HSBC Global Research said it expects Sri Lanka’s GDP to average 4% this year and accelerate to 6% in 2010 as the end of the war has brightened the country’s growth prospects.
The report, released this week, said the growth outlook is more positive with massive reconstruction and rehabilitation work set to start and the collapse in inflation as well as the easing of central bank policy. The end of the civil war has boosted confidence and is leading to a rush to invest in Sri Lanka. Although there are great untapped opportunities, many challenges remain, the report stated.
The report further said the government needs to create the right post-conflict environment by not only ensuring security, law and order and protection for the broader civilian population but most importantly, a political solution to the ethnic problem.
Tourism, business process outsourcing (BPO) and manufacturing are key sectors ripe for FDI, according to the report. At the same time, public investment should get a boost as military spending is cut back. ‘Overall, we expect a rising investment share of GDP to raise the country’s potential GDP towards 7 – 7..5%,’ the report said.
HSBC Research said it is fair to say that some progress has been made in reducing the budget deficit. However over the last two years, the main aim of the government has been to end the war, putting fiscal consolidation on the backburner. ‘Now that the war is over, there is hope that the government will renew its efforts to rein in the budget deficit.
Much remains to be done in terms of rationalizing the tax structure, broadening the tax base, cutting subsidies and most importantly reducing the government’s high salary and interest bill.’
The report said Sri Lanka’s balance of payment deficit was US$1.3 billion in 2008 on the back of a large trade deficit given the price spike in oil and food related commodities and rising offshore interest payments. HSBC Research expects exports to remain weak given that nearly 60% of the shipments from the country are headed to the US and Europe combined. However, imports are expected to decline in part due to lower demand for export inputs and consumer goods. “Overall, we look for the trade deficit to narrow to around US$4.8 billion from US$5.8 billion last year.”
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