Central Bank sees 2018 economic growth at 4%

• Slashes growth forecast from 5% - 5.5%
• First half growth expected to have moderated to 3.4%
• Economy grew 3.2% during first quarter of this year

By Nishel Fernando

The Central Bank has revised down the economic growth forecast for this year to 4 percent from the initial growth forecast of 5 - 5.5 percent at the beginning of the year, as the economic growth in the first half of the year is expected to have moderated to 3.4 percent. The International Monetary Fund (IMF) had also earlier forecasted a 4 percent economic growth for the island nation in 2018,while the World Bank had projected the economy to grow at 4.3 percent.

Sri Lanka’s economy grew at 3.2 percent in the first quarter of 2018 and the second quarter figures are yet to be released by the Department of Census and Statistics. 

However, the Central Bank expects the economic growth to be around 3.4 percent during the first half of the year.Addressing the reporters at the monetary policy announcement press briefing last Friday, the Central Bank Governor Dr. Indrajit Coomaraswamy said it is unlikely that the economic growth is going to be over 4 percent this year. “Being realistic, I suspect it’s going to be around 4 percent,” he said.

He highlighted that there’s a significant negative output gap as the Central Bank has identified Sri Lanka’s potential growth rate to be 5.75 percent.

The Governor noted that the economy needs to grow by 4.6 percent during the latter half of the year to reach 4 percent.

“The economy was expected to grow by about 3.4 percent in the first half of 2018, and will have to grow by 4.6 percent during the latter half of the year to get to 4 percent,” he said.

However, the Governor was optimistic that Yala season harvest would enhance growth rate to achieve 4 percent target.

While reiterating that the 4 percent was a realistic forecast, he emphasised that the Central Bank didn’t want to be taken by surprise unlike last year when Sri Lanka recorded a 3.3 percent economic growth— the lowest growth since 2001—and which was also below the projections. 

“We were surprised with a downside last year and hopefully, this year, we will be surprised with an upside,” he said. 

Private sector credit growth decelerated to 14.9 percent year-on-year(YoY) in June 2018 from 15.1 percent in May, and the Central Bank expects the private sector credit growth to a moderate 13-14 percent by the end of this year.

Dr. Coomaraswamy said that given the surplus liquidity conditions in the domestic money market, the bank deposit rates and real interest rates need to come down, which would facilitate growth. 

“A matter of some concern is that bank deposit and lending rates are rigid as they are. In fact, this concern was expressed to CEOs of banks at the recent monetary meeting. We do think that bank deposit and lending rates now need to come down. As we monitor that, we could see how it develops,” he said. 

Sri Lanka plans US$ 250mn Panda bond

Sri Lanka plans to enter into the Chinese bond market with an initial issuance of US$250 million renminbi-denominated bond or Panda bonds later this year, Central Bank Governor Dr.  Indrajit Coomaraswamy said. “We are working towards panda bond issuance before the end of the year. We went on a non-deal road show to China and met representatives of some banks, insurance companies, other institutional investors, and the most encouraging meeting being with the People’s Bank of China,” he said. 

Dr. Coomaraswamy noted that the planned Panda bond issuance would be followed by a currency swap. 

Moreover, he revealed that a proposal has been received from the People’s Bank of China to set up a joint task force to examine how Sri Lanka could explore the Panda bond market.

The Governor also revealed Central Bank’s intentions to tap into the Japanese bond market with the sale of yen-denominated Samurai bonds.