A SkyUp Airlines Airbus is seen after landing at Mattala Rajapaksa International Airport on December 28, 2020. Sri Lanka welcomed its first foreign tourists in nine months on December 28 even as a new deadlier strain of the coronavirus gripped the island. Photo: AFP / STR

Sri Lanka on Monday ordered tight foreign exchange controls after announcing a 3.9% contraction in the economy that accentuated concerns over its ability to repay foreign debt.

Central Bank of Sri Lanka Governor W.D. Lakshman said the coronavirus pandemic caused a record fall in the tourism and trade-dependent economy last year as he announced the figure.

He said the central bank will keep lending rates below 10% to help revive the battered economy but there will be tighter controls on imports.

A ban on non-essential imports including all types of vehicles, imposed in March, has already been extended through 2021 and Lakshman suggested there could be more controls.

“For the sustainability of the low interest rate structure, it is essential that foreign exchange leakages for non-essential imports and outward investment are minimised,” he said without giving details.

The central bank chief insisted however that Colombo will honour its foreign debt obligations amounting to about $4.0 billion a year.

International rating agencies have slashed Sri Lanka’s credit worthiness after raising fears over the island’s ability to repay its debt.

Sri Lanka’s economy has steadily grown in recent decades with the exception of 2001 when there was a 1.4% GDP contraction after Tamil separatists bombed the country’s main airport and crippled tourism.

The record decline in 2020 follows a setback after the 2019 Easter Sunday jihadist bombings which killed 279 people at three hotels and three churches.

Sri Lanka was emerging from the devastating attacks when the coronavirus pandemic halted international travel in March.

The island is battling a new wave of infections with the number of cases increasing to more than 44,000 from 3,300 in October.