Despite the substantial fall in the global oil prices, Sri Lanka has worsened its external current account position while its regional peers have been able to contain their current account deficits taking advantage of lower import bills, the Asian Development Bank (ADB) said, releasing its update on Asian Development Outlook (ADO) for 2015.
According to the ADB, the rapid increase in consumer and investment goods—particularly the lower tariff-driven transport equipment—pushed up the import bill by 5.7 percent year-on-year during the first of half of 2015, expanding the current account deficit to US $ 792 million.
The ADB forecast a current account deficit of 2.9 percent of the GDP for 2015. In 2014, the country recorded a current account deficit of 2.7 percent of GDP.
“... the sharp fall in oil prices has steeply reduced import costs to offset in large part the fall in export sales and so constrained deterioration in the current account deficit—except in Sri Lanka. There, a large increase in consumer goods imports has pushed the current account deficit higher than in the other three countries,” the ADB said. The situation is expected to further deteriorate in 2016 with current account deficit expanding to 3.6 percent of GDP due to the expected continuation of weak external demand amid a modest increase in oil imports and favourable prices for food and
The South Asian region currently experience a moderate inflation—projected to increase by only 0.5 percent in 2016—due to the modest increase in the oil prices and essentially stable food prices.
The ADB has a revised GDP growth target for Sri Lanka at 6.3 percent for 2015 and 7.0 percent for 2016 as the Asian-focused development lender expects the private sector investments to rise after the diminished political uncertainties.
Sri Lanka’s private investments slowed due to the political uncertainties surrounding the January 8 presidential election and the unstable interim government led up to the Parliamentary elections on August 17.
Sri Lanka’s GDP growth slowed down to 4.4 percent in the first quarter and 6.7 percent in the second quarter of 2015 against the corresponding quarters last year due to stalled construction sector growth.
“Offsetting this in part, robust spending in consumption-related sectors such as wholesale and retail trade sustained relatively strong growth,” the development lender wrote.
Sri Lanka’s growth appears to be now driven by domestic consumption, largely driven by cheap bank credit but the sustainability remains a question.
Meanwhile the ADB revised down the growth forecast for the South Asian region to 6.9 percent in 2015 from 7.2 percent and 7.3 percent in 2016 from 7.6 percent, mainly due to the modest growth acceleration in India—trimmed down to 7.4 percent in 2015 and 7.8 percent in 2016.
“The slower expansion in India is due to unexpectedly sluggish growth in the major industrial economies, flagging global trade, and parliamentary deadlock stalling action on structural reform,” the report stated.