• ICRA Lanka cuts growth forecast to 3.4% but Delta surge could prompt further review 
• Expresses dour outlook for private sector loans and investments as virus kills animal spirits 
• Expects private credit to continue to slow down in Aug./Sept.

The lingering virus could dampen the economic activities through the end of September, further delaying any hopes for a tangible recovery in the economy, which was continuously battered by half a decade of subdued growth before contracting last year. 

Weighing in on the current economic climate, which is again turning dour by the day, rating agency ICRA Lanka Limited said the virus and in particularly the more transmissible Delta variant is acting as a heavy dampener, preventing the economy from making a return to normality and also in a sign that the pandemic will continue to cast a longer shadow over the economy.   

“Rapid escalation of the Delta variant is the number one concern for the economy right now,” the rating agency said in its monthly economic update titled ‘Economy reels from the Delta surge’, released yesterday.

“Though the vaccination drive is currently in full swing, the effectiveness of vaccines against the Delta variant still remains to be seen,” it added, expressing heightened concerns of the economic prospects under these trying times.

A fortnight ago, ICRA Lanka cut Sri Lanka’s economic growth forecast for 2021 to 3.4 percent from its earlier projection of 3.6 percent, assuming no major shocks in the third and fourth quarters.

However, with more than half way through the third quarter and the virus is still making rounds with even more intensity, the rating agency is again forced to reassess even their reprojected targets for the economy. 

“In this context, in contrast to our previous expectations, the activity level in the economy may remain subdued for at least till the end of September.” 

The rating agency’s forecasting models have indicated that the country’s output might have grown by around 4.1 percent during 2Q on lower base effects, as most effects were in semi-dormancy, due to the reimposed economic restrictions. 

The gloomy outlook, if persists, could also have spillover effects on almost every other sector of the economy, from the government revenues to public debt to external sector to inflation to interest rates, from their already terrible state. 

The rating agency expects that even the banks would turn hesitant to extend credit to the private sector, due to heightened risk and the less appetite for investments from businesses, taking a further toll on job and income creation, production and prices. 

“With gloomy outlook and mounting uncertainty of how the pandemic is going to evolve in the next few weeks, banks will not be very enthusiastic in extending credit to the private sector nor will the businesses be overly interested in investments,” ICRA Lanka said. 

“Therefore, we expect the private credit to continue to slow down in August/September,” they added.