ADB expects Sri Lanka growth to recover to 3.6-pct in 2019

ECONOMYNEXT – Sri Lanka’s growth is expected to recover to 3.6 percent in 2019, up from 3.2 percent in 2018, amid higher state spending and stable agriculture and industrial activity, the Asian Development Bank (ADB) said.

"Our forecast assumes normal weather agriculture to grow and contribute," Utsav Kumar, Senior Country Economist at ADB’s Sri Lanka office said.

"Public sector salaries and clearing pension anomalies will support growth."

He said a higher outlays for capital spending in the budget will also boost construction which contracted in 2018.

"While the economy is projected to recover over the next two years for Sri Lanka to sustain and accelerate growth, fiscal and structural reforms remain essential," Kumar said.

Sri Lanka was also hit by up to four hours of power cuts from March, which also tend to hit growth. Kumar said the power cuts were not taken into account when the growth forecast was made.

Downside risks to the economy could come from a ‘no deal Brexit’ which may increase tariffs and political risks from an election year which may increase uncertainty.

"One thing investors do not like is uncertainty," Kumar said.

There was also a structural decline in out migration which will reduce remittances.

Inflation in 2019 is forecasted at 3.5 percent, he said.

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Sri Lanka’s soft-peg with the US dollar in 2018 after the Central Bank printed money in April to boost credit and unsterilized liquidity was allowed to build up in August.

The rupee fell faster in late 2018 amid a political crisis. Defending the currency led to prolonged liquidity shortages.

Prolonged liquidity shortages tend to have output shocks, while depreciation tends to push the price structure up, unless the currency is allowed to bounce back up after credit slows, analysts who have watched cycles of repeated policy errors of the Central Bank say. In the last quarter of 2018, growth fell to 1.8 percent.

In January private credit turned negative for the first time in four years and the rupee had been allowed to strengthen up to April with some dollar purchases also made. (Colombo/Apr05/2019-SB)