Sri Lanka expects economy to grow under 4.0-pct in 2017: CB Governor
ECONOMYNEXT – Sri Lanka’s economic growth may fall below 4.0 percent in 2017, partly dragged down by a contracting agricultural output Central Bank Governor Indrajt Coomaraswamy said.
In the fourth quarter of 2017, growth fell to 3.3 percent amid stabilization measures, compared to an artificial boost given with deficit spending and money printing fiasco in 2015 and 2016.
"This year we will end up at best 4.0 percent (growth)," Governor Coomaraswamy said.
"Probably less than 4.0 percent, which is less than what we expected."
Sri Lanka has had two years of droughts and floods hurting agricultural output.
Coomaraswamy said both agriculture and agro-processing sectors had been hurt by the drought.
Stabilization measures including credit restrictions had also slowed the services sector.
The central bank is now collecting forex reserves under an International Monetary Fund backed program, following balance of payments crisis generated by delayed hiking of interest rates in 2015.
Just like there is an artificial boost to economic activity during a money printing cum balance of payments crisis period, when foreign reserves are run down to finance imports drawn by money printing, economic activity slows when reserves are re-build and with slower credit.
A currency collapse which has pushed inflation close to double digits has also hit disposable incomes hurting domestic spending and investment.
A currency collapse and subsequent inflation created by the central bank denies a living wage to workers but it can boost profits of export firms or hotels that price output in dollars.
The government has also raised taxes, to reduce the budget deficit, which will however bring long term stability.
Coomarswamy said there will be no artificial monetary stimulus to growth though market interest rates were falling amid slowing credit and a narrowing budget deficit.
He said growth will have to come from economic reforms, many of which had been proposed in the 2018 budget.
Sri Lanka had a disastrous budget in 2015 and there were no progressive reforms in the 2016 budget.
Sri Lanka had probably the highest income after Japan when the country had a currency board and free trade, (and free banking before 1885).
But it all ended after a money printing central bank was created in 1951, removing the hard budget constraint and allowing unchecked deficit spending backed and currency depreciation to destroy real debt.
However during the ousted Rajapaksa regime, large volumes of dollar debt was taken and the central bank cannot imposed losses on holders of dollar denominated debt by currency depreciation, unlike it does investors in rupee instruments like the Employees Provident Fund.
The dollar debt is now serving as a partial hard budget constraint. (Colombo/Dec28/2017)