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Sunday August 14th, 2022

Sri Lanka GDP could contract 4-pct in 2020, import controls may drive deficit to 11-pct: analysts

ECONOMYNEXT – Sri Lanka’s economy could contract up to 4 percent in 2020 and the budget deficit could expand to as much as 11 percent gross domestic with import controls amplifying the impact of Coronavirus on revenues, analysts said.

Sri Lanka’s manufacturing activity has rebounded strongly by June according to a Purchasing Managers Index compiled by the central bank, while the services recovery is weak, with tourism down and people still wary of traveling and congregating.

The import lockdown may also be hitting services. The central bank has said it will revise its forecast for 2020 after first-quarter data is out, but is expecting a contraction in the second quarter.

The International Monetary Fund initially forecasted a 0.5 percent contraction for Sri Lanka in April 2020, when emerging and developing Asia was expected to grow 1 percent which was downgraded by 1.8 percent in June to a contraction of 0.8 percent.

Global economic output was downgraded by 1.9 percent to a contraction of 4.9 percent in June from 3.0 percent in April. Fitch Ratings is forecasting a 1.3 percent contraction for 2020.

GDP Contraction

“Our base case scenario as of now forecasts Gross Domestic Product (GDP) to contract by about 4 to 4.5 percent this year,” Lakshini Fernando, Vice President at Asia Securities, a Colombo-based brokerage speaking at an online forum organized by Echelon Magazine.

“We also took in to account the fact that airports are closed so the services sector will have a significant multiplier effect running through.

“On the external side, we looked at how global slowdown will affect the manufacturing sector yet again a negative multiplier effect.

“We initially forecasted the entire pandemic and the overall lockdown to naturally start easing by the end of May which played its part naturally.

“However, there was a scare of a second wave but what we see is if the government can control with minimal lockdowns, continuing economic activities at 50-60 percent, you will see activity continue to some extent.”

Fernando forecasts the industrial sector to contract by 19-22 percent in the second quarter and 5.5-7 percent by the third quarter. The Services sector is expected to contract by 9-11 percent, she said. For the full year, the industrial sector is expected to contract by 5.8-6.2 percent and the services sector to contract by 1.3 to 1.8 percent.

“Initially we expected the base case scenario to be at a 3 percent GDP contraction in 2020 and recover to a U level in 2022,” Nikita Tissera, Head of Research at Bartleet Religare Securities said.

“However given the current scenario and the fears of a second wave, we have to increase the forecast to about 4 percent marginally”.

He says even though Sri Lanka has 2700 plus COVID-19 cases, the fact that they are from specific clusters works positively for the country.

“We really don’t believe that we will go in for another lockdown because we will have the impact of it and the society is also mature enough to handle it,” Tissera said.”We could face it if there was a second wave after the election.”

So-called Second Waves are found in countries that did not kill the Chinese or Wuhan wave in January and February, which is most of Europe, the Americas where the infection trees have a large number of levels.

Clusters in Singapore and Korea also date back from the Wuhan Wave. Sri Lanka’s clusters date back from March 2020, and also from testing gaps, where those released from quarantined are not tested in week three and four.

“We are looking at Negative GDP growth of around 2-3 percent this year,” Udeeshan Jonas, Senior Vice President – Head of Research at Capital Alliance said.

“But it has not been a V-shaped recovery as what we would have liked to be. It is rather a U or W shaped recovery”.

First Capital’s Dimantha Mathew expects GDP growth to contract -1.4 percent in 2020

“For the second and third quarter we are looking at -7 percent and -3 percent GDP growth,” he said. “Full-year GDP growth outlook will be -1.4 percent with the 4th quarter having a positive GDP growth”.

CTLSA Securities is forecasting a 2 percent contraction, with tourism, consumption, and construction expected to be weak.

Budget Deficit Driven by Import Controls

The budget deficit for 2020 could rise as much as 11 percent as import controls hit tax revenues analysts said.

“On the deficit, I believe we will have a 10-11 percent deficit this year,” Tissera said. “Forty-nine percent of the government’s tax revenue comes from imports.

“So, the lack of imports would continue to weigh in heavily on lack of revenue, so I foresee 11 percent of a deficit on GDP for this year.”

Sri Lanka imposed sweeping import bans until July 2020 after unprecedented money printing triggered foreign exchange shortages. The controls have since been extended.

Up to 240 billion rupees of excess liquidity has gone out of the system in forex reserve sales (sale of foreign assets) to importers and the Treasury, official data show.

The central bank is now also ‘unprinting’ selling down Treasury bills (domestic assets) and terminating reverse repo deal to withdraw liquidity before it hits the forex market.

“I am expecting around 10 percent budget deficit which means debt to GDP of 82 percent of last year-end will go up to slightly above 90 percent (in 2020),” Executive Director, Research/Strategist at CT CLSA Securities, Sanjeewa Fernando said.

“That’s a bad number as a country.”

