Economy to grow 3.7% this year: HSBC

• Recovery of agriculture activities and strong growth in services sector key reasons 
• But growth figure still remains below the five-year average of 4.2%
• Says CB cannot keep monetary policy accommodative due to US Fed rate hikes

Sri Lanka’s economic growth this year is expected to inch up to 3.7 percent on strong performances of the agriculture and services sectors from the multi-year low of 3.3 percent growth recorded for 2017, said HSBC Global Research. 

In a report released a couple of days after Sri Lanka published its second quarter economic growth, which was at an estimated 3.7 percent, the global lender with a strong foothold in Asia gave a slightly optimistic growth estimate on the US $ 87 billion economy. 

“Growth is likely to inch up in 2018 on the back of stronger agriculture and services. 

While the former recovers from weather related disruptions, the latter is likely to see healthy growth across all sectors except ‘public administration’ which should continue to remain weak owing to the tighter fiscal policy”, HSBC said. 

Sri Lanka’s economic growth was seen slowing down since 2016 due to several factors—from weather related disruptions to a combination of tight fiscal and monetary policies instituted after the country was driven into a balance of payment crisis. 

The Gross Domestic Product (GDP) which grew at 5.0 percent in 2015, slowed down to 4.5 percent in 2016 and further to 3.3 percent in 2017. 

Meanwhile, the growth in the second quarter of 2018 picked up from the 3.5 percent in the same quarter last year, and 3.1 percent recorded for the second quarter, largely due to the recovery in the agriculture and growth in industry and services sectors.

Under industry, the construction sub-sector picked up by 1.4 percent in the second quarter after contracting by 4.7 percent in the first quarter. 

Despite the expected uptick in the economic growth during 2018, HSBC said the growth figure remains below the five-year average of 4.2 percent. 

According to HSBC, the below-trend GDP growth and an expectation of mid-single digit inflation point towards the need to keep the monetary policy accommodative. But the global lender noted that the Central Bank cannot do so due to continuous rate increases in the United States and the tighter dollar liquidity. 

“On the other hand, US Fed rate hikes, and tighter dollar liquidity warrant tighter policy.”

Due to tightening dollar liquidity levels, the Sri Lankan rupee has fallen by 9.0 percent as of yesterday against the mighty US dollar, which has been strengthening against other world currencies due to a robust US economy.  If the falling of rupee persists, the drag on the economic growth could become intense as it will slowdown economic activities of the heavily import-reliant nation.