Sri Lanka likely to record negative economic growth this year

• Contraction in economic growth for first time in 19 years
• Blowout budget deficit of close to 10% of GDP
• Economy set to go through “extremely bumpy ride”
• Extreme austerity appears to be need of the hour

Sri Lanka’s economy is not spared by the massive shocks delivered by the coronavirus (COVID-19) pandemic, and due to the current multifaceted vulnerabilities, the country is likely to witness negative growth.

Pointing out that Sri Lanka posted a negative growth last in 2001 (-1.4 percent), the first contraction since the country gained independence, JB Securities Managing Director and economist Murtaza Jafferjee said, “It is likely that 2020 will also be one of negative growth. With this shock, it is highly likely we will have a year of negative growth and will have an absolute blowout budget deficit of close to 10 percent of GDP.” Jafferjee made these comments while sharing with Mirror Business the impacts the national economy would go through as a result of the COVID-19 outbreak.

While the first big hit is to economic growth, Jafferjee said the second big hit would be on the country’s fiscal situation, since with the massive tax cuts that came into effect a few months ago, together with the slow growth the country was already witnessing, the tax revenue is set to further decline.

Jafferjee said this comes at a time when the government has to increase expenditure to support the vulnerable population.   

“Sri Lanka needs money at a time when the poorest population is most vulnerable. We have a large amount of debt that has to be rolled over by the latter part of the year. Firms will go into losses in March that will spill into April.

“Furthermore, although oil prices have come down, Sri Lanka’s import bill has not reduced; we will have to have significant curbs on imports to maintain the balance of payments (BoP),” he said.

Jafferjee cautioned that the economy would go through an “extremely bumpy ride” and what could precipitate a bigger disaster is that due to a pending election, the usual prudent fiscal measures would be held back because of political consequences.

“We need extreme austerity, a set of political-economic policies, to conserve foreign exchange, which would entail quite a bit of hardship to the population. But, when you factor in, the current government has to have the election soon, they may not do it and this could worsen the problem,” he warned.

JB Securities is a Colombo-based equity brokerage and research house.

The Central Bank earlier this month said Sri Lanka’s economic growth could slump to 3.5 percent this year, from earlier projected over 4 percent growth, as revenue from exports, tourism, remittances and logistics, would be hit by the recent escalation of the coronavirus outbreak to a ‘global health emergency’, spreading beyond China.

The Central Bank was earlier projecting the country’s subpar economic growth to recover in the range of 3.7-4.5 percent, driven by fiscal and monetary stimulus. (SAA)