ADB slashes SL’s growth forecast for 2018 and 2019

• Cuts this year’s growth forecast to 3.8% from 4.2%
• Growth forecast for next year revised down to 4..5% from 4.8%
• SL and Bhutan only countries to see growth downgrades
• Projections for current account deficit raised on higher oil prices

The Asian Development Bank (ADB) yesterday downgraded Sri Lanka’s economic growth forecast for both 2018 and 2019 as weaker domestic demand, investment and exports continue to hurt the US $ 90 billion economy plagued by structural deficiencies and foreign debt. 

Issuing an update to the Asian Development Outlook (ADO) report for 2018 this week, the Asia-focused development lender lowered its growth forecast on Sri Lanka to 3.8 percent for 2018 from the original forecast of 4.2 percent. 

Further, the island nation’s 2019 growth forecast was also revised down to 4.5 percent from the original forecast of 4.8 percent in April.

“Sri Lanka’s growth forecast is downgraded for both this year and next on weak investment and exports, and as the government implements structural reform to lift its fiscal performance”, the update to the ADB’s flagship annual publication said. 

As the government cuts spending to contain budget deficit domestic demand tend to ease, dampening the country’s growth prospects. 

Sri Lanka neither can cut rates nor relax government spending to spur growth at this juncture as each action has its own perils, which are more damaging than stimulating growth in the short-term. 

Instead, it is highly speculated that the Monetary Board, which meets next week, would raise its benchmark interest rates to stem the fall in the rupee and foreign outflows. 

The ADO update captures Sri Lanka with Bhutan, the only two South Asian nations out of eight, which got their growth forecasts cut for two consecutive years. 
Pakistan, which is facing similar economic struggles to that of Sri Lanka, has been upgraded to grow by 5.8 percent in 2018 from the original forecast of 5.6 percent—the highest rate in 13 years propelled by surge in private consumption. 

However, the growth projection for the economy revised down to 4.8 percent in 2019 from an earlier projection of 5.1 percent, “in light of a pressing need to deal with large budget and external imbalances”. 

After the Opposition party led by the former cricketer turned politician, Imran Khan came into power in a general election held in July, the new government announced its commitment to a tough reform package to cut budget and current account deficits, which could put the US $ 284 billion economy to a sustainable path. 

“…in Bangladesh and Nepal, robust investment pushed estimated growth in fiscal 2018 higher than forecast, but in Bhutan and Sri Lanka weaker domestic demand lowers growth expectations for both 2018 and 2019”, ADB said.  However the Manila-based ADB said the deficit projections for South Asia were revised to widen to 2.9 percent of GDP in both 2018 and 2019 as higher oil prices are expected to push up import bills in India and Sri Lanka.

Meanwhile, continued imports of capital goods in Bangladesh, Maldives, and Nepal are expected to widen their current account deficits. 

“With higher oil prices, high dependence on imports, and only a marginal recovery in remittances, projections for the current account deficit are raised for both 2018 and 2019”, ADB said in its country chapter on Sri Lanka. 

As Sri Lanka’s rupee has weakened by almost 10 percent against the US dollar due to emerging market selloff in recent times, expanding of the current account of an economy heavily dependent on imports becomes a common phenomenon.  

Sri Lanka’s current account deficit is estimated to widen to 2.9 percent of GDP in 2018 and 3.1 percent in 2019. But the inflation forecasts for the two years have been revised down to 4.5 percent and 4.7 percent due to normalizing agriculture and weaker than anticipated economic growth. 

Sri Lanka’s economy slowed to 3.3 percent in 2017 – the lowest in 16 years – due to bad weather and tight monetary and fiscal policies.