Sri Lanka expects to grow 4.0-pct in 2019 despite credit, import collapse

ECONOMYNEXT – Sri Lanka is expecting to grow 4.0 percent in 2019, up from 3.2 percent in 2018, the Central Bank said, despite a severe credit and import collapse in the first quarter from monetary instability triggered last year.

The Central Bank said reforms were needed to unlock growth.

" ..[I]t is essential that the root causes for the continued low economic growth are addressed by expediting the required structural reforms with a focus on improving productivity and efficiency of the economy," the central bank said while releasing its annual report to the finance ministry.

The forecast had been made before a strike by Islamist extremists on Churches and hotels, which is expected to hit tourism revenues and investment sentiment.

Police had received foreign intelligence that Christian churches would be hit by extremists, but no action was taken. In Sri Lanka, Buddhist extremists regularly attack Christian places of worship and it is usual for police watch on the sidelines, taking no action, critics say.

Analysts say a key reform should be the Central Bank which had been a source of instability since it was set up in 1950, abolishing a currency board that had kept the economy stable, allowed free trade and generated economic activity, leading to the import of foreign labour.

It operates a highly unstable soft-peg with the US dollar with a bewildering array of convertibility undertakings called a ‘flexible exchange rate’ and cuts rates to target inflation without a floating rate generating instability.

It is now planning a modified inflation targeting framework (apparently without a floating exchange rate) which is called ‘flexible inflation targeting’ by 2020. However at least until 2020 it must operate a peg to collect reserves. Reserves also serves as a sinking fund to debt repayments.

The Central Bank has also threatened to narrow its policy corridor which has already been narrowed to 100 basis points. A narrowing of the policy corridor will make the country more vulnerable to instability when a weak-side convertibility undertaking is deployed, critics have warned.

In 2018, the economy grew 3.2 percent with a recovery in the first quarter undermined by de facto inflation targeting with a peg and liquidity shocks which led to monetary instability.





The currency is also sharply down, though inflation is relatively low amid a ‘deflationary collapse’ style bust, but the effects of depreciation will be seen as credit recovers analysts say.

Analysts warn that recovering from the twin effects of a credit and currency collapse is more difficult that recovering from a credit slowdown with a stable currency.

Per person gross domestic product is expected to fall to 4001 US dollars I 2019 from 4,102 dollars in 2018 amid currency collapse. However a pick-up inflation may change the forecast, analyst say.

Last year, the Central Bank forecasted that per capita GDP will grow to 4,350 dollar per person with 5 percent real growth.

The first two months of 2019 has seen a sharp private credit and import fall, which while allowing forex reserves to be collected, will slow economic activity analysts say. (Colombo/Apr25/2019-SB)

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