CB forecasts economy to grow at 1.5% this year

In terms of Section 35 of the Monetary Law Act No. 58 of 1949, the seventieth Annual Report of the Monetary Board of the Central Bank was presented to Prime Minister and the Minister of Finance, Economic and Policy Development Mahinda Rajapaksa by Central Bank Governor Professor W.D. Lakshman. Dr. P. Nandalal Weerasinghe, Senior Deputy Governor and Dr. Chandranath Amarasekara, Director of Economic Research of the Central Bank were also present.

• CB’s projections remain optimistic compared to IMF, WB forecasts 
• Exports projected to fall by US$ 3.2bn and imports US$ 4.5bn
• Due to decline in imports, trade deficit to further narrow down to 7.7% of GDP
• Forecasts fiscal deficit of 7.9% of GDP from the estimated 6.8% in 2019
• Private sector credit growth expected to further decelerate to 4% from 4.3% in 2019
• Total govt. debt stock up to 86.8% in 2019 from 83.7%cin 2018
• Per capita income contracted to US$ 3, 852 in 2019 from US$ 4, 079 in 2018

The Central Bank (CB) expects Sri Lanka’s economic growth to decline to 1.5 percent this year from 2.3 percent in 2019, possibly avoiding a coronavirus-induced recessions, although with severe impacts across sectors causing hardships for all stakeholders.

“In the near term, the economy is likely to be impacted severely in terms of growth, fiscal, external, and financial sector performance, while causing hardships to all stakeholders of the economy,” the CB stated unveiling its Annual Report for Year 2019 yesterday. 

In 2019, real GDP growth has slowed down to 2.3 percent from 3.3 percent in 2018 while per capita GDP contracted to US$ 3, 852 in the year from US$ 4, 079 in 2018.

For 2020, the CB expects the country’s economy to grow at a rate of 1.5 percent, reaching per capita income of US$ 3, 940 despite the recent depreciation of the rupee against the US dollar. 

However, CB’s projections remain somewhat optimistic compared to the projections of the International Monetary Fund (IMF) and World Bank (WB). 

The IMF has projected Sri Lanka’s economic growth to contract by 0.5 percent and the WB has projected up to 3 percent contraction of the country’s economy this year. According to the CB, Sri Lanka’s exports are projected to fall by around US$ 3.2 billion and imports are expected to fall by around US$ 4.5 billion this year. 

Due to the projected substantial decline of imports, the CB expects Sri Lanka’s trade deficit would further narrow down this year to 7.7 percent of GDP from 9.5 percent
recorded in 2019.

In the fiscal sector, the CB projects the fiscal deficit would spike to 7.9 percent of GDP this year from the estimated 6.8 percent last year with State revenue and grants falling below 10 percent amidst the effects of the pandemic and due to tax cuts.

By end 2019, Sri Lanka’s government debt as a percentage of GDP rose to 86.8 percent from 83.7 percent at end 2018, reflecting the impact of higher net borrowings to finance the budget deficit and the relatively modest growth in nominal GDP in 2019.  In 2020, the central government debt is projected to rise to 92.4 percent of GDP. 

Meanwhile, the private sector credit growth is expected to further decelerate to 4 percent YoY this year from 4.3 percent YoY last year.

The annual average inflation in 2020 is also expected to remain unchanged at 4.5 percent level with a marginal increase of 0.2 percent compared to last year. 

The CB prescribed the government to focus on implementing appropriate growth supportive reforms to address longstanding structural issues and enhance domestic production, improve export orientation, attract foreign direct investment (FDI), facilitate innovation, improve factor productivity and efficiency, and improve policy buffers.

“…if implemented without delay, these would enable Sri Lanka to realise the desired outcome of achieving sustained and equitable economic growth and become a prosperous nation in the period ahead,” the CB stressed. 

The CB sees the country’s economic growth reaching 4.5 percent in 2021 from a low base and expects the economy to grow at a minimum of 6 percent thereafter.