Sri Lanka’s September manufacturing expands but services slow

The official Purchasing Managers’ Index (PMI) calculated by the Central Bank showed that manufacturing activities had expanded in September faster than in August but the services sector expansion had slowed due to declines in new businesses and business activities. 

The manufacturing PMI increased 4.2 index points to 57.7 from a month ago, supported by new orders and production. But the other sub-indices of manufacturing PMI—the employment and suppliers’ delivery time— decreased while the stock of purchases index remained unchanged. 
“Overall data points to an expansion where all the sub- indices apart from suppliers’ delivery time index which is neutral, are above the 50.0 threshold,” the Central Bank said in a statement. 
Monthly PMI data is a crucial indicator to gauge how an economy has performed in a month and is widely used by market participants, analysts and policy makers. 

Meanwhile, the services sector PMI recorded 57.7 index points in September from 61.2 index points. 
The slowdown in the services sector expansion was attributed to the declines in new businesses, business activity, employment, and backlog of work. 
An index value of above 50 nevertheless indicates an expansion in a sector on a month-on-month basis. 

Sri Lanka’s second quarter gross domestic product growth slowed to 2.6 percent after growing by 5.5 percent in the first quarter. The services sector performed modestly but the agricultural sector shrank due to adverse weather conditions. 
As a result, the first half growth slowed to 3.9 percent down from 5.3 percent during the same period last year. 
However the Central Bank is confident of achieving a 5.0 percent or above growth for 2016. 
Yet the conditions for credit have toughened and the impending higher taxes could also undermine the growth during this year and the next. 

It is also speculated that the Central Bank could again tighten its monetary policy if the credit that flowed into the economy did not recede as expected. 
Sri Lanka’s credit for the private sector grew 28.5 percent year-on-year in July, well above the 20 percent levels the authorities want to see. 

Higher interest rates and higher taxes could undermine the manufacturing and services activities, further slowing the economy even below 5.0 percent, independent economists opine.