Economic growth will rebound to 7.2% whilst inflation will remain in the high-single digits by the end of 2013, according to a report from CT Smith Stockbrokers (Pvt) Ltd (CTS).

Anticipated cuts in policy rates of between 50-75 basis points, are expected to spur growth, particularly in the services sector which the firm projected would lead growth contributing 59% of GDP, followed by the industrial sector, which is projected to reach 30% of GDP.

The easing of policy rates is also expected to increase inflationary pressures leading to an annual average inflation of 8.8% whilst point-to-point inflation is expected to close the year at 9.7% as compared with 9.8% last month and 9.2% in December 2012.

In terms of fiscal targets, CTS predicted that the government would overshoot its fiscal deficit target of 5.8%, instead reaching 6.5% of GDP by the end of 2013. Revenue targets too are unlikely to be met with the firm predicting year-end revenue to come in at 14.7% of GDP and a Debt to GDP ration of approximately 80%.

The trade deficit is expected to narrow marginally by the end of the year to US$ 9.3 billion, comprised of US$ 10.7 billion in export earnings, an 8% Year-on-Year increase, and import expenditure of US$ 19.9 billion.

The overall balance of payments was estimated at US$342 million, against approximately US$ 100 million in 2012. Worker remittances from the approximately 1.7 million Sri Lankans currently employed overseas is expected to hit US 6.3 billion, an increase of 8% YoY. Sixty percent of remittances are expected to originate from the Middle East.

Improvements in the country’s overall macro-economic environment, particularly declining interest rates, are also expected to be reflected in the performance of the Colombo Stock Exchange, especially during the first half of 2013 (1H13) with foreign investors remaining a key driver of market momentum, according to the report.

Whilst foreign investors had generally expressed a preference of larger stocks in the banking and diversified sectors, interest in less liquid stocks in the F&B sector is also expected to see a revival going forward.