Sri Lanka GDP grows 3.2-pct in 2018
ECONOMYNEXT – Sri Lanka’s gross domestic product was estimated to have grown 3.2 percent in 2018, data from the state statistics office showed amid monetary instability triggered by money printing and real effective exchange rate targeting as well as a political crisis.
GDP growth slowed from 3.4 percent a year earlier.
Agriculture grew 4.8 percent after a drought ended, industry grew 0.9 percent and services grew 4.7 percent.
In the fourth quarter, growth was estimated at 1.8 percent, amid a steep collapse in the currency and a political crisis, down from 3.7 percent a year earlier.
The statistics office said agriculture grew 4.5 percent, services grew 4.3 percent and industrial activity contracted 3.6 percent in the quarter.
The appointment of Mahinda Rajapaksa as Prime Minister by President Maithripala Sirisena, worsened capital flight which had already begun by September following a second monetary policy error.
The credit system was hit by monetary instability from March after the Central Bank released liquidity and printed money activity to enforce a rate cut in April triggering monetary instability and capital flight.
Monetary instability worsened in August with the rupee ultimately falling to 182 to the US dollar by the end of 2018.
Capital flight and exporter hold backs, overcame any benefit to the credit system from reductions in the budget deficit.
Liquidity shortages emerged as the Central Bank enforced shifting convertibility undertakings, which were shifted downwards.
Severe monetary instability can shrink growth as estimated in national income accounts. In 2001, GDP contracted 1.5 percent, on top of a civil war when the rupee fell from 75 to 95 to the US dollar.
Inflation was contained at about 4.3 percent in 2018. Inflation can go up as the price structure adjusts to the fallen currency as monetary instability recedes. Currency depreciation also keeps nominal interest at high levels even if the capital account is free. (Colombo/Mar20/2019-SB)
Jehan Perera - Executive Director National Peace Council