Continued capacity-building activities:

Economy steady 8% growth

The Sri Lankan economy will expand 7.6 percent in 2012 slightly above its potential output level on the back of continued capacity building activities.

The Group Chief Economist, RAM Ratings, Dr. Yeah Kim Leng said that after a robust growth of 8.0 percent in 2010 the country’s economy maintained its growth momentum in the first half of 2011 clicking an 8.0 percent Y-O-Y growth. The official estimates say that growth will be 8.3 percent, and we expect this momentum to continue in the second half on the back of its robust industrial and service sectors bolstered by healthy private sector consumption. “We project a marginally lower growth of 7.8 percent this year given the downside risks of persistent uncertainties in the external sector,” said Dr. Leng.

Following on from the robust trend in 2010 the services sector maintained its expansionary momentum at 9.1 percent for the first half of 2011.The agriculture, forestry and fishing sector charted the poorest growth performance due to adverse weather conditions at the beginning of the year which had destroyed large tracts of agricultural land and the corresponding produce.

Dr. Leng said that the tourism sub sector experienced a surge in activity with tourist arrivals rising 34.3 percent Y-O-Y in the first nine months of this year. There has also been increased interest in post war Sri Lanka as a holiday destination in the last two years, with the majority of tourists from Western Europe.

The establishment of better quality visitor services and tourist infrastructure such as hotels and dining venues has also fuelled the interest in Sri Lanka. The requirement for these services has driven the growth of this sector which has proved lucrative given its high growth stage of development. The latest estimates from the CBSL cite a 49 percent jump(or $521.7 m) in tourism receipts for the eight months of this year.

The tourism industry as a whole is an important driver of services growth and remains one of the chief areas of focus for the country’s development plans with additional allocations to this sector in Sri Lanka’s latest five year economic plan. Given the continued resilience of domestic driven services, the services sector is forecast to achieve a growth of 8.3 percent in 2011 followed by another 8.0 percent in 2012, said Dr. Leng.

The industrial sector has been showing an increase since the global recession expanding to 10.3 percent in the first half against 8.4 percent in 1H 2010.

This has been driven by the mining and quarrying activities more robust demand from the construction sub-sector has been propelling the production of building inputs and materials. The government plans to improve the industrial sector’s share of GDP to 35 percent by 2015 from 28.7 percent recorded last year. The industry and services sectors’ share of GDP are expected to increase to 29.0 percent and 59.7 percent by 2012.

The industrial sector has failed to chart any significant growth in the last few years relative to the services sector as more extensive infrastructure development is required for the expansion of industrial activities.

Dr. Leng said that capacity building remains the government’s focus with multilateral grants and loans centered on the building of much required infrastructure.

The latest global competitiveness Report by the World Economic Forum shows that Sri Lanka fares quite well in infrastructure development compared to its peers.

He said that as capacity building remains one of the main themes to leverage on post war liberalisation we expect the construction sub sector to be able to sustain expansion in the foreseeable future. This growth will keep fuelling demand for minerals and other materials used in construction.

Gross exports have been recovering from global recession, with imports outpacing exports, driven by strong domestic demand and nation building efforts. The country’s main export markets are however a concern with the US and EU. Still mired in stagnation, demand will shrink further next year although the real effect on growth should be minimal as Sri Lanka is not as export driven as some of its peers.

The gap between advanced and emerging economies has been narrowing during the last decade and it will narrow further in the coming years. Advanced economies are predicted to grow at 1.6 percent while emerging economies will grow at 6.4 percent. With the advanced economies still in trouble, global demand has shifted to emerging economies and it is predicted that the global demand in emerging economies will double to over 40 percent. SG