ADB says weather and politics will decide SL’s future growth

• Forecasts agriculture to rebound to 6% growth this year and 5.6% next year
• Says rebound in agriculture will spill over to other sectors of economy 
• Cautions on external risks as country faces US $ 22bn bunched-up foreign debt repayments
• Expects overall inflation to average 5.2% this year and slow further to 5% in 2019

Sri Lanka’s future economic growth largely hinges on the prospects in the agriculture and domestic politics as adverse weather and toxic politics could derail the growth similar to what the country experienced in 2017, according to the Asian Development Bank (ADB).  

Releasing its flagship Asian Development Outlook for 2018, the Asia-focused multilateral lender cautioned Sri Lanka on the risks emanating from potentially unexpected large rise in global interest rates and the volatile capital markets, which could sharply limit the planned borrowings and increase their cost.
Sri Lanka yesterday launched a sovereign bond to raise up to US $ 500 million with five and 10-year tenures with price guidance of around 6 to 7 percent. The warnings from the development lender comes at a time when the country operates with US $ 22 billion in bunched-up foreign debt repayments coming in 2018-2024 and US $ 4.2 billion due in 2019—an uphill task facing the US $ 82 billion economy. 

Sri Lanka’s economy grew by 3.1 percent in 2017, the worst since 2001, as adverse weather hit agriculture and monetary and fiscal squeeze impacted the industry and service sectors. 

“Growth over the next two years will depend on agriculture and the political climate as elections approach. Assuming normal weather in 2018 and 2019, agriculture is expected to rebound to 6.0 percent growth in 2018 and recover fully in 2019, expanding by percent,” the Sri Lanka chapter of the annual publication said. 

In 2017, the agricultural sector contracted by 0.8 percent from a much larger 3.8 percent contraction in 2016. 

However, the Manila-based lender is of the view that the turnaround in the agricultural sector could have positive spillover effects on the other two sectors of the economy as well — industry and services — which account for 30 percent and 60 percent of the overall economy. 

“Industry will benefit from recovery in agriculture as demand expands and agro-industry recovers in 2018,” the report noted. 

Apparel is expected to benefit from continued strong global growth and GSP Plus while construction will expand on continuing government projects and new private sector ventures, mainly hotels and apartments and with construction starting on buildings in the Colombo Port City financial centre project.  As a result of the acceleration of these activities, ADB projects the industry sector to expand by 3.9 percent 2018 and 4.5 percent in 2019.

Growth in services is forecast at 3.7 percent in 2018 and 4.6 percent in 2019 on higher demand as rural areas recover, continued growth in financial services and tourist arrivals and a small expansion in public administration and professional services.

Both industry and service sectors suffered from the poor agriculture sector performance last year due to weaker demand from the majority rural communities as their incomes eroded from the crop damages and poor harvest from adverse weather continued for four consecutive seasons. 

Except for post-disaster relief, little did the policymakers do to provide sustainable solutions to revive this most important segment in the economy, which still employs close to 30 percent of the labour force, accounting for 6 percent of the GDP. Apart from short-term fixes, there is a serious drought in long-term policies, application of technology and innovation in the agricultural sector.  Agriculture is seen as Sri Lanka’s core competence and the island nation has the comparative advantage due to its climate and rich soil. But unfortunately, it is ranked as the least policy-driven sector in the economy as all eyes are on building a high-tech service economy.

ADB also expects the food inflation to abate as agriculture recovers under normal weather.  By February 2018, food inflation had dropped to 3.2 percent year-on-year from 7.3 percent in December 2017, as overall inflation settled at a low of 3.0 percent, mainly reflecting a high base effect. 

ADB expects the overall inflation to average 5.2 percent in 2018 and slow further to 5.0 percent in 2019 assisted by likely energy pricing formula and the continuation of the fiscal consolidation, which again largely hinges on the political climate and the agriculture sector performance.

Fitch rates SL’s dollar bond ‘B+’ 

Fitch Ratings has assigned Sri Lanka’s upcoming US dollar-denominated bonds an expected rating of ‘B+(EXP)’.

The expected rating is in line with Sri Lanka’s long-term foreign-currency issuer default rating (IDR) of ‘B+’ with a stable outlook. 

The rating would be sensitive to any changes in Sri Lanka’s long-term foreign-currency IDR. In February 2018, Fitch affirmed Sri Lanka’s long-term foreign-currency IDR at ‘B+’ with a stable outlook. The long-term local-currency IDR is also ‘B+’ with a stable outlook. 

The government has announced it would raise US $ 2 billion in sovereign bonds and US $ 3 billion in Sri Lanka development bonds.