Central Bank expects V-shaped recovery amid pent-up demand

• Says recovery could kick in from second half of this year amid pent-up demand due to lockdowns 
• Global economic recovery also expected to add some tailwind to local economy from fourth quarter 
• Says govt. has capacity to honour its debt obligations this year
• SL has repaid US $ 1.6bn debt during first four months and has US $ 3.3bn in remaining debt for remainder of year 
• Authorities plan SL’s next ISB late this year or early next year with rebound in global economy 

Although the Sri Lankan economy is expected to contract in the ongoing quarter, due to the coronavirus-induced lockdowns, the Central Bank expressed confidence that the economy could be off to a V-shaped recovery from the second half of the year, while the authorities draw plans to launch the country’s next sovereign bond towards the latter part of the year or early next year.

“A V-shaped recovery is projected for Sri Lanka,” said Central Bank Economic Research Director Dr. Chandranath Amarasekara. The Central Bank projects the pent-up demand to kick in from the third quarter in the domestic economy, as the lockdown orders ease and people restart spending on things that they had to forgo setting forth somewhat a faster recovery than one would have typically expected. 

At the same time, the global economic recovery is also expected to add some tailwind from at least the fourth quarter. 

“With the removal of lockdowns and with the normalcy returning, the domestic economic activity will drive growth in the second half of the year. We expect some recovery in the global economic activity in the fourth quarter and Sri Lanka will also benefit from the beginning of this global recovery in the fourth quarter,” Dr. Amarasekara told a webinar on the state of the economy, last week. 

As opposed to certain quarters that projected protracted economic pain from the pandemic, the Central Bank appears to believe that the economic setback caused by the new coronavirus is temporary.

Unlike in any other economic crises in the past, what many have yet to grasp this time is that economic actors remain desperate to return to normalcy, enormous fiscal and monetary stimulus have been launched, borrowing cost hovers near zero levels, regulations are being eased and growth-induced policies are put into practice, in a bid to hyper-accelerate the growth.  

“We expect the setback from the pandemic to be temporary, although there will be a rethinking of the economic policies and the strategies of the government as well as the private sector. But in any case, we expect that from 2021, with appropriate reforms, the country will revert to a sustained high growth path,”
Dr. Amarasekara said. 

The Central Bank in April revised down its growth projection to 1.5 percent for 2020. 

The Central Bank’s projections show economic growth returning to 4.5 percent in 2021 and then rising to 6.0 percent and above in the following years. 

Meanwhile, Senior Deputy Governor Dr. Nandalal Weerasinghe reiterated that the government has the wherewithal to comfortably settle its remaining debt obligations for the year. 

The country has repaid US $ 1.6 billion debt during the first four months of the year and has US $ 3.3 billion in remaining debt obligations for the remainder of the year. 

He said the government is working with multiple multilateral and bilateral partners while the Central Bank is negotiating SWAP lines to get the reserves back up to the levels at the beginning of the year. 

Sri Lanka has already begun negotiating a SWAP line with the Reserves Bank of India, which is expected to materialise soon. 

The Central Bank also hopes to launch the country’s next sovereign bond sale in the latter part of this year or early part of next year. “With all these plans, we are very confident we would be able to meet all these debt-servicing obligations during the balance period and once the situation improves towards the end of this year or early next year, we would have (the) access to international capital markets and we will be able to raise not only the official credit lines and concessional lines but also the commercial financing for us to meet the reserve obligations,” Dr. Weerasinghe said.