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Sri Lanka could have near zero growth in 2020, despite Covid-19 controlled recovery: Central Bank

ECONOMYNEXT – Sri Lanka’s domestic economic activities and exports are recovering fast with Coronavirus under control, but a 1.6 percent contraction in the first quarter and an even steeper fall in the second quarter may lead to barely positive growth in 2020, officials said.

Sri Lanka is one of the global leaders in controlling the spread of Coronavirus up to now.

“Domestic economic activities have recovered relatively fast, in spite of the bleak economic conditions continuing in economic partner countries, which are still unable to distance themselves from Covid-19 related issues,” Central Bank Governor W D Lakshman said.

However the first quarter had contracted 1.6 percent according to census data which central bank believes is unexpectedly low.

“With a sharper contraction expected in the second quarter it is essential to have a strong rebound in the second half of the year to make the economy record an overall positive growth in 2020,” he said.

The central bank had projected a 4.0 percent growth before Coronavirus and 1.5 percent after. The International Monetary Fund had projected a negative 0.5 and Fitch Ratings 3 percent.

“For us to reach at least zero percent, we need a significant rebound in the fourth quarter,” Deputy Governor Nandalal Weerasinghe said.

“It is too early for us to come out with a number, but under that scenario, if mostly if we achieve higher growth in the fourth quarter a little over positive growth in the third quarter then we will achieve at least zero growth in 2020 under those assumptions.

Director of Economic Research Chandranath Amarasekera said the central bank did not expect ‘much of a pick-up’ in the third quarter.

“But in the fourth quarter we need a substantial pick-up to correct the contraction in the first two quarters,’ he said.

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Sri Lanka’s economic activities were slowing in March and the country went to a complete lockdown in the last week. Many countries have seen very steep downturns in activity, with lockdowns.

Governor Lakshman said the general elections had elected a stable government to carry out economic policies outlined the ‘Vistas of Prosperity’ policy document.

He said there was a greater stability in the external sector indicators, sovereign bond yields have fallen exports have rebounded and the trade deficit had improved.

In Sri Lanka the trade deficit narrows when private credit weakens, consumption and domestic economic activities collapse and at times there may also be a narrowing of net financial inflows.

This year however the worst import controls seen since the collapse of the Bretton Woods system in 1971 had been imposed.

“Except in the past few days the exchange has well-behaved retaining the desired conditions for stability,” he said.

Governor Lakshman said with the measures taken by the central bank and Treasury 2020 would end with ‘external reserves stable ‘ after all debt due for the year repaid.

He said weak global economic conditions were likely to continue for some time.

Market interest rates had also fallen.

He said private credit is yet to pick up and low tax revenues were making the government rely more on the banking sector to fulfill cashflow requirement. (Colombo/Aug20/2020)