Sri Lankan economy to shrink 5.5% this year: ADB

• Less dour forecast compared to June ADO update, which forecast GDP to contract 6.1%
• Prices to stay muted as inflation projected at 4.5% with further easing expected for 2021
• Most APAC economies can expect difficult growth path for the rest of 2020: ADB Chief Economist 
• Maldivian economy projected to contract 20%, India 9%; Bangladesh remains outlier with Bhutan and Nepal

Sri Lanka’s output will contract by 5.5 percent in 2020 before recovering to 4.1 percent growth in 2021 as the country is recovering from the heavy economic toll caused by the pandemic on the livelihoods and businesses, according to Asia Development Bank (ADB). 

In their periodic assessment of the economies in Developing Asia—Asian Development Outlook (ADO)—, the ADB had given a less dour outlook for Sri Lanka for 2020 and a more positive case for 2021 than what they projected a few months earlier. 

In its June ADO update, the Asia-focused lender projected a 6.1 percent contraction in the economy for 2020 followed by a modest growth of 3.5 percent for 2021 when prospects looked somewhat gloomy for both the domestic and global economy when more than a third of the world was sheltering-in-place. 

However, since then, the Sri Lankan economy made positive strides in multiple sectors. Activities in the agriculture, industrial and services sectors have expanded reaching pre-pandemic levels demonstrating resilience of the country’s industrial base.  

 Meanwhile, merchandise exports staged a faster rebound since May with the easing of lockdowns, reaching nearly a billion dollars each month from June through August. 

“Most economies in the Asia and Pacific region can expect a difficult growth path for the rest of 2020,” said ADB Chief Economist Yasuyuki Sawada, releasing the latest update to ADO.
“The economic threat posed by the COVID-19 pandemic remains potent, as extended first waves or recurring outbreaks could prompt further containment measures. Consistent and coordinated steps to address the pandemic, with policy priorities focusing on protecting lives and livelihoods of people who are already most vulnerable, and ensuring safe return to work and restart of business activities, will continue to be crucial to ensure the region’s eventual recovery is inclusive and sustainable,” Sawada added. 

Sri Lanka succeeded in containing the virus and has received plaudits for its coordinated efforts in doing so. The authorities deployed effective contact tracing mechanism to prevent community spread bringing the virus largely under control. At the same time, the government announced massive fiscal and monetary stimulus to prevent the health crisis transcending to an economic crisis. 

The ADB said the governments in the region have provided income support to the extent of US$ 3.6 trillion, equivalent to 15 percent of regional GDP. 

 On prices, ADB projected a more modest 4.5 percent inflation for Sri Lanka for 2020, which is set to decelerate to 4.2 percent in 2021 as slowdown in demand is expected to outweigh inflationary supply side disruptions.

Meanwhile, the broader Developing Asia’s economy is projected to decline by 0.7 percent in 2020, recording the first regional GDP contraction since early 1960s before growing by 6.8 percent in 2021.

Within the South Asian sub-region, which Sri Lanka falls into, the economy of tourism-reliant Maldives is projected to contract by 20.5 percent in 2020, before recovering to 10.5 percent growth in 2021. 

While India is expected to shrink by 9.0 percent in 2020 before recovering to 8.0 percent growth in the following year, Bangladesh remains an outlier in the block to record the most growth among Bhutan and Nepal for 2020. 

Bangladesh is projected to grow by 5.2 percent in 2020, accelerating to 6.8 percent in 2021. 

Meanwhile, in the East Asian region, China, the epicenter of the pandemic, is projected to record growth of 1.8 percent in 2020, accelerating to 7.7 percent in 2021. The Southeast Asian economy, Vietnam, is also projected to grow by 1.8 percent in 2020 and 6.3 percent in 2021.