing in Reconstruction in Post-conflict Sri Lanka

In the aftermath of an exogenous shock such as resolving the prolonged conflict in Sri Lanka, it is expected that markets begin to revive, domestic and foreign investment increases, and the government and donor communities begin to extend substantial rebuilding efforts. The major impact of such events and efforts is the expansion of the economy which may also exert inflationary pressures, create exchange rate upheavals, and expand external and internal imbalances. Addressing and managing the forces of such instability on the economy to ensure a sustainable growth path require well-designed policy measures. However, policy design becomes complicated if the external economic environment becomes unhealthy, while it is facilitated by some external help such as assistance from international organizations such as the International Monetary Fund (IMF). To evaluate the stability of the Sri Lankan economy after the end of the conflict in 2009, this chapter compares it with Sri Lanka’s liberalization shock of 1977. The paper concludes that after the end of the conflict, Sri Lanka’s economic stability was better maintained with a tighter monetary policy, and it was facilitated by the lesser impact of a shock, a gradual global recovery from the great global recession of 2007, and the effects of assistance from the IMF.