ECONOMYNEXT – Sri Lanka’s economic growth is expected to slow to around 4.5 percent in 2016, and 4.8 percent in 2017, lower than the originally forecast 5.0 for the two year amid external volatility, the International Monetary Fund said.
"The external environment is not as favourable as we used to think, that is the main reason for the downward revision," Jaewoo Lee told reporters.
"Capital outflows have picked up in many emerging markets including Sri Lanka."
The US Federal Reserve is widely expected to raise rates again.
US long term Treasuries yield have also spiked, which some attribute to President elect Donald Trump’s plans to build infrastructure, which indicates higher US borrowings.
But when there is emerging market volatility, the mostly soft-pegged countries including China dump US bond, pushing up yields.
Sri Lanka’s second quarter growth was lower than expected, but will pick up in the second half drive by services and construction, Lee said.
Sri Lanka has also raised taxes, with more resources generated by the people going to the state. Analysts say since government spending by definition does not go for less productive purposes unlike citizen’s own decision-making, long term growth also has to be hit.
Capital outflows also reduce total resources available for spending by domestic agents. A depreciating currency will also reduce the real spending ability of domestic agents, killing real economic activity.
IMF programs also require foreign reserves to be collected, which also reduce total resources available for growth creating spending. (Colombo/Dec09/2016)