CB’s top researcher reveals how external agencies forecast doomsday scenarios

Central Bank’s top researcher recently revealed how external agencies, including that of the World Bank, International Monetary Fund (IMF) and rating agencies project doomsday scenarios for the Sri Lankan economy even when the country is rapidly returning to normalcy after the COVID-19 outbreak.

Earlier this week the World Bank projected a deeper recession for the Sri Lankan economy—a contraction of 3.2 percent—revising down its mid-April forecast of 3.0 percent contraction for 2020 projected at the height of the pandemic. 

The IMF maintains a much milder negative outlook with only 0.5 percent contraction projected for Sri Lanka and is yet to be revised again. 

According to the World Bank, the Sri Lankan economy will not rebound until 2022 as the country will only make its lost output during the whole of 2021 with no uptick in the activities projected.  

Revealing the most primitive and biased methods employed by some external agencies to provide economic forecasts for countries, Dr. Chandranath Amarasekara, Director of Economic Research at the Central Bank said, these agencies appeared to have assumed the 2019 economic performance as the base-case for their economic forecasts for 2020 and beyond.

Despite the pandemic-induced economic damage, Sri Lanka is expected to achieve an impaired growth of 1.5 percent as Central Bank expects a faster ‘V’ shaped recovery from the second half of the year, initially supported by the domestic demand and later by the global economic recovery. 

“Our expectation was that compared to the 4.5 percent growth projected for Sri Lanka at the beginning of the year, the growth would be 3 percentage points less in 2020 due to the damage caused by the virus,” said Dr. Amarasekara explaining the rationale for the revised growth projections for 2020. 

“I think what the IMF and other external agencies have done is they have taken the 2.3 percent growth in 2019 as the baseline and taken a cut on to that growth rate,” he said speaking at a recent webinar on the state of the Sri Lankan economy. 

However, he doesn’t think assuming 2019 as the baseline to arrive at 2020 projections is an appropriate method given the scale and the origins of the incidents which led to the economic pains in 2019 and 2020. 

In 2019, Sri Lanka’s growth slowed to 2.3 percent, lowest since 2001 as the economy was beset by the Easter Sunday attacks and it heightened policy and political uncertainty—both of which were domestic malaises as opposed to the pandemic, which is a global crisis.

“So, we don’t think 2019 could be a good base to project 2020 growth,” Dr. Amarasekara noted. 

“We have been always arguing that Sri Lanka was less integrated with the global economy. So, if we take that argument as correct, and we have seen domestic economic activities - investments and consumption - have been driving Sri Lanka’s growth in the past as well. 

When we look at all these, what we see is that, there can only be a contraction, if at all, in the second quarter because of nearly two months of lockdowns. And we expect that there will be a revival in the domestic economic activities after the elections and after the budget, and that will help Sri Lanka to achieve a positive growth definitely,” he added.   

Fitch Ratings has forecast 1.0 percent contraction in the Sri Lankan economy and downgraded the sovereign to ‘B-‘ citing that the pandemic could exacerbate the already rising public and external debt sustainability challenges, following the tax cuts late last year. 

Despite the tax cuts being vehemently berated by all these external agencies, they proved effective and stoked economic activity in the first two and a half months of the year before things came to a grinding halt due to the pandemic. 

After consecutive quarters of weak earnings, listed corproates reported relatively strong earnings in the March quarter. Consumer spending was on an upswing while private sector credit, which stayed stubbornly low, surged demonstrating the newfound confidence in the economy.