Sri Lanka’s battered economy on a healing path – Colombo Page

Jan 09, Colombo: Hit by successive blows from 2018 political crisis and Easter Attacks, Sri Lanka’s GDP growth in 2019 is expected to be the lowest since 2001, says ICRA Lanka, a Group Company of Moody’s Investors Service.

According to a recent report of ICRA, “Sri Lanka Economy 2019 Highlights- A battered economy on a healing path” Sri Lanka’s economic growth has been in a downward trajectory for a half a decade.

The International Monetary Fund (IMF) and Asian Development Bank (ADB) projects the growth to be 2.7% for 2019, lowest since 2001.

In third quarter of 2019 the economy saw signs of recovery with industry and service sectors gathering impetus but the growth is expected to be less than 3% in fourth quarter.

In 4Q, with the announcement of the Presidential Elections, businesses and investors were seen adopting a “wait and see” approach which resulted in stagnation in economic activity for the most part of 4Q.

Following the Presidential Election, the economic activities revived briefly driven by the positive sentiments. However, performance of the agriculture sector continued to remain muted owing to adverse weather conditions. Export sector did not experience appreciable improvement over the months in comparison to 2018 but imports shrunk notably causing trade gap to narrow.

The Central Bank of Sri Lanka (CBSL) made significant intervention to bring the interest rates down. As a result, there is marked drop in short-term and long-term interest rates. Yield curve showed a significant downward shift from the year beginning. Liquidity shortage that prevailed in the beginning of the year led to a private credit crunch. After several liquidity injections by the CBSL, the liquidity improved causing the credit demand to pick up.

Exchange rate showed depreciating. By the year end, the CBSL maintained rupee at about LKR 181/USD, marginally stronger compared to the beginning of the year.

Reserve position improved owing to successful issuances of International Sovereign Bonds (ISBs) and Extended Fund Facility (EFF) and we expect the gross official reserves to cross USD 7Bn by December 2019.

Inflation rate in the economy was moderate in 2019 and was well within the bounds of CBSL’s targets, but accelerated towards the end of the year.

Throughout the 2019, the wage growth of the informal private sector has been declining showing signs of eroding purchasing power.

ASPI gained just over 1% compared to the year beginning. Due to the disruptions emanating from the Easter Attacks, services sector went through two consecutive months of contraction in April and May, while the impact on manufacturing was moderate.

Tourism is the worst hit sector, but currently going through a faster recovery. Banking sector lost pace in 2019 due to eroding profitability, deteriorating asset quality and slower asset growth.

ICRA Lanka said it is cautiously optimistic about the economic prospects in 2020 and expect modest growth given no major external shocks take place.

The credit rating agency made this assessment based on three factors; the possible full recovery of the tourism, expectation of relatively calmer political climate following the election early 2020, and improved economic activity due to the expansionary fiscal policy and potential monetary easing.

At the same time, it also emphasized the fact that in order to revive the economy, there must be political will to make tougher choices. “This means the government must adopt prudent policies, maintain fiscal discipline, and implement structural reforms,” the report said.

Taken from