Sri Lanka’s full year real GDP growth forecast for 2013 was downgraded to 5.4 percent from the previous projected 5.9 percent, implying that the ongoing slowdown is to intensify in first half of 2013, before growth starts to pick up in the second half, according to a Londonbased, independent research and credit rating agency.

“Heading into 2013, we are less convinced that Sri Lanka’s economic growth is headed towards any sort of material recovery from the ongoing slowdown. On the back of our 2013 growth downgrade, we have adjusted our forecasts for Consumer Price Inflation (CPI) and the Central Banks’s policy rate,” international credit risk rating agency Business Monitor International (BMI) said in its ‘Sri Lanka Business Forecast Report for Q1 2013’.

According to the data released by the Department of Census and Statistics this week, Sri Lankan economy grew at 4.8 percent in the 3Q12 (nearly a 3-year low) and the Central Bank of Sri Lanka (CBSL) revised the growth projections down to 6.5 percent from the earlier 6.8 percent for 2012.

Nevertheless the CBSL targets a growth of 7.5 percent in 2013 above the 7.2 percent projection for Developing Asia.

BMI further stated that they were now penciling in more aggressive disinflation and more dovish moves by the CBSL.

For 2013, BMI has downgraded their average CPI forecast to 7.0 percent from the previous 8.0 percent, and has downgraded end 2013 policy rate projection to 8.50 percent from 9.00 percent. “The island’s economy is still feeling the pinch on multiple fronts; rising credit costs, the weak Sri Lankan rupee and the fragile state of the global economy. Crucially, leading indicators continue to paint a bleak outlook for the economy,” BMI noted. With price concerns gradually coming off the table, BMI believes the primary focus of the Central Bank’s policies over the next 12 months will be fixed on economic growth.

“We are projecting 125 basis points worth of easing in 2013, taking the Reverse Repo rate to 8.5% by end 2013,” BMI predicted while acknowledging much of the macroeconomic imbalances being ironed out. “Taking into account our view for monetary easing going forward, we believe that these dynamics favour an outright bullish stance towards the country’s local debt. We reiterate that the country’s public debt profile has markedly improved over the years,” the report said.

While the country’s overall business environment remains mediocre from a PanAsian perspective, BMI said that they could not ignore the rapid and dynamic changes taking place in the regulatory framework, which indicate that its business environment is making significant strides which in turn should help to sustain the country’s foreign direct investment boom.