Sri Lanka’s economy to ‘decelerate’ by 1.5% in 2020-CB
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CB Governor Prof. W.D. Lakshman presenting the Annual Report 2019 to Prime Minister Mahinda Rajapaksa with Dr. P. Nandalal Weerasinghe, Senior Deputy Governor and Dr. Chandranath Amarasekara, Director of Economic Research of the Central Bank, also in the picture.
Sri Lanka’s economic (GDP) growth in Sri Lanka is expected to ‘decelerate’ by around 1.5 per cent in 2020 from a growth of 2.3 per cent in 2019, according to the Central Bank.
The bank in a section titled “COVID-19 and Sri Lanka: Challenges, Policy Responses and Outlook” contained in the CB annual report for 2019 released on Tuesday said that “through various direct and indirect channels, including the ongoing diversion of additional financial resources to support economic activity, the COVID-19 pandemic will adversely impact the progress of the economy during the year, contrary to previous expectations of a rebound in economic growth”.
Last year’s economic growth was attained compared to the growth of 3.3 per cent in 2018, as per the provisional estimates of GDP of the Department of Census and Statistics (DCS). All major sectors of the economy recorded positive, but modest growth rates, according to the 2019 annual report.
Referring to the coronavirus crisis, the report said that while Sri Lanka has been relatively successful in so far combating the COVID-19 outbreak, as a result of early measures adopted to contain the spread, the interplay of setbacks to domestic economic activity stemming from such containment measures and spillover effects from the global economy are likely to have a notable impact on the Sri Lankan economy during the year.
The socio-economic impact could also be extensive with the loss of income and livelihoods for a large segment of society. With approximately 60 per cent of those employed being engaged in the informal sector and an estimated 1.9 million being daily wage earners, a large number of households is likely to be in a precarious position, it said.
Although Sri Lanka has not seen any significant strain on the public healthcare system due to proactive mitigation measures, any unexpected rise of the spread could take a significant toll on the limited capacity of the system.
“Despite a rapid recovery from the Easter Sunday attacks, the tourism industry is likely to experience the brunt of not only the current pandemic but also its aftermath that may be long lasting and persistent. The overall downturn in the global economy and the economic woes in countries and regions, from which Sri Lanka has been traditionally attracting tourists, including China, India and Europe, will hinder the recovery of the tourism sector. Another key spillover effect of the contraction of the global economy is the decline in remittances, which have been a vital cushion for Sri Lanka’s external sector. In recent years, the leading shares of workers’ remittances have been from West Asia, the European Union, and Far East Asia,” it added.
Although the reduced fuel import bill (based on lower fuel prices) would ease the burden on the trade deficit, the overall impact on the external current account, arising from the developments in merchandise and services trade and remittances, is likely to be negative in 2020.
Although Sri Lanka’s exposure to short term capital flows is marginal, this has resulted in the sharp escalation
of Sri Lanka’s international sovereign bond yields, similar to the experience
of other emerging market and developing economies.
“Although the recovery of global economic activity is likely to be a slow process, measures to achieve normalcy in domestic economic activities could enable Sri Lanka to record a faster recovery, as domestic demand accounts for a significant portion of aggregate demand in Sri Lanka,” the report said.
According to GDP estimates based on the expenditure approach, growth in 2019 was driven by consumption growth and the improvement in the external balance of goods and services.
The report said that during 2019, Sri Lanka’s dismal performance continued in terms of real economic growth, although macroeconomic stabilisation measures helped correct the external sector imbalances to some extent, while inflation pressures remained muted on average.
Policy measures aimed at reducing pressures on the balance of payments (BOP) and the exchange rate continued in 2019, which together with steps taken to revive the economy, contributed to notable slippages in the fiscal sector. Subdued demand conditions allowed the continuation of low inflation during the year, although extreme weather conditions and resultant disruptions to domestic food supplies caused some volatility in consumer prices. Growth of credit to the private sector decelerated sharply, driven by subdued economic activity and weak business confidence, affecting the performance of the financial sector. Considering the need to support economic activity amidst muted inflation, well anchored inflation expectations and diminished pressures in the external sector, the Central Bank adopted an accommodative monetary policy stance, and took steps to expedite the transmission of monetary policy measures to the economy through regulatory action aimed at reducing market interest rates, the report said.
“As domestic economic activity started to show early responses to the policy measures taken to revive the economy and improving business sentiments at the beginning of the year 2020, the outbreak of the COVID-19 pandemic, the containment measures adopted by all countries including Sri Lanka, and the resultant projected contraction in the global economy, triggered further uncertainties regarding the country’s economic performance in 2020. In the near term, the economy is likely to be impacted severely in terms of its growth, fiscal, external, and financial sector performance, while causing hardships to all stakeholders of the economy. The monetary policy space in terms of the low inflation environment, and the banking sector space created by the maintenance of capital and liquidity buffers above industry norms, enabled the Central Bank to support the efforts of the government to ease the burden on businesses as well as individuals. Despite the temporary setback posed by the pandemic, appropriate growth supportive reforms to address longstanding structural issues and enhance domestic production, improve export orientation, attract foreign direct investment (FDI), facilitate innovation, improve factor productivity and efficiency, and improve policy buffers, if implemented without delay, would enable Sri Lanka to realise the desired outcome of achieving sustained and equitable economic growth and becoming a prosperous nation in the period ahead,” it said.