“Our debt to GDP is pretty high, total debt to GDP as at end last year is 89 percent,” Mathew said. “But with the new interest coming and the rollover of those debts, I’m sure we are going to go well above 90 percent somewhere close to 95 to 96”.

However, analysts said the likelihood of sovereign default was low.

Fernando said the government has shown tight spending controls for the first few months of the year, slashing capital spending, which will help keep the deficit.


Sri Lanka would need hard reforms under an IMF program after elections: analysts

Analysts said Sri Lanka will have to do hard reforms under an expected International Monetary Fund program to get economic activity moving and avoid external sovereign default.

Credit Growth and Interest Rates

Private credit growth for 2020 would be low or negative, analysts said keeping a lid on interest rates, despite the worsening deficit.

A further policy interest rate cut was also a possibility.

“If we take credit growth in line with GDP… we are still going on a 0 to -1.5 percent credit growth figure,” Mathew said.

“If we look at interest rates, on the yield curve we feel that bond rates have bottomed out,” Mathew said.

“However there is a possibility that at least there is room for another monetary policy easing rate cut in the range of 50 basis points.

“But we feel that the yield curve has already been adjusted for that 50 basis points as well. If that’s not given then the market may be disappointed.

“But in addition to that though we feel interest rates have bottomed out, we don’t feel that there is likely to be an immediate uptrend due to the lack of demand and credit in the system.

“So, with that, we don’t see any sort of pressure coming in until the 4th quarter of this year. The only issue is if the liquidity comes down further. Otherwise, we feel that the interest rates can remain at these levels.”

Sri Lanka’s last policy rate cut did not involve injecting money more through open market operations to enforce. It simply solved the problem of having a too-narrow policy corridor by lowering the floor rate amid weak overall credit.

To stop foreign exchange problems and maintain monetary stability, analysts have called for a wider policy corridor and a halt to call money rate targeting, which is incompatible with targeting the exchange rate or allowing external flows.

When the call money rate is targeted with excess money in a monetary stimulus, exchange controls, and in Sri Lanka’s case import controls also is the inevitable outcome, which is known as the impossible trinity of monetary policy objectives.


Sri Lanka has to reform soft-peg to avoid monetary instability, default: Bellwether

Sri Lanka private credit negative for second month in June 2020

Data showed that total credit in June was only 78 billion rupees and private credit was negative was in both May and June.

Tissera says the market has room for 100 basis point rate cut for both lending and benchmark rates.

“This is the highest liquidity we have seen in the banking sector historically, still the loan book isn’t growing,” he said. “I think interest rates weren’t a factor for loan book growth at all. Lack of growth in the loan book is a factor of low demand.

“I foresee another 100 basis points drop in the benchmark rates in the next 12 months and I believe this could happen across the yield curve and I think the yield curve could possibly see a downward shift.”

Jonas from Capital Alliance said amid weak credit growth money is flowing into financial markets and is pushing down yields.

“We believe that this interest rate environment could continue hence we believe that the rates could come down by another 70-80 basis points,” he said.

Sri Lanka’s stocks have also risen despite bad earnings. Foreign investors however are exiting amid the liquidity.

Exchange rate

Sri Lanka rupee fell close to 200 to the US dollars as money was printed in March but has since been allowed to appreciate to 185 to the US dollar. Amid suspected real effective exchange rate targeting the central bank is buying dollars at 185 instead of allowing it to appreciate it back to 182 to the US dollar.

Sri Lanka’s central bank has the worst record among central banks in South Asia, whose monetary units are derived from the Indian rupee at around 4.70 to the US dollar at self-determination from British rupee.

Pakistan has the second-worst record and Maldives Monetary Authority has the best with the country now having 11000 dollars per capita income with long periods of economic stability and free trade.

Analysts expect the rupee to trade between 185 to 190 to the US dollar this year, but it could weaken later.

“Exchange rates may comfortably remain 195 rupees to the dollar because of import controls,” Jonas said.

“But next year the scenario might be different in terms of the exchange rate, there could be higher depreciation once import controls are removed.

“And if the liquidity is not absorbed from the system then we might see that flowing into imports which might effectively drag rupee a little bit more,” Jonas said.

“I believe Sri Lanka will continue to protect the currency,” Tissera said. “I think the imports will continue to be curtailed for a little longer than we like and it will probably be one way of us preserving currency to be able to maintain our interest payments.”

“I’m not placing a lot of stress on the rupee in the short term – let’s say in the next 18 months – it will be in the 190-192 rupees against the US dollar.”

Classical analysts have said as long the overnight interbank rate is near the floor rate and no money is injected to keep it in the middle of the corridor (sterilization in excess of 100 percent) or under the policy ceiling (100 percent sterilization only) there is no pressure on the rupee peg. (Colombo/July27/2020-sb)

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Sri Lanka coconut auction prices continue to climb

ECONOMYNEXT- Sri Lanka’s average coconut prices grew 3.7 percent to 64,618.23 rupees for 1,000 nuts at the last auction held on Friday August 12, official data showed.

