Projections need reforms

After several months of silence, the Central Bank this week released a report projecting that Sri Lanka’s economy will contract by 1.7% this year but will record a strong rebound to reach 5% growth in 2021. However, these optimistic prospects need to be underpinned by key reforms and strong policies that the Government needs to urgently focus on. 

The latest projections were published in a Central Bank report titled ‘Recent Economic Developments: Highlights of 2020 and Prospects for 2021’. Despite the strong impact of COVID-19 on economic expansion this year, the Central Bank has remained staunchly optimistic, initially projecting the economy would grow by 1.5% before shifting to a neutral stance. 

However, this new report indicates the Central Bank has deviated from its position maintained since mid-2020 and even without 2Q data, acknowledged Sri Lanka’s economy will shrink. Nonetheless the Central Bank’s projection is still far more optimistic than similar projections made by the International Monetary Fund (IMF) and Asian Development Bank (ADB), which estimate growth to reduce by 5.5%-6% in 2020. 

Without second quarter and third quarter data it is difficult to understand which organisation is more accurate. But it is safe to say that if COVID-19 infection numbers continue to rise and there is prolonged imposition of curfew, that will have a deeper impact on the economic front. Given Sri Lanka’s debt dynamics, restrictions on key sectors and large budget deficit, a continuation of COVID-19 in 2021, which remains a strong possibility, may undermine bullish growth predictions made by the Central Bank.    

Private sector credit growth will grow only by 6% in 2020 but is expected to fare much better in 2021 at 13.9%. Board money growth will decline from 20.6% to 15% in 2021 and inflation will likely remain anchored at mid-single digit levels. 

But the achievement of this projected medium-term macroeconomic path is contingent upon implementing the identified reforms in the period ahead. Along with the establishment of a stable Government, the COVID-19 outbreak has created an opportunity to review macroeconomic policies and set appropriate policy priorities and long-term development goals for the country.

The Government’s drive to support and encourage domestic production to reach self-sufficiency in identified goods is likely to play a crucial role in Sri Lanka’s economic transformation, according to the Central Bank. However, the maintenance of quality standards of domestically-produced goods and ensuring availability at a reasonable price are vital to derive intended benefits in the medium to long term. This is imperative to boosting Sri Lanka’s competitiveness because import substitution will not be successful unless products move up the value chain and can also expand the country’s limited basket of exports.    

Adequate investment in innovation and research and development (R&D), and the promotion of export-oriented Foreign Direct Investment (FDI) are needed to improve efficiency and enhance productivity, particularly in the SME sector. If Sri Lanka is to achieve the high growth predicted in 2021 it has to have improved access to international markets, so trade negotiations with existing and new partner economies must continue. 

The current economic challenges before Sri Lanka make the Budget for 2021 of extreme importance. As the major policy document of the Government it will be a catalyst for achieving the rose-tinted projections of the Central Bank and Sri Lanka’s prospects in weathering the external challenges looming next year.