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Wednesday December 1st, 2021
Economy

Sri Lanka expects 5.0-pct GDP growth in 2021, 6.5 in first quarter 2022

ACTIVITY: Sri Lanka is doing better than some with relatively high levels of vaccination, but the country has severe monetary instability and a wide budget deficit coming from tax cuts.

ECONOMYNEXT – Sri Lanka is expecting 5.0 percent economic growth in 2021 and 6.5 in the first quarter of 2021, Central Bank Governor Nivard Cabraal said.

“We will have a real GDP growth of around 5 percent in 2021 and we will aim at 6.5 percent in the first quarter of 2022,” Cabraal said presenting a policy road map for the next six months.

“I believe we should be able to achieve that without much difficulty and stabilize inflation in the mid-single digits.”

Sri Lanka’s economy grew 12.3 percent in the June 2021 quarter recovering from a steep contraction in 2020, when full year GDP also fell 3.6 percent.

Sri Lanka printed money to keep rates down and had seen lost almost all its net reserves.

The 5.0 percent rate is in line with a projection made in June.

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Sri Lanka 2021 GDP growth target lowered to below 5.0-pct: CB

Cabraal however has a formidable challenge in restoring monetary stability as forex shortages from earlier money printed to maintain low rates has triggered run on the central bank’s reserves and weakened confidence.

Cabraal, during an earlier tenure from 2006-2015 focused on strong growth and Sri Lanka’s official data showed an average 6.4 percent growth, partly driven by debt funded state spending.

But there was also greater monetary stability except after 2011/2012 when ‘stimulus’ led to a fall of the currency peg from 113 to 131.

However, since 2015, the island nation’s economic growth has been below 5 percent as rapid cycles of stimulus and economic breaks (stop-go’ policies) triggered currency crises in 2015/2016 and 2018.

President Gotabaya Rajapaksa’s gamble to slash taxes soon after being elected in November 2019 ahead of parliament polls has resulted in the country losing state revenue of around 600 billion rupees a year.

In 2020 a fresh cycle of extraordinary stimulus has now left the central bank without net reserves.

“The GDP was 80 billion US dollars when I left and when I came back also it is at the same value,” Cabraal, an accountant by profession, said.

“It was a little discomforting. But at the same time it was comfort as well. It was as if there was no change.”

Cabraal said he knew there were several challenges and there were fears among the public that had to be overcome.

“It is not that we do not know,” Cabraal said.

There was sluggish growth and struggling business, a severe lockdown impact, increase in non-peforming loans, low level of forex reserves, increase in unofficial remittances and weakened tax revenues.

The central bank had high level of domestic treasury bills.

There were fears about the exchange rate, importers were stockpiling goods, there were concerned consumers and weakening of confidence and concerns over upcoming bond repayments.

Cabraal took over as government resigning his portfolio as state minister for Finance and has allowed rates to go up saying he placed stability first.

He said measures will be taken to stabilize, which will be followed by a period of consolidation.

Cabraal said the island nation escaped from being officially declared as a country in recession with the economy growing by 8 percent in the first half of the year.

“Had we not gotten that kind of growth, it would have been that we are officially in recession,” he said.

“So fortunately we did not have to do that although on a low base.”

“We found that sectors concerned are also gradually improving, which gives us some confidence that the underlying situation within the entire economy gives us hope that we can move forward with a lot more confidence.”

Sri Lanka’s vaccination levels were also high at around 60 percent. (Colombo/Oct01/2021)

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