Economy could continue to hobble through 2023 as macro-challenges persist : CT CLSA

• Economy could give up 3.1% of GDP in 2023 after shedding 8.8% in 2022

Sri Lankan economy, which is set to give up close to 9.0 percent of its output in 2022, will extend its decline into 2023, shedding a further estimated 3.1 percent of output before seeing any recovery in 2024, according to CT CLSA Securities. 

The stock broker in a strategy report released recently estimated the economy to shed 8.8 percent in value in 2022, declining the most in its post independence history after the economy contracted 7.1 percent in the first nine months.

The Colombo-based stock broker said the current macro-economic challenges from red-hot inflation to foreign currency shortages would persists though 2023, though with less intensity than the incumbent year, weighing on consumption and business and investment activities. 

CT CLSA said the current bout of runaway inflation, although has turned around, could squeeze households and thereby the consumption demand, and hence weighing on any prospects of economic recovery in 2023. 

Consumption accounts for more than two-thirds of the Sri Lankan economy. The ultra-tight monetary policy and the tighter fiscal policy have put a significant damper on the consumption demand, business activity and investments.
“With Sri Lanka currently facing a series of macro economic issues, including heightening inflationary pressures, depleted foreign reserves as well as import induced shortages, the near to short term economy is expected to undergo an unprecedented level of contraction before recovering to normalcy in 2024E”, CT CLSA said.

“Further, rising cost of living, may push many consumers to the poverty belt, whilst households may be forced to avoid many non-essential expenses, leading to a meltdown in consumer demand,” it added. 

The much anticipated deal with the International Monetary Fund remains a wild card but it is unlikely even unlocking the deal could lift the economy to a positive growth path as early as in 2023.  

 The officials are walking on an extremely fine line between supporting the economy towards its recovery and bringing the inflation back to its target range of 4 to 6 percent from the current 60 percent levels. 
Any tweaking to the monetary policy in particular cannot risk stoking inflationary pressures again as the Central Bank could cut rates next year. 

CT CLSA Securities weighing in on the monetary policy matter said it expects the Central Bank to turn away from its hawkish stance in the first quarter of next year to ensure economic stability given the exponential interest rates which kill economic activities.  

The Central Bank has also come under pressure as of late from a range of stakeholders from legislators, businesses and analysts to ease the monetary policy to provide support to the economy before it suffers any more damage to irrecoverable levels.