SL's economic growth 'projected to plunge'

by sanjeevi Jayasuriya

The need for a deep robust financial sector for sustainable growth in Sri Lanka was highlighted by the Asian Development Bank (ADB) recently released report ‘Asian Development Outlook 2015’, the flagship annual economic publication.

Sri Lanka’s economic growth is projected to plunge this year, before recovering next year, as political uncertainties are expected to disappear, paving the way for public and private investment to rebound and consumption to increase, it said.

The policymakers should adjust their development strategy to focus on innovation. Higher skills and tertiary education which meet market needs for a knowledge economy should be the key focus as Sri Lanka is on the threshold of gaining upper middle income country status.

The GDP per capita was estimated at around US $ 3,700 in 2014, the report said. The composition of GDP is likely to see a shift from investment to consumption in 2015.

Price reduction of food and fuel will encourage private consumption and a shift towards recurrent expenditure in the budget will increase Government consumption, ADB’s Senior Country Economist for Sri Lanka, Tadateru Hayashi said.

In 2014, low inflation and low interest rates supported a recovery in domestic investment on top of strong external demand. Faster growth in construction and export-oriented apparel lifted the industry sector, while the upward trend in services was driven by wholesale and retail trade, hotels and restaurants and cargo handling. The improving global economy contributed to higher tourist arrivals and a better trade performance, he said.

Inflation is expected to remain low in 2015 supported by a series of cuts in fuel prices at the end of 2014 and January 2015, which flow through to reduced prices of other goods and services.

Tax reductions in the Government’s interim Budget on several essential items will also contribute to lower prices.

The annual average inflation rate is expected to dip to 2 percent this year, before rising to 5 percent in 2016.

Exports are expected to strengthen this year and next year as the economies of Sri Lanka’s trading partners pick up pace. Imports are expected to rise overall, although lower investment by the government and private sector may slow import of investment goods this year.

The current account deficit for this year is projected at 1.4 percent of GDP, increasing marginally to 1.5 percent in 2016 as international prices rise and domestic investment picks up.