Recession risk looms; CB and others cut SL’s growth outlook

Sri Lanka could fall into a recession in 2022 as the most optimistic forecast of one percent came from the Central Bank while most others predicted marginal or de-growth for the country’s economy. 

First Capital Research (FCR) in an economic outlook report published in the final week of April forecasted the growth to come between 0.5 percent to a minus 1.6 percent in 2022, when the economy amid the worst-ever economic crisis faced by the island nation. 

Neither the Central Bank nor FCR gave a medium-term outlook beyond the near term, due to uncertainty. 
“… in the short run, a notable rise in the interest rates would discourage lending and in turn hamper economic growth but would address interest rate anomalies and pressures on the exchange rate to a certain extent, thereby attracting productive investment in the medium to long run,” the Central Bank said in a note about the section on the economic outlook in its annual report published late last week.

“Sri Lanka’s economy is envisaged to grow modestly in the near term, as the economy is to reset with a debt restructuring programme and long overdue structural reforms alongside an economic adjustment programme to be supported by the IMF, which is expected to facilitate the economy to gather momentum over the medium term,” it added. 

Sri Lankan economy recorded an annual average economic growth of 6.8 percent from 2010 to 2014. However, as the post-war euphoria faded, it started sputtering from 2015, due to an ill-advised fiscal and monetary stimulus by the then ‘good governance regime’ followed by the revenue-based fiscal consolidation instituted under an International Monetary Fund (IMF)-backed programme.

That pulled down the economic growth in the five years from 2015 to 2019 to an average 3.7 percent per year before the pandemic-induced lockdowns plunged the economy into a recession in 2020, before recording a 3.7 percent recovery in 2021. 

But soon after that, the economy crashed in the first quarter of the current year, due to the forex crisis spiralling out of control.  

“The build-up of macroeconomic instability in the economy, stemming from the heightened vulnerabilities on both the external and fiscal fronts, rising social unrest and political instability, effects of the pandemic, domestic energy crisis and elevated commodity prices both globally and domestically are expected to significantly dampen the growth prospects in 2022 and have lingering effects in the immediate future leading to a slowdown in growth,” the annual report noted.

“Also, economic activity is likely to further slowdown amidst the announcement of a suspension of external debt servicing by the government for an interim period and commitment to a debt restructuring programme,” it added. 
However, the Central Bank is hopeful that the medium-term growth could return, albeit modestly under an economic stabilisation programme expected to be introduced with the backing of the IMF. 

However, empirical data doesn’t suggest that Sri Lanka returned to a meaningful growth under the IMF programmes, the most recent one being the one abandoned in 2019, when the growth faltered to just 2.3 percent, from 5.0 percent in 2014. 

While stability is crucially important to sustain a durable growth, absence of robust and meaningful growth would leave Sri Lanka as a developing nation status for an indefinite period while leaving behind scores of its people in dire poverty.