An independent research house has projected a gloomy outlook for Sri Lanka this year with the economy just growing a mere 3.9 percent amid slowing consumer spending, a depreciating rupee and an expanding budget deficit, though private sector credit is likely to ease.
According to CAL Research, part of Capital Alliance Group, the fiscal tightening measures will hurt the consumer demand, which hitherto helped propel the Lankan economy.
However, this is a much conservative estimate compared to what the country’s Central Bank and the International Monetary Fund (IMF) have already projected.
The IMF, in December, slashed its growth forecast on Sri Lanka to 4.8 percent for 2017 from its earlier forecast of 5.0 percent. The Central Bank however has taken a more optimistic view on the economy, forecasting a 5-5.6 percent growth though not overlooking the significant downside risks.
“Sri Lanka’s GDP growth for 2017E is expected to fall to 3.9 percent, from our 2016E of c. 5 percent (excluding FDI),” CAL Research said in its latest macro outlook titled ‘Infrastructure growth to counter fall in consumption’.
However, CAL Research said lower growth would be propelled to a certain extent by the infrastructure growth mainly funded by foreign direct investments as consumption is likely to weaken and will become less of a growth driver.
Interestingly, the tightened money conditions in 2016 and the lower disposable incomes due to higher taxes did little to slowdown consumer demand. This is aptly demonstrated through the country’s consumer retailers posting strong financial results supported by higher revenues.
Meanwhile, CAL Research said the rupee would plunge to 163 against the US dollar and the inflation would accelerate. The research house expects a more market-oriented level for the rupee in 2017, primarily due to the pressure on reserves.
Commenting on the price pressure, CAL Research estimates urban prices to rise up to 8.4 percent by the end of the year as the oil bill is expected to rise at lease by US $ 230 million due to higher thermal power generation.
“CAL expects higher thermal oil use for power generation in 2017, which may result in the total oil bill increasing by US $ 230 million. CAL expects crude oil to average US $ 55/bbl, while the total cost for Sri Lanka is expected to top US $ 70/bbl,” CAL said.
Under these circumstances, the budget deficit is expected to expand between 7.9-9.0 percent of gross domestic product (GDP), overshooting the government’s deficit target of 4.6 percent for 2017.
However, CAL Research holds a more dovish outlook for private sector credit of around 11 percent in 2017.
“Due to an increase in indirect taxes and a 4 percent LKR depreciation towards the end of 2016, CAL expects private sector credit growth to fall to 11.2 percent in 2017E from 19.5 percent in 2016E.
This demonstrates CAL Research’s expectation of higher interest rates for longer period.
Sri Lanka’s economy was seen drifting during the last two years with no major progress being made as policy and political uncertainties weighed on the economy.