Sri Lanka expects 5.5-pct growth in 2018; with investment not stimulus: CB Governor
ECONOMYNEXT – Sri Lanka’s economic growth will rebound to 5.0 to 5.5 percent in 2018 from a below 4.0 percent in 2017 with more domestic and foreign private investment, Central Bank Governor Indrajit Coomaraswamy said.
Growth will have to be driven by domestic private investment and also larger flows of foreign direct investment coming from economic reforms of the government, he said presenting a road map for monetary policy during 2018.
Private investors need a stable macro-economic environment with predictable policies to operate and invest, Coomaraswamy said.
The central bank through its tighter policies had brought stability to the economy, and the exchange rate, creating conditions for investors to act, but growth has taken a hit.
Sri Lanka’s growth will fall to a ‘shade below 4-pct" in 2017, Coomaraswamy said.
The economy was hit by a drought floods, and the usual hangover from a monetary backed fiscal overspending in 2015 and 2016 (a Keynesian stimulus), which generated a balance of payments crisis.
In 2015 the central bank cut interest rates in April, in the wake of a disastrous 2015 deficit budget, released over 300 billion rupees of liquidity and printed over 250 billion rupees more, triggering capital flight and credit bubble that naturally spilled over to imports and busted the currency.
Coomaraswamy tightened policy by raising rates and also engaging in some credit restrictions which were not market oriented.
The government also tightened fiscal policy, raising taxes in 2016. Government spending is generally less productive than private spending as it is ‘other people’s money’ which tends to reduce long term benefits.
No Monetary Mirage
Coomaraswamy was not looking to cut rates at the moment with market interest rates already falling amid slowing private credit and a more stable budget deficit.
Growth has to come from investment, Coomaraswamy said.
Sri Lanka’s potential growth (according to one method of calculation) was 5.9 percent and the slower 4.0 percent represented a slack, he said.
But with market rates falling and inflation only now starting to trend down, the central bank will watch wage pressures and inflation expectations in early 2018 before cutting rates, he said.
Deputy Governor Weerasinghe said in the interbank market rates are moving towards the lower end of the policy corridor from the higher in 2017.
Sri Lanka’s overnight rates can move 150 basis points down without a rate cut with the policy corridor at 8.75 percent to inject liquidity and 7.25 percent to withdraw liquidity.
At the moment interbank rates are moving towards the lower band with credit pressure easing.
The central bank usually generates balance of payments crisis by resting the raising of the ceiling rate when credit pressure builds up or by outright cutting rates like in 2011 and 2015 when credit pressure builds up.
That a central bank can generate long term growth through rates cuts is a false belief.
Coomaraswamy said the Board of Investment was expecting foreign direct investment to reach 1.5 billion US dollars this year.
In the medium term Sri Lanka needs FDIs of 2 to 3 billion US dollars a year to reach a higher growth path, Coomaraswamy said. The Hambantota investment zone as well the Colombo Port City project could bring in FDI’s he said.
China Harbnour Engineering is to start on three towers investing a billion US dollars on the reclaimed property soon, AFP the French News Agency reported yesterday.
An economic recovery in the US and EU, which was also helping boost exports as would planned trade deals with Singapore and India, Coomaraswamy said.
A project pipeline under the Megapolis Ministry could also bring investments, he said. (Colombo/Jan03/2018)