Lanka to notch 7.8% GDP growth rate in 2014

By Jithendra Antonia

Despite a gloomy outlook and another difficult year in the global economic front the year 2013 for Sri Lanka was a year of many notable achievements having responded to the economic stabilisation package that was implemented in 2012 by the Central Bank of Sri Lanka (CBSL).

Presenting the "Road Map for Monetary and Financial Sector Policies for 2014 and Beyond" for the eighth consecutive year, CBSL Governor Ajith Nivard Cabraal said the country targets a 7.8% Gross Domestic Product (GDP) growth in 2014 while maintaining inflation at mid-single digit levels.

On the contrary he pointed out that in 2013 mixed signals were observed in advanced economies and weaker prospects were noted in emerging economies and that US economy was growing at a moderate pace and the Fed announced gradual tapering of quantitative easing (QE).

The advanced economies' below-trend growth continued, with output rising at an average annual rate of about 1%, while many Emerging Market Economies (EME) experienced a slowdown to below-trend 4.8% growth.

Despite EMEs continued to account for the bulk of global growth net capital

flows to EMEs have been negative in recent months, both in terms of bonds and equity, Governor said. He said that the effect of global uncertainties was experienced in South Asia as well. In 2013 South Asia faced greater economic turbulence while regional inflation remained highest amongst developing economies.

According to the Governor however, amidst the challenging global environment, Sri Lanka's economy remained resilient and on track and the economy returned to the high growth trajectory, with the vigilant and prudent policies of the Central Bank and the Government.

Accordingly a notable growth of over 7% was observed in all key sectors of the economy in Q3-2013; a first since Q1-2006. He went on to say that Sri Lanka is now a US $ 67 billion economy and country expects the economy to gradually expand to 8.5% GDP growth by 2016.

Although the predicted growth could slow down due to external factors such as uncertain weather conditions, geopolitical tensions and slower growth in global demand Central Bank is confident that inflation could be contained at around 5% or below, in the medium term and it is expected to be 4-6% during 2014.

The Road Map 2014 presentation comprised an assessment of the macroeconomic developments in the previous year - 2013, policy direction for 2014 and for the medium term.

Outlining Sri Lanka's economic performance at the presentation on the Real Sector Developments and Inflation Governor Cabraal said that country's economic growth rebounded and an economic growth of 7.2% is expected in 2013.

Country's level of investment has been maintained at over 30% of GDP and the Headline Inflation declined to 4.7%, the lowest for the last 59 months or over two and a half year in single digits. Subsequently Core inflation is at its lowest levels which recorded to be 2.1% in December 2013 and unemployment remained at low levels at nearly 4.5% in the first half of 2012.

On the external front the Governor said that exports are expected to grow by 6.9% with monthly export earnings exceeding US$ 1 billion since October

2013 and the Trade Deficit is estimated to contract by 8.7%. Country's tourist arrivals at has achieved record levels and remittances are estimated to reach US $ 6.7 billion with last quarter financial performances of 2013. Sri Lanka's Foreign Direct Investment (FDI) has surpassed US$ 1 billion for the third consecutive year whilst Balance of ayments (BOP) recorded a surplus of US$ 700 million. Foreign Reserves have achieved a healthy level of nearly US$ 7.1 billion or the equivalent for 4.5 months of imports and the the Rupee remained stable amidst global market volatility.

In the Fiscal front the Budget Deficit declined to 5.8% of GDP in 2013 from 6.4% in 2012 whilst debt to GDP ratio declined to 78.0% in 2013 from 79.1% in 2012. The Central Bank reduced Policy rates by 100 bps (Basis Points) and market interest rates has thus declined by 61-452 bps last year.

According to the Governor the private sector credit picked up and credit to public corporations also moderated sharply. On the other hand stability of the banking sector preserved throughout the year upported by strong capitalisation and liquidity conditions.

Whilst Sri Lanka's average growth from 2006-2013 (8 year period) was 6.7%, and from 2010-2013 (4 years) Sri Lanka had recorded a 7.5%, showing evidence of a sustainable growth model of the state.

Governor noted that the agriculture sector strengthened with high growth in paddy fisheries sectors and the sector has expanded by 7.0% in Q3-2013.

Accordingly paddy production has recorded a growth of 56.5% in Q3 due to theincreased harvest in the Yala season and the fish production increased by 9.9% in Q3 of 2013. However, tea, rubber and coconut production of the country has declined due to adverse weather conditions.

He also highlighted that the industrial sector recorded the highest sectoral growth for the fifth consecutive year and all sub-sectors of the industrial sector performed well in Q3-2013 whilst mining and quarrying sector had recorded the highest growth with 12.5% followed by electricity, gas and water at 11.2% and construction at 10%.

The Governor said that favorable macroeconomic conditions, increased economic activities, expansion of infrastructure development and gradual recovery of major trading partner economies fuelled the growth momentum of the Industry sector.

Sri Lanka which is also on the course to gradually develop as a service economy in 2013 the services sector has gathered momentum by expanding in to a 7.9% growth in the third quarter. There have also been noteworthy improvements in all sub-sectors in the services sector in Q3-2013.

Accordingly country's hotels and restaurants sector has recorded the highest growth of 13.6%, followed by transportation and communication with a 11.8%, wholesale and retail trade has recorded a 7.6% and banking,

Insurance and Real Estate at 6.7% growth.

He noted that in the present context country's growth was broad based and inclusive, with higher contributions from lagging provinces and the dominance of the Western Province is diminishing and the contribution by

other provinces to GDP is on the rise. During the year due to the higher labour force participation of females, labour force participation rate (LFPR) has increased significantly to 54.2%. But however, he said that unemployment rate rose to 4.5% in the first half of 2013 mainly due to the entry of new job seekers to the labour market.

Sri Lanka was ranked 60th in the world in the Global Prosperity Index achieving the highest rank in South Asia whilst Sri Lanka ranked 92nd in the world in the Human Development Index and has advanced to the high human development category from the medium human development category.