Growth to rebound in 2010 - ADB

The main concerns of the Sri Lankan economy for 2009 and 2010 are slowing growth, a deteriorating balance of payments, and meeting fiscal targets the Asian Development Bank (ADB) Outlook 2009/2010 report said.

Although the domestic financial system has reported no direct losses from foreign securities, the global financial crisis and economic slowdown mean that Sri Lanka faces tighter access to capital markets and weaker demand for its exports.

Growth is expected to fall to 4.5% this year as the global slowdown deepens, affecting export industries. In addition, last year’s exceptional agricultural performance is unlikely to be repeated. On the positive side, there are signs that the civil conflict could end this year, paving the way for reconstruction, which should give a stimulus to the economy if financing is available, the report said.

Growth is forecast to rebound to 6.0% in 2010, reflecting a measure of global economic recovery. Inflation dropped to 7.6% in February 2009, reaching single digit levels for the first time since July 2006. It will continue its downward trend, following the lowering of global prices, and is expected to average 8.0% this year.

However, inflation has historically been high and has been affected by government borrowing from the domestic banking sector. Keeping inflation low will therefore depend on the Government’s borrowing program as well.

The Government expects to ease the monetary policy stance a little this year, accordings to the Financial Road Map for 2009 released by the Central Bank. That document also states that the growth of broad money is targeted at around 14% this year, which is expected to facilitate the Government’s projected growth rate of 5.6%.

The targets have been set with annual inflation in mind of 9% this year. With inflation falling, the Central Bank cut its policy rates by 25 basis points in February, the first change in two years.

Market interest rates can also be expected to fall. Easing of monetary policy is intended to stimulate the economy and help counter the negative impact of the global slowdown.

Since Sri Lanka’s financial system was not exposed to the toxic assets of the US and European systems, it should remain largely unscathed. However, non-performing loans seem to be rising, because industries such as clothing, tea and construction are facing difficulties. These problems will persist during 2009 when borrowing sources stay limited.

Maintaining fiscal discipline in 2009 will remain a major challenge.

The budget for 2009 expects the deficit to fall to 6.5% of GDP, a view underpinned by assumptions of discipline in current spending and strong revenue performance. Historically, both these targets have been hard to meet, leading to cuts in the capital budget to maintain the deficit at a manageable level.

The public investment program will also depend on the Government’s ability to raise funds in international capital markets, the report said.