Rapid economic growth forecast in 2014 and 2015 - ADB

Asian Development Outlook 2014 (ADO 2014), the flagship annual economic publication from the Asian Development Bank (ADB) released last week forecasts 7.5 percent economic growth in Sri Lanka in 2014 and expects it to remain at that level in 2015.

The report said that the improved external environment, higher investments, and recovery in domestic consumption will sustain a rapid pace of GDP growth in the next two years. “Sri Lanka's economic performance will further strengthen with the improvement in the external environment over the next two years,” said ADB's Senior Country Economist for Sri Lanka, Tadateru Hayashi, at a media briefing in Colombo last week.

“Domestic conditions, with relatively low inflation, improving consumption demand and a falling fiscal deficit augur well for a higher growth trajectory,” he said.

Sri Lanka's economy recorded 7.3% growth in 2013, supported by strengthening domestic demand on an eased monetary policy and improvement in exports and tourism.

Faster growth in the wholesale and retail trade, hotels and restaurants, transport, banking, insurance and real estate lifted performance in the large service sector providing the impetus for the rebound.

Favourable weather helped maintain agricultural growth.

Inflation is expected to remain in the mid-single digits in 2014 and 2015. Steady international fuel, stable food prices and assuming normal weather, will help to keep inflation in check over the next two years.

Exports are expected to strengthen with better economic performance in the European Union and the United States, Sri Lanka's main export destinations. After declining in 2013, imports will pick up in 2014 as domestic demand materialises.

Workers’ remittances expanded in 2013 as a result of increased labour migration under the professional and skilled category, the expansion of formal channels for remitting money, and the introduction of a web-based money transfer system.

Continued strong performance in remittances will help contain the current account deficit at 2.6% and 3.5% in 2014 and 2015.

The fiscal deficit steadily shrank to 5.8% of GDP in 2013, from a peak of 9.9% in 2009. However, while the government has reduced expenditure and attempted to improve revenues to narrow the deficit, the revenue ratio did not pick up as expected. Better economic performance and more imports are expected to catalyse higher revenue collection in 2014 and 2015.

Continued policy action is also needed with improved revenue administration, to achieve a higher revenue ratio, the report said.

The report also said that developing Asia will extend its steady economic growth in 2014 as higher demand from recovering advanced economies will be dampened somewhat by moderating growth in the People's Republic of China (PRC).

It forecasts developing Asia will achieve GDP growth of 6.2% in 2014, and 6.4% in 2015. The region grew 6.1% in 2013.

The report said that widening income gaps are undermining decades of successful poverty reduction in developing Asia and said governments should proactively use fiscal policy to close gaps and promote more inclusive growth.

ADB's Deputy Chief Economist Juzhong Zhuang said that fiscal policy can and should play a bigger role in promoting inclusive growth in Asia.

Asian policy makers must act now to integrate inclusion targets into their budget planning to transition to a path where the benefits of growth are broadly shared, he said.

Fiscal Policy for Inclusive Growth, the special theme chapter in the ADO notes that during the 1990s and 2000s, more than 80% of the region's population lived in countries with worsening Gini coefficients, a common measure of inequality.

The same market forces that have enhanced growth in the region - globalisation, technological progress, and market reform - now exacerbate inequality.

International experience shows that public spending can reduce income inequality. Government spending on education and health care, for example, broadens access for the poor to these vital services and helps level the playing field. Making infrastructure affordable and accessible allows the poor to take better advantage of the opportunities that come with improved education and health, the report said.