ECONOMYNEXT – Sri Lanka can contain damage from last month’s suicide bombings and ensure a quicker economic recovery if it improves security and prevents further unrest, although the budget deficit will widen, Central Bank Governor Indrajit Coomaraswamy said.
“Clearly, there’s likely to be an impact on the government budget,” he told a public forum Friday.
“On the revenue side, the VAT (value added tax) reduction on tourism will have an impact. But tourism is only five percent of total VAT receivables so the impact should be manageable.
”But if there is a quick recovery, because the security situation stabilises, then the economic slowdown can be contained.
“But if there’s a significant slowdown, then VAT receipts and corporate tax receipts will be adversely affected which will affect revenue.”
Y. M Indraratna, director of economic research of the central bank, said the medium-term outlook presented in the bank’s 2018 annual report projected real sector gross domestic product growth would rise to four percent and 5 percent thereafter.
The external sector was projected to strengthen in the medium term with improvements in the trade and services account while revenue-based fiscal consolidation was to reduce the budget deficit.
But these forecasts were done before Easter Sunday’s bombings of churches and hotels which killed over 250 people, including tourists , Indraratna told the forum to discuss the state of the economy as reflected in the annual report.
It was too early to do a comprehensive revision of the forecasts but several “variables” are likely to be hit, she said.
“Tourist arrivals and earnings would be significantly lower and there would be negative spill over to related sectors like hotels and restaurants, transport, entertainment and hospitality training.
“So real GDP growth could be lower than projected and the current account different,” Indraratna said.
“The fiscal deficit could be higher than projected although expenditure switching could dampen the effect on the budget.”
But Indraratna said inflation is likely to remain at desired levels.
Coomaraswamy said the security forces were making progress in dealing with the attackers and subsequent communal violence and economic recovery depends on how well authorities restore normality and revive investor and tourist confidence.
“It is fair to say the extent of the impact (of the attacks) will depend on how quickly we can normalise the security situation and also the sentiment and confidence of economic agents.
”But the situation needs to stabilise and stabilise quickly. If we can achieve that we can pull through this. The quicker that happens, the less would be the impact.
”But if it drags on and there’s a kind of messiness in the way we deal with it, then the impoct will be worse. It is up to us to deal effectively with the situation.”
(COLOMBO 19 May 2019)