Economy

Economy to grow 6-6.5% next 10 years - RAM

02 Nov 2012 - {{hitsCtrl.values.hits}}

Sri Lanka’s economy has been forecast to grow at 6.0%-6.5% on average for the remainder of this decade, according to a report from RAM Ratings (Lanka) Ltd.

The agency also revised its GDP growth forecast for 2012 to 6.5%, followed by a 7.0% forecast in 2013 as global economies begin to chart a clearer part to economic recovery

he forecast was based primarily on Sri Lanka’s favourable demographic profile which at present stands at 40% for the ratio of the population under 15 years of age against those between 15 and 64.

“This favourable demographic profile ensures Sri Lanka’s medium-term consumption and laboursupply growth, thus providing an underlying basis for economic expansion”.

“Various fiscal programmes to restructure the workforce follow.ing the civil war and the continu

ous growth in tertiary-education enrolment also encourage growth as they facilitate better allocation of human resources, which would in turn expand Sri Lanka’s production possibility frontier. Furthermore, the continuous inflow of capital, particularly from large emerging economies, will provide the means for Sri Lanka to accelerate its growth potential in the coming years,” the report stated.

However, the report cautioned that the primary risk to Sri Lanka’s medium term growth prospects stems from the country’s regulatory environment, despite improvements made in the recent past.

“Although the World Bank has noted that the country’s business environment has indeed improved, there is considerable scope for further progress. This is especially true with regard to the bureaucratic or regulatory costs involved in obtaining construction permits, registering property, paying taxes and enforcing contracts.”

“Enhancing the role of the private sector in Sri Lanka’s development provides a certain degree of dynamism that is essential for more sustainable longer-term growth,” the report pointed out.

The report went on to highlight further risks to Sri Lanka’s growth prospects, mostly as a result of a weak global economic climate, commodity price volatility and the country’s own fiscal tightening policy changes enacted earlier this year.

“Risks to Sri Lanka’s medium-term fiscal performance are substantial. Slower economic growth – as a result of a more subdued global economy and the Central Bank of Sri Lanka’s tightening stance – will dampen tax revenue.”

“The higher interest rate set by the CBSL and the recent depreciation of the rupee will, likewise, adversely affect the overall fiscal balance through higher interest payments. Volatile global commodity prices – particularly with regard to fuel prices – will likely burden large state-owned energy enterprises, which can pose risk to the sovereign’s finances in the future,” the report stated.

Despite fluctuations in oil prices throughout the year, caused in part by the on-going sanctions against Iran, the world’s second largest oil producer, the report forecast a fullyear average oil price of US$ 100- 105 per barrel due to stagnant global demand.

The spill over of the Euro-zone crisis is also anticipated to continue to hamper Sri Lanka’s attempts to boost export earnings throughout the year, with a growth forecast of 2.2% this year, followed by a lift to 3.7% in 2013.

“Although exports managed to outperform expectations last year, the downtrend has been evident since exports peaked in May 2011. The EU, Sri Lanka’s primary export destination by far, has been mired in a downward spiral that has seen its demand for external goods dwindling drastically. Part of the decline in European demand may also be attributed to the removal of the Generalised System of Preferences Plus scheme,”

The report noted that despite the Eurozone’s downward trends, exporters are yet to find viable alternate markets.

“Of even greater concern is the apparent dependence on Europe; in spite of its decline, the EU’s share of exports has not budged from a third of total Sri Lankan exports, indicating that the domestic economy has yet to find a suitable alternative market for its products. The relaxing of the CBSL’s intervention in the foreign-exchange market has seen the rupee depreciate against the US dollar, although we expect it to gradually appreciate again due to easing measures in the advanced economies, which will further hamper exports.”

Meanwhile, import growth was forecast to drop to 6.7% and recover at 7.2% in 2013, following last year’s drastic 32.7% increase.

Economy

Economy to grow 6-6.5% next 10 years - RAM

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