ECONOMYNEXT – Sri Lanka’s gross domestic product will grow 4.1 percent in 2021 with private investment and consumption recovering, though macro economic risks persist, the Asian Development Bank said.
“Growth will benefit in the near term from increased private consumption as pent-up demand is released, and
consumption and investment will benefit from low interest rates and ample liquidity,” the Manila-based lender said its flagship Asian Development Outlook.
“Progress on the Colombo Port City special economic zone is expected to foster foreign direct investment, as does development in the Hambantota Industrial Zone.
“The strength of recovery in 2021 and 2022 will crucially depend, however, on the pace of vaccination in Sri Lanka and in key export and tourist markets. Sri Lanka plans to vaccinate nearly half of itspopulation by the end of 2021.”
Sri Lanka however has macro-economic risks.
“Sri Lanka’s challenging macroeconomic situation will likely moderate growth in 2022,” the ADB said.
“..[R]isks to recovery prospects are fiscal and debt challenges, import restrictions, significant external financing
requirements, underlying structural issues, and extreme weather.”
Sri Lanka’s economy has suffered from monetary instability ever since a Latin America -style central bank was set up a by a Federal Reserve ‘money doctor’ in 1950, allowing money to be printed to break a currency peg.
Sri Lanka hit its first currency crisis as the Federal Reserve tightened policy in after 1951 as it resisted the Treasury through the Fed Treasury Accord to raise rates and stop liquidity injections through the purchase of Liberty Bonds at a fixed price analysts say.
Sri Lanka’s central bank is now buying Treasury bills at a fixed yield of 5.18 percent.
“Increased money market liquidity and reduced policy rates allowed the fiscal deficit to be financed at low rates,” the ADB report said.
“The central bank imposed ceilings on the weighted average yield of government Treasuries at primary auctions and purchased unsold portions of Treasury auctions, raising its holdings of Treasuries by 9.7 times to SLRs725 billion at the end of 2020.”
By April the central bank had 983 billion rupees of bills and balance of payments deficit was continuing in 2021 with printed excess liquidity redeemed for dollars via unsterilized financial account interventions to repay foreign debt.
Meanwhile the ADB said central government debt service during 2021 to 2025 averaged 4.0 billion US dollars.
“Foreign exchange requirements are higher when factoring in the external debt of the private sector and state-owned enterprises, as well as dollar denominated government development bonds,” the ADB said. (Colombo/Apr29/2021)