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Sri Lanka faces key challenge in 2020 to maintain economic stability

Source: Economynext/Amitha Thennakoon

ECONOMYNEXT – Sri Lanka’s main challenge in 2020 will be to maintain economic stability with tax cuts expected to boost demand and drive growth higher with more lasting reforms as the country recovers from a currency collapse in 2018, economists and analysts have said.

“Immediate challenges for the economy will be to maintain macroeconomic stability and prioritize the key reforms required to maintain the stimulus from the recent tax revisions over the medium term to long-term,” said Shiran Fernando, Chief Economist of Ceylon Chamber of Commerce.

“This requires continuing progressive reforms on investment, the expansion of exports and productivity enhancements in the public sector.”

Sri Lanka is planning to keep the budget deficit at around 5.5 percent of gross domestic product with capital spending and non-priority items kept in check, the Treasury has said.

In 2020 an economic growth of 4.0 to 4.5 percent is expected, from less than 3 percent in 2019, as the country was hit by the collapse of a ‘flexible exchange rate’ of soft peg and Easter Sunday blasts.

In a 2020-2025 policy framework the new administration has said it aims for a deficit or less than 4 percent of GDP and and economic growth of 6.5 percent.

This year the deficit is expected to reach 7.0 percent of GDP.

“The recent changes to taxation can provide room for increased consumption as it increases disposable income, in addition to the public sector salary raise to be implemented from 1st January,” Trisha Peiris, at Frontier Research, a Colombo-based research house said.

“This will likely lead to increased economic activity and growth in the coming year.

“In the meantime, it would be important to balance the extent of further monetary easing on the back of fiscal stimulus provided.”

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Sri Lanka’s newly appointed Central Bank Governor W D Lakshman kept policy rates unchanged amid markets expectations for a rate cut.

Sri Lanka ended 2019 with 4.8 percent inflation, low by historical standards. Inflation is may go up to around 6 percent before falling, central bank officials have said.

Analysts have said that targeting a call money rate with excess liquidity remains a risk to the economy as the practice had triggered balance of payments crisis when private credit strengthens.

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Depending on how the deficit is managed, there may also be domestic borrowings in the first half as private credit, demand recovers, and more taxes are earned in the latter half of the year.

Sri Lanka has also abandoned a fuel price formula which may pressure state enterprise credit, if oil prices pick up. Many commodities have already gone up.

Lack of monetary stability with or without fiscal pressure has probably been the main factor that has hit Sri Lanka after independence. (Colombo/Jan01/2020)

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