CB governor says economy will rebound in 4Q

By Lalin Fernandopulle

The fourth quarter growth this year will be fairly decent hovering around five percent or even little more and growth next year will be higher than this year said Central Bank Governor Dr. Indrajit Coomaraswamy told the Monetary Policy Review meeting last week.

The Governor, on a optimistic note, said despite an unsatisfactory growth rate in the second quarter this year the economy will rebound in the fourth quarter with business confidence and stability in the country.

The economy grew by by 2.6 percent, year-on-year, in the second quarter this year compared to the growth of 7.0 per cent recorded in the same period last year.

The growth in the first quarter 2016 was revised to 5.2 per cent, according to the Department of Census and Statistics data.

When asked what were the reasons for the sluggish growth rate in the second quarter this year the governor said the strong base effects of the second quarter last year and floods which was followed by drought affected the growth in the second quarter this year.

The service sector grew by 4.9 per cent while industry related activities recorded a moderate expansion of 2.2 percent during the secod quarter this year. Agriculture related activities which were affected by adverse weather, recorded a contraction of 5.6 percent in the same period this year.

"We are confident with policies in place the economic growth rate will pick up in the fourth quarter this year and record a higher growth rate next year, with various projects expected to get off ground and more foreign direct investments to come to the country," Dr. Coomaraswamy said.

However, the governor said the flow of foreign direct investments has to improve to boost economic growth. The FDI level this year was unsatisfactory.

When quipped about the impact of the delay in implementing the Value Added Tax (VAT) amendments on the release of the next tranche under the Extended Fund Facility (EFF) program of the IMF with the country the governor said the VAT Amendment Bill will be presented to parliament and will come into force within the first ten days of this month having completed two weeks given to the public to raise concerns on the Bill.

However, he said the IMF will be concerned about the implementation of the VAT and the measures taken to bridge the budget deficit in the next budget.

The IMF team which concluded its mission last week in the country to review the economic progress prior to releasing the next tranche of the EFF program laid emphasis on the VAT Amendment Bill to be enforced without delay and policy measures to bridge the budget deficit.

On the external front the declining trend in exports has been a concern. However, with strong bilateral relations and free trade agreements with many South East Asian countries in the pipeline and the GSP Plus expected to be restored there will be better prospects for trade with large markets such as India and China.

"The success of East Asian countries is exports and investments which Sri Lanka is below par in both areas," the Governor said.

The trade deficit expanded marginally by 0.7 per cent, year-on-year, during the first seven months this year as the decline in export earnings was greater than the contraction in the expenditure on imports. Export earnings declined by 5.0 percent year-on-year to US$ 897 million in June this year. However, tourism earnings increasing by around 16 per cent during the first eight months of the year and worker remittances up by 4.5 per cent from January to July strengthen the external sector.

With regard to external reserves the governor said it had improved to a satisfactory level and added that there will be no further foreign borrowing this year.

Gross reserves increased to US$ 6.6 billion by end August this year, while the rupee recorded a marginal depreciation during the year.

Central Bank officials said there could be a marginal increase in inflation in the next few months with the new VAT structure coming to force.

Inflation declined in August on a year-on-year basis due to the normalisation of domestic supply conditions as well as the suspension of the implementation of certain changes to government tax policy.

Monetary aggregates continued to expand at a higher rate with broad money growing by 17.8 percent in July this year compared to 17.0 percent in June due to the expansion in private sector credit. Credit to the private sector increased by Rs. 62.9 billion in July this year and during the first seven months private sector credit increased by Rs. 411.3 billion.