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Tracking growth 

Comments / {{hitsCtrl.values.hits}} Views / Monday, 23 December 2019 00:57

The economy grew by 2.7% in the third quarter of 2019, the Census and Statistics Department said last week, indicating Sri Lanka is recovering somewhat from the Easter Sunday attacks that slashed the previous quarter growth to a five-year low of 1.6%, and showing stronger expansion in the industry and services segment. In the corresponding quarter of last year, GDP grew by 3.5%. 

The economy grew at its slowest pace in more than five years from April to June 2019, with 2Q showing only a 1.6% gain, slowing from a growth rate of 3.7% the first quarter. However, the impact on some segments including the accommodation, food and beverage service activities were slower by 7.5% when compared to the third quarter of 2018, data showed. Agriculture also failed to show a significant growth despite better weather seen in 2019. With the current weather situation there is now concern that this modest gain of 0.4% growth will not be sustained in the 1Q of 2020, especially since it has to be compared to a relatively high base posted in the corresponding period in 2019.

Government policy outlined earlier indicated that there was expectation of a good harvest to both boost consumption and bolster economic activity. This could have added momentum to the stimulus package already announced and reducing interest rates and the loan write-off for small and medium enterprises. It now needs to be seen whether this uptick will be somewhat tempered.  

The World Bank expects Sri Lanka’s economic growth to decelerate to 2.7% by the end of this year from an earlier forecast of 3.5% in June amid security challenges and political uncertainty. It has projected growth to be better in 2020, at 3% or above. Two ratings agencies have also called on the Sri Lankan government to consider the repercussions on macroeconomic fundamentals in rolling out the stimulus package, this is particularly important given Sri Lanka’s debt dynamics and the need to return to international financial markets to raise funds for repayments.  The World Bank has called on the Government to remain focused on (a) continuing fiscal consolidation by broadening the tax base and aligning spending with priorities; (b) shifting to a private investment-tradable sector-led growth model by improving trade, investment, innovation and the business environment; (c) improving governance and SOE performance; (d) addressing the impact of an aging workforce by increasing labour force participation, encouraging longer working lives, and investing in skills to improve productivity; and (e) mitigating the impact of reforms on the poor and vulnerable with well-targeted social protection spending.  Essentially the focus has been on keeping reforms in the eye of policy makers. Responses from the Government have indicated that these considerations are being heard and there will be an effort to maintain fiscal discipline in the months ahead. The low global interest rates are also an asset to the government in raising funding, which together with the relatively low contribution of agriculture and an uptick in sentiment as well as a recovery in the tourism industry could see growth holding steady, at least in the short-term. But it is unlikely that the reforms can be delayed for long if Sri Lanka is to be moved out of its boom and bust cycles. 


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