Sri Lanka economy grew by 2.3% last year, CB annual report

The Sri Lankan economy recorded a subdued growth of 2.3 per cent in 2019, 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 Central Bank’s annual report for 2019 released on Tuesday. 
 
The report was formally handed over to Prime Minister and Minister of Finance Mahinda Rajapaksa by Central Bank Governor Prof. W.D. Lakshman and bank officials on Tuesday.

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.

The Easter Sunday attacks had a severe impact on the tourism sector, and their adverse spillover effects were felt across the economy, worsening the sluggish growth of the economy and further dampening business confidence. 
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.
 

Inflation
Despite transient supply side disturbances, both headline and core inflation moved broadly in the desired range of 4-6 per cent during 2019, mainly as a result of subdued demand conditions and well anchored inflation expectations.
 
External sector developments
Policies to curtail import expenditure resulted in a notable improvement in the trade and current account balances. Gross official reserves improved by end 2019, supported by significant inflows to the government and the Central Bank, despite large foreign currency debt service payments by the government in 2019. The exchange rate remained broadly stable during 2019, supported by a significant improvement in the current account, despite some transient volatility experienced amidst outflows of portfolio investment, responding to domestic and global developments.

Fiscal sector developments
The report said that the process of fiscal consolidation faced significant challenges in 2019, amidst the notable decline in government revenue and the rise in government expenditure. 

Central government debt as a percentage of GDP rose to 86.8 per cent by end 2019 from 83.7 per cent at end 2018, reflecting the impact of higher net borrowings to finance the budget deficit and the relatively modest growth in nominal GDP in 2019.
 
Monetary sector developments
In an environment of muted demand driven inflation pressures and well anchored inflation expectations, the Central Bank adopted an accommodative monetary policy stance in 2019 to support the revival of economic activity and address the sluggish growth in credit extended to the private sector. 
Growth of credit to the private sector recorded a sharp deceleration in 2019 amidst high market interest rates, policy uncertainty, dented business confidence especially after the Easter Sunday attacks, and subdued economic activity during the year, although a recovery was observed in absolute credit disbursements towards the end of the year supported by the measures taken by the Central Bank to ease the monetary conditions.

Financial sector developments
Performance of the financial sector moderated in terms of assets base, credit quality and profitability of financial institutions due to the challenging business environment created by subdued economic growth, policy uncertainty, and the deterioration of investor sentiments stemming from the Easter Sunday attacks. The banking sector, which dominates the financial sector, displayed a moderate expansion during the year, compared to the previous year, reflecting the impact of the low demand for credit and tightened credit screening in an environment of deteriorating credit quality. The performance of Licensed Finance Companies and Specialised Leasing Companies deteriorated, owing to unfavourable market conditions and sector weaknesses.  - ENDS -