Lankan economy to post moderate growth in 2015, 2016

---

By Chandeepa Wettasinghe

Sri Lanka’s economic growth for this year and next year appears to moderate considerably compared to previous projections, according to forecasts released by leading multilateral agencies this week.
The International Monetary Fund (IMF), in its latest edition of the World Economic Outlook said that the Sri Lankan economy would grow at 6.5 percent in 2015 and 2016, which is a continuation of its projections in October.
“Real GDP growth is estimated at 7.4 percent for 2014, and is likely to continue in the relatively robust range of 6-7 percent in 2015,” the recent IMF Staff Mission to Sri Lanka Head Todd Schneider said following his visit last month.
The 2014 growth exceeded IMF’s projection of 7 percent given in October, while falling short of the 7.5 percent figure quoted by the Asian Development Bank (ADB) and 7.8 percent predicted by the Central Bank and the World Bank. The World Bank said that growth would be 6.9 percent and 6.6 percent in 2015 and 2016, respectively, revising from their outlook in early January, which showed figures of 7.5 percent and 6.8 percent respectively.
“Growth is expected to decline to 6.9 percent in 2015 due to slowing construction activity. This trend is partially set off by consumption growth thanks to increased public sector wages and higher disposable income,” the World Bank said.
Meanwhile, the Asian Development Bank’s Outlook last month said that growth would fall to just 7 percent in 2015 due to political uncertainty, before rebounding to 7.5 percent in 2016.
In contrast, the Central Bank early this year, under the previous regime said that growth would remain at a round 8 percent from 2015 to 2020, while inflation would be just 3.3 percent in 2015, and remain around 4 percent till 2020.
The new regime however has been contesting the figures, saying they were calculated without a rational base.
Schneider had said that inflation would remain in the low single digits, while facing some upward pressure from higher wages translating into higher demand.
ADB placed an annual headline inflation figure of 2 percent for 2015, and 6 percent for 2016, while the World Bank quoted figures of 3 percent and 5.3 percent respectively. The sudden jump in 2016 is due to the base effect, which reflects higher inflation following an unusually low period in the price index.
March inflation numbers were at an all-time low of 0.1 percent, driven by the price cuts in the interim budget and lowering of fuel prices.
However, both the World Bank and ADB had recommended fuel importing countries to not completely give way to the all-time low fuel market forces, as they questioned whether the benefit will truly trickle down to the consumer, while presenting the state with an opportunity to derive income.
Meanwhile, deflationary situation cannot be ruled out in the near future, with the Central Bank reducing the policy rates by 50 basis points to further stimulate economic growth. 

 

---

CB cuts policy rates by 50 basis points

The Central Bank on the following day of Avurudu cut the policy rates by 50 basis points, a move that was least expected amid concerns of high domestic borrowings by the government to cover its costs.
The April Monetary Policy review issued by the Central Bank said the current behaviour of market interest rates appeared to be “inconsistent with the continued low inflation and investments needed to address concerns on economic growth for the year.”
Headline inflation in March was at all time record low of 0.1 percent, a result of administrative cuts in energy prices and a number of consumer items by the new government. 
The Central Bank expects inflation to remain at low-mid single digit level in 2015.
“Therefore, there is further leeway to continue relaxation of monetary policy, primarily through a reduction in policy interest rates of the Central Bank to encourage economic activities by enhanced credit flows and investments due to lower cost of funds and behaviour of market interest rates consistent with economic growth outlook,” the Central Bank said. Accordingly, the Standing Deposit Facility Rate (floor rate for the absorption of overnight excess liquidity from the banking system) was reduced to 6 percent from 6.5 percent and Standing Lending Facility Rate (interest rate applicable on reverse repurchase transactions of the Central Bank with Commercial banks on an overnight basis) was reduced to 7.5 percent from 8 percent.  The Central Bank said if the monetary relaxation creates any adverse effects over other economic variables, “a mix of other monetary policy tools is available to fine tune such effects.”