Consumption expected to pick up second half of this year

• Govt. likely to introduce fiscal stimulus in the run up to 2020 elections 
• Public sector salary hike predicted

By Chandeepa Wettasinghe

The remainder of 2018 and the entirety of 2019 would be positive for consumer markets as the government is likely to introduce fiscal stimulus in the run up to 2020 elections after the battering it took at the local government elections, industry experts opined.

“There was an upset in the recent local government elections and what we see is that ahead of the 2020 presidential election, the government will accelerate expenditure. A lot of consumer-friendly policies will come into play,” Asia Securities Research Vice President Mangalee Goonetilleke said.

Speaking at the Asia Securities’ Wealth Insights Series for the consumer sector held at the Lakshman Kadiragamar Institute in Colombo last Friday, she said that the 2019 budget would most likely see the government give another salary increase to the public sector.

Goonetilleke said that this would further restrict the room the Central Bank has to loosen monetary policy, since there would be higher purchasing power among consumers, leading to higher inflation.

“Over the next year we will see overall inflation pick up on the back of government expenditure increasing, with non-food inflation going up. Food inflation is going to be low, but the non-food inflation will go up, and therefore overall inflation will go up,” she said.

Hemas Holdings PLC Executive Director/CEO Steven Enderby too said that the government may have to think about loosening fiscal policy.
“The government has the hard choice of putting more money into the market,” he said.

Softlogic Holdings PLC Retail Sector Head Nasser Majeed said that the government’s policies with regard to expenditure would play a major role in consumer sentiment in the coming years.

He added that with more money being freed up from food expenditure, Sri Lankans would spend more on consumer durables and branded products going forward, especially while Sri Lanka crosses the US$ 4,000 per capita mark and ascends to the upper middle income category.

Most of the experts seemed to agree that consumption would pick up in the second half of 2018 and continue in 2019, although the extent of activity would fall short of the levels seen in 2015, when a fiscal stimulus package linked to elections saw a boom in consumption.

However, Cargills (Ceylon) PLC Corporate Finance & Investor Relations Head Talal Marzook said that the government would find itself in a difficult situation with the debt payments coming up, and the targets set by the International Monetary Fund related to fiscal and monetary policy, and the electricity and price reforms, which if implemented would adversely affect consumption.

“I hope the government stays on its course and maintains stability instead of stimulating consumption, because long-term growth is better than short-term growth,” he said.

Earlier in the week however, the government had said that it is looking at providing more subsidies and social safety nets, especially for the lower income households, and it showed non-committal towards meeting the energy pricing reforms.