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Research house gives gloomy outlook for economy in 2016

14 December 2015 03:06 am - 0     - {{hitsCtrl.values.hits}}

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  •     Economy to slow down to 5.9%
  •     Budget deficit to reach 8% of GDP
  •     Interest rates to rise over 200bp
  •     Inflation to reach above 7%
  •     Rupee to collapse to 154/US $
Hot on the heels of the International Monetary Fund (IMF) warning over an uncertain Sri Lankan economy with its risks largely tilted towards downside, a Colombo-based independent research company dropped another bombshell with a significantly gloomy macro-economic outlook for the post-war Sri Lanka in 2016.

According to Capital Alliance (CAL) Research, the 2016 budget deficit will overshoot by a massive US $ 1.4 billion to 8 percent of gross domestic product (GDP) from the projected 5.9 percent of GDP due to overly ambitious revenue targets.

This is after incorporating the inflows from the new tax schemes and the incomes from the possible divestitures of government stakes of certain companies outlined in the Budget.

The Budget presented on November 20 projected the revenue to grow by over 38 percent or Rs.569 billion over 2015 to Rs.2, 047 billion.

Besides this being an uphill task, the government had to withdraw some of the revenue proposals and relax some of the expenditure items contained in the original Budget, making the task even more challenging.

This can be considered a significant reversal from the continuous fiscal consolidation path the country committed to since the end of the war in 2009.  

The spillover effects of a massive budget deficit are much more severe on other areas of the economy as the government will be compelled to resort to domestic banking sector borrowing which would in turn put pressure on the domestic interest rates.  

Analysts note that international borrowing could be challenging, given the expectations of the United States hiking its interest rates.

However, the Budget 2016 has reduced its dependency on banking sector borrowings to Rs.182 billion from Rs.319 billion a year ago while the government’s foreign borrowings have increased, hence no crowding out effect of the private sector is envisaged.

Nevertheless, CAL Research forecasts the one-year Treasury bill rate to reach to between 8.7 to 9.1 percent by end 2016 from the current level of 6.92 percent, which was up 6 basis points at the primary auction this week.

CAL however expects the private sector credit to grow between 11.1 to 13.5 percent in 2016 with the broad money (M2b) growing by 15.8 percent, due to likely slow down in consumption.

“CAL expects a general increase in incomes of 5.9 percent, due to income tax revisions and imposition of maximum retail prices on several essential items, which may support M2b growth of 15.8 percent.”

Further the rupee is to take a steeper fall to 149 to 154/ US $ by the end of 2016 from the current Rs.143 levels due to increase in net imports by 9 percent and the upcoming debt repayments to the tune of Rs.700 billion next year, which will apply continuous pressure on the reserves.

In the absence of foreign inflows, the balance of payment (BOP) could further deteriorate.

All these implications are expected to snowball into much higher prices in 2016 as the headline inflation is to hit 7.1 percent, much higher than the Central Bank projected 4 percent.  

Higher import food prices due to weaker rupee coupled with the rise in Value Added Tax (by 1.5 percent) and the Nation Building Tax (by 2 percent) which will be passed on to the end consumer is likely to overheat the Lankan economy forcing the Central Bank to tighten its monetary stance.

This will result in much lower growth in the economy in 2016 which is expected to slow down to 5.9 percent from the 6.5 percent projected for 2015, barring the impact from the FDIs. 

This is less than the 7.5 percent growth projected by the Central Bank for 2016.

“We do not take FDI in to our estimates, as the degree of confidence of such estimates is low. However, CAL expects US $ 1 billion of FDI that is fully deployed during the year to add c.24bps to GDP growth. The primary reason for such a low value addition is due to the majority of the funds expensed on imports,” CAL stated in their note on the 
macro-economic outlook. 

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Order Gifts to Sri Lanka. See Kapruka's top selling online shopping categories such as Toys, Vegetables, Grocery, Flowers, Birthday Cakes, Fruits, Chocolates, Clothing and Electronics. Also see Kapruka's unique online services such as Sending Money,Online Books, Delivery Service, Food Delivery and over 700 top brands. Also get products from Amazon & Ebay via Kapruka Gloabal Shop Sri Lanka

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