Economic growth in 2018 understated: Central Bank

3 January 2019 11:55 am - 0     - {{hitsCtrl.values.hits}}

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Sri Lanka’s gross domestic product (GDP) is possibly understated by over 0.5 percent last year as the Department of Census and Statistics (DCS) lacks resources to capture required data to support the new methodology adopted in 2015, according to the country’s central bank. 


Central Bank Governor Dr. Indrajit Coomaraswamy yesterday cast his doubts on the GDP growth figures for 2018, where he noted that Sri Lanka is likely to have recorded a GDP growth of 3 percent.


According to the national accounts published by the DCS, Sri Lanka’s economy grew at 2.9 percent in the third quarter of 2018 while the second quarter growth was estatimated at 3.6 percent.


“My view is that we need to look carefully whether we are recording GDP accurately. I don’t think this is a 3 percent growth economy at the moment.” Dr. Coomaraswamy made these remarks yesterday at a press conference held at the Central Bank, following the launch of the ‘Road Map: Monetary and Financial Sector Policies for 2019 and Beyond’ report.

“We adopted a new methodology about two to three years ago; everyone was saying that the methodology is excellent but that methodology needs a lot of surveys to support it. We don’t have the sources to undertake all the surveys to support that methodology,” he noted.


The base year for the national accounts was moved to 2010 by the DCS, along with a new methodology to enhance the accuracy of constant price estimates and represent the real economic structure of the economy.


Dr. Coomaraswamy pointed out that the International Monetary Fund had predicted a 3.5 percent GDP growth for 2018 while the World Bank‘s forecast was 4 percent. The Central Bank was anticipating a 3.8 percent growth last year. 


“My view is that the growth is somewhere between 3.5 and 4 percent in 2018,” he said.


Dr. Coomaraswamy said that due to lack of resources to conduct all surveys necessary to capture economic activities under the new methodology, the DCS uses proxy responses for surveys, which might not be accurate to make a judgment. 


He noted that the accuracy of these surveys would largely depend on picking the right proxy responses and a sufficient number of proxy responses. 


In particular, Dr. Coomaraswamy was doubtful of the activities recorded in the transport and construction segments, while noting that the proxies used for the surveys in the segment may not be completed. 


Further, he was also doubtful of capturing the data in certain new sectors, such as economic activities of Colombo Port City, which is under construction, as well as the emerging activities in the rapidly growing shared economy. 


Meanwhile, responding to a media query, the governor said that the political crisis, which prevailed for almost two months, last year, had caused a significant cost to the economy.  


He noted that domestic and foreign investments, tourism and capital markets were particularly impacted by the crisis. 


However, he stressed that the biggest impact was on the sentiment and confidence of the country, which is extremely difficult to quantify. 
Speaking of the economic growth forecast for this year, Dr. Coomaraswamy opined that the improved weather conditions would support the economic growth this year.


“It’s not just in terms of agriculture but also in terms of hydropower generation, which is a high value-added activity, which kind of constitutes to growth significantly. If we can increase hydro generation to 30 to 35 percent, it will significantly support the growth,” he said. 


The Central Bank is expected to announce the GDP forecast for 2019 at the first monetary policy review press conference in February. 


SL to halve foreign holdings in govt. securities to 5%


(Colombo) REUTERS: Sri Lanka plans to restrict foreign holdings of government securities to a maximum 5 percent from the current 10 percent to prevent possible hot money flows and improve the quality of reserves, the country’s central bank chief said yesterday.

The surprise move comes after the island nation suffered about US $ 1 billion in foreign outflows from rupee-denominated government securities in 2018.


Nearly 42 percent of these outflows were in the last couple of months in the aftermath of a political crisis triggered by President Maithripala Sirisena sacking Prime Minister Ranil Wickremesinghe. Foreigners held 3.1 percent of the total outstanding government securities of Rs.5.29 trillion as of December 26, the Central Bank data showed.


“In view of the increased volatility in global financial markets, we also intend to reduce the threshold for foreign investment in rupee-denominated government securities from 10 percent of the outstanding government securities stock at present to 5 percent,” Central Bank of Sri Lanka Governor Indrajit Coomaraswamy said.


A rise in interest rates in the U.S. and major economies, and trade tensions, have led to greater volatility in the system, he added, during the release of the bank’s 2019 economic outlook.


“All that has elevated uncertainty. In such a context, foreign institutional investors, that is footloose money, goes in and out very fast. Those are the people we gave this 10 percent limit. Now with a much more volatile global financial context, its better not to have as much exposure.”


Sri Lanka’s economy is struggling to attract long-term foreign investment due to policy inconsistency and political instability. The recent political crisis led to rating downgrades by credit agencies Fitch, S&P and Moody’s. They cited refinancing risks and an uncertain policy outlook.


The government does not encourage short-term capital flows into government debt, Central Bank Senior Deputy Governor Nandalal Weerasinghe, told reporters.


“Our policy is to encourage more long-term reserves like international sovereign bonds and syndicated loans. This is just to improve our quality of reserves and to have more stable money,” he said. 

 

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