COVID-19 dampens SL’s hopes of economic revival

From left: Central Bank Governor Prof. W.D. Lakshman and Senior Deputy Governor Dr. Nandalal Weerasinghe at the Monetary Policy press briefing yesterday. Pic by Upul Abeysekera 

• CB cuts economic growth forecast to 3.5% from over 4%
• But still says economy will perform better than last year
• Keeps policy interest rates unchanged after 50 bps cut in Jan.
• Expects revenue from exports, tourism, remittances and logistics to decline
• But believes private sector credit growth to pick up to 12-13%
• Says conclusion of general election, presentation of budget will boost investor confidence 

By Nishel Fernando
The Central Bank (CB) said yesterday that Sri Lanka’s economic growth could slump to 3.5 percent this year from over 4 percent projected earlier as revenue from exports, tourism, remittances and logistics would be hit by the recent escalation of coronavirus (COVID-19) outbreak to a global health emergency spreading beyond China. 

The CB was earlier projecting the country’s subpar economic growth to recover in the range of 3.7-4.5 percent driven by fiscal and monetary stimulus.

“The on-going developments, particularly the coronavirus (COVID-19) outbreak, will have adverse effects on Sri Lanka as well. Nevertheless, we expect Sri Lanka’s economy to perform better in 2020 than in 2019 and record a growth rate of 3.5-4 percent,” CB Governor Prof. W.D. Lakshman told reporters in Colombo yesterday.

“The current accommodative measures will be continued until the global economy shows signs of recovery,” he added. Accordingly, CB’s Monetary Board, at its meeting held on March 04, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) at their current levels of 6.50 per cent and 7.50 percent respectively.

CB Director- Economic Research, Dr. C. Amarasekara outlined that the country is facing a direct impact from China as well as the impact from global economic slowdown.

“The exact impact on the Sri Lankan economy would depend on the extent of the global spread of the COVID-19 outbreak,” he said. 

The CB expects the current slowdown in global tourism would adversely affect the country’s tourism sector, which has seen a notable recovery since the Easter Sunday attacks in April last year.

Cumulative tourist arrivals in the first two months of this year fell 12 percent year-on-year (YoY) to 435,941 with a decline of 55.1 percent YoY in arrivals from China during the period. Chinese tourists amounted to 9 percent of total arrivals in 2019. 

Dr. Amarasekara also pointed out that global economic slowdown could affect prices as well as demand for Sri Lankan merchandise and service exports.

Sri Lanka’s merchandise exports, which have been experiencing marginal declines since mid last year, recorded a sharp decline of 7.4 percent YoY in January 2020 to US$ 961.2 million.
Supply chain disruptions from China are also impacting the country’s largest export segment, apparel, while the recent coronavirus cases reported in Europe and the United States also have a negative impact on export orders.

However, Dr. Amarasekara said the build-up of stocks prior to the Chinese New Year somewhat dampened this effect. 

In 2019, China accounted for 18 percent of Sri Lanka’s consumer goods imports, 16 percent of intermediate goods imports and 33 percent of investment goods imports.

In addition, a slowdown in port activities is also expected during the year. 

The CB also cautioned that the spread of the virus to countries such as South Korea and Italy could have some downward effect on remittance inflows. 

In 2019, 3 percent of total foreign employment migration was to South Korea and Italy.

Further, a potential coronavirus spread in the Middle East could also have a severe impact on remittances.

Several key projects in Sri Lanka have also been delayed due to the non-return of Chinese workers after the Chinese New Year. The CB conservatively estimates the Chinese workers in Sri Lanka to be around 8, 000.

On a positive note, the crude oil prices have declined to US$ 52 per barrel in March 5 from US$ 66.6 per barrel at the end of 2019, which could ease Sri Lanka’s import bill. The country’s total fuel imports amounted to US$ 3.9 billion in 2019.

As major economies in the world are likely to become more accommodative, the CB believes it could help to ease the costs of refinancing; however, the current flight of quality investment flows could offset the cost advantage.

“These adverse implications are likely to outweigh any marginal benefit arising from reduced global energy prices and international interest rates,” 
the CB stated. 

The country has also seen an increase in imports following the recent tax cuts. Sri Lanka’s imports picked up in December 2019 for the first time since October 2018.

Sri Lanka’s rupee has depreciated by 0.2 percent against the US dollar so far this year after appreciating 0.6 percent at the end of last year. 

In January, private sector credit growth marginally accelerated to 4.5 percent YoY from 4.3 percent YoY in December. Similarly, Broad Money (M2b) growth also accelerated to 7.0 YoY in the month from 8.3 percent YoY in December.

CB Senior Deputy Governor Dr. Nandalal Weerasinghe said CB still expects private sector credit growth to pick up to 12-13 percent YoY during this year.“That is based on the economy growing at around 4 percent and inflation at around 5 percent,” he said.

Prof. Lakshman meanwhile urged the banking sector to take measures to pass on the benefit of the recent policy rate cut to borrowers, while noting that the transmission process may take months. “We hope commercial banks will pass the benefit of our policy rate reduction to borrowers without any further delay,” 
he said. 

The Governor expects the current fiscal regime coupled with declining market lending rates to compensate the possible decline in external demand once the parliamentary elections conclude.

“Expected political stability following the parliamentary elections and the presentation of the budget will boost investor confidence further,” he added.  

CB expects inflation to reverse to the 4-6 percent target range as it accelerated to 6.8 percent in February. 

The CB also stands ready to provide liquidity to domestic financial markets when necessary while noting that the net financing requirement for 2020 is unlikely to pose any excessive pressures on the market.