Healthy growth in services and construction sector expected

By Gamini Warushamana

Two thousand and twelve commenced with a positive outlook on economic growth, based on a continuation of the growth momentum in post-terrorism development on the domestic front and a recovery of the global economy.

However, the situation on the domestic and global fronts changed adversely and as a result the Sri Lankan economy did not perform as expected.

The GDP growth forecast of many agencies have been revised downwards from seven percent or above to around 6.5 percent. Recent data released by the Department of Census and Statistics for the third quarter of 2012 clearly shows the setback in all three sectors. According to statistics, the GDP growth rate in the third quarter has declined to 4.8 percent compared to 8.5 percent in 2011.

All three sectors have shown lower growth rates compared to the third quarter of the previous year and agriculture, industries and service sectors grew at -0.5, 7.3 and 4.6 percent.

However, in the first quarter, growth was fairly high and government policies helped sustain the strong growth momentum of 2011. The GDP growth rate of the first quarter was 7.9 percent and agriculture, industries and service sectors recorded 11.5, 10.8 and 5.8 percent growth.

A policy debate was seen at the beginning of the year and some economists argued that expansionary policies should be continued ,facilitating the recovery of the economy.

There was a boom in exports as a result of removal restrictions on imports and exchange control. Increased imports coupled with a high oil bill and a decline of exports created an imbalance in the external sector and the Government had to shift to contractionary policies in February.

Inevitably the cost of such policies is lower growth that was witnessed in the third quarter GDP statistics. Such policies have achieved the expected results as shown by statistics. In the third quarter, however imports declined by 1.6 percent compared to the corresponding period of the previous year and there was a 57.8 percent growth of imports in the third quarter of 2011 compared to 2010.

However, in 2012 the poor performance of the export sector due to low global demand contributed to external sector imbalance. Export growth in the third quarter was low as 5.3 percent compared to a 13.4 percent growth in the corresponding period of the previous year.

Domestic issues such as drought, floods too contributed to the slow down of the economy in 2012.

Outlook for 2013

It is clear that 2013 will begin on a negative note. Floods have already destroyed large extents of the Maha season paddy cultivation, other crops plus causing large scale damage to infrastructure facilities.

The agriculture sector will be affected by adverse weather and industrial sector performance will depend on the recovery in the export markets.

However, with the expansion of the economy, economic analysts anticipate a healthy growth in the services sector with robust growth in the construction sector and domestic private consumption.

They also argue that the Central Bank’s tightening of policies may trickle down to the real economy in 2013. They also anticipate a continuation of government investments despite most of them being backed by relatively high cost commercial borrowings from foreign sources.

Strict import control will be continued to maintain external sector stability and analysts said that a time frame cannot be given for the relaxation of import restrictions.

There is no possibility of an immediate expansion of the export market though there is a dialogue to diversify the export sector and exploit markets in regional countries and emerging economies and, therefore, export revenue may depend on recovery in key trading partners, the US and the EU.

However, the import growth will be sustained by robust domestic consumption and construction.

According to analysts external sector risk too remains unchanged. US recovery is modest. Policy constraints and ineffectiveness retards recovery in the EU. These are the two main export markets of Sri Lanka.

Dr. Sirimal Abeyaratne of the University of Colombo said that 2013 starts with two problems, budgetary issues and the balance of payment issue we already face. The global outlook too is gloomy but there are opportunities as well. There is a huge capital outflow from the US and Europe.

The East Asian countries exploit this situation and we too can attract part of it as the investment climate here has improved.

The tourism sector is growing and there are positive and negative factors that we should manage wisely which we failed to do in 2012, he said. Taking all these factors into account economic analysts have forecast a growth of around seven percent in 2013.