SL economy stable - SCB Global Research

The Standard Chartered Bank (SCB) Global Research has described Sri Lanka as stable on the policy front and there was no pressing need to adjust policy levers at present.

“Sri Lanka's macroeconomic environment remains stable and we see pressing need to adjust the policy levers at present. With domestic macro conditions expected to become more supportive as 2013 progresses, the mood is one of cautious optimism,” according to SCB in its latest Asia Focus research. Inflation continues to moderate, while growth remains stable.

We maintain our 2013 GDP growth forecast of 6.5%, but with risks to the downside due to the slower-than-expected export recovery in H1-2013, the Bank said. Although domestic and global supply conditions are expected to improve, inflation remains elevated and is still a risk, owing to domestic factors. The expected moderation in headline inflation to 6.5% in Q2-2013 and Q3 is largely due to base effects and improvements in domestic supply.

We expect inflation to spike in Q4-2013 due to a pick-up in domestic demand and private sector investment resulting from policy easing and lower interest rates.We expect the external demand outlook to improve in H2-2013 due to brighter growth prospects in Sri Lanka's key export markets in EU and the US (which together contribute 50% of total export earnings). We see the shortfall in tax revenue as a key risk to macro stability.

The pick-up in domestic activity expected for the remainder of this year is likely to generate higher tax revenue; however, our GDP growth forecast of 6.5% suggests that tax revenue may fall short.