The highest price was 62,900 rupees for 1,000 nuts, while the lowest was 57,000 rupees at the auction conducted by Sri Lanka’s Coconut Development Authority.

Buyers offered 1,019,395 nuts at the auction and sold 576,906.

Exports of coconut-based products have risen by 12 percent in January to June to 434.48 million dollars from a year earlier, data show. (Colombo/Aug13/2022)

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Chinese tracking vessel cleared to dock at Sri Lanka’s Hambantota Port

Hambantota Port

ECONOMYNEXT – Sri Lanka’s Ministry of Foreign Affairs has given the green light to Chinese tracking vessel Yuang Wang 5 to dock at the Chinese-built Hambantota Port from August 16 to 22.

Sri Lankan authorities had first given clearance to the Chinese vessel on July 12, to make a port call at the Hambantota Port from August 11 to 17​ for replenishment purposes.

However, following a diplomatic standoff after concern about the tracking vessel’s anticipated arrival were reportedly raised by the US and India, Sri Lanka’s foreign ministry requested China to defer the port call until “further consultations”.

A report by Sri Lanka’s privately owned Times Online news website said Saturday August 13 morning that the foreign ministry has authorised the docking of the ship.


Sri Lanka permits entry to controversial Chinese tracking vessel Yuang Wang 5

The ministry’s official statement released Saturday evening confirmed that the ship has been given clearance to dock at the Hambantota Port for the new dates August 16 to 22.

“The Ministry wishes to reiterate Sri Lanka’s policy of cooperation and friendship with all countries. Security and cooperation in the neighbourhood is of utmost priority. It is Sri Lanka’s intention to safeguard the legitimate interests of all countries, in keeping with its international obligations. The Ministry is deeply appreciative of the support, solidarity and understanding of all countries, especially in the current juncture when the country is in the process of addressing severe economic challenges and engaging in multiple domestic processes to ensure the welfare of the Sri Lankan people,” the ministry said, without naming the stakeholder countries. (Colombo/Aug13/2022)

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Sri Lanka looking to provide relief to bona fide protestors: justice minister

Pix by T.N.Nawas

ECONOMYNEXT – Sri Lanka has entrusted the process of identifying individuals who engaged in violence during the widespread anti-government protest to a “different group”, as there is a “practical issue” with separating those individuals, the island nation’s Justice Minister said.

“There is a problem. This is not a legal issue; it is a practical issue because the Aragalaya consists of several groups. In fact even the police has difficulty identifying who were genuinely involved in the peaceful struggle and the others who came from outside and caused some violence,” said Minister Wijedasa Rajapaksha, speaking to EconomyNext on Wednesday August 10.

“We needed assistance in identifying those who [protested] bona fide. We want to give them relief; [not] take any legal action against them.”

Sri Lanka saw a massive uprising against the government’s inability to protect people from a debilitating economic crisis caused by wrong economic policies. The public took to the streets to demand the resignation of then President Gotabaya Rajapaksha and a stop to Sri Lanka’s systemic corruption.

Most protestors focused on sustained protests in several areas of the island, particularly the GotaGoGama agitation site in front of the President’s Secretariat.

However there were incidents of violence that saw houses of ruling party MPs looted and burned down and public property damaged. President Ranil Wickremesinghe’s private residence was also burned down in July, while he was Prime Minister and protestors were occupying the Official Residence of President Rajapaksha, who had by then fled the country.

Wickremesinghe declared a State of Emergency shortly after, granting the forces power to arrest anyone suspected of engaging in violent behaviour.

However, many of the arrested protestors allege that they were not part of the “violent minority”.

“This was such a peaceful protest. When the Bastille was stormed there was not a brick left in the place,” said one protestor.

The protestors subsequently handed over the occupied government buildings to the authorities, and have now wrapped up the occupation segment of the protests following to a court order.

Activists both local and international are asking the government to repeal the State of Emergency, but Wickremesinghe has not indicated that he plans to do so anytime soon.

The Supreme Court meanwhile has granted leave to proceed to a Fundamental Rights Petition filed by former Human Rights Commissioner of Sri Lanka Ambika Satkunanathan.

Satkunanathan tweeted Friday August 12: “The Supreme Court granted leave to proceed in Articles 12(1) and 14(1) in the fundamental rights petition I filed challenging the declaration of the state of emergency and the emergency regulations.”

Though Satkunanathan had filed the petition for other allegedly violated Articles, the Supreme Court will only be proceeding with Articles 12(1) and 14(1) which deal with equality under the law and freedoms of speech, expression and assembly.

Several prominent protestors have been jailed under the Emergency laws, and on Wednesday August 10 the Immigration Department cancelled the visa of a Scotswoman who had documented the protests.

Minister Rajapaksha said that he had met with protestors, and discussed the situation regarding arrests.

“We are in the process [of identifying protestors]. We entrusted that to a different group on the advice of the president and we will do that in the following days,” he said.

“The police will have to take action only against those who engage in vandalism,” he said. (Colombo/Aug13/2022)

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