Growth prospects

Friday, 11 January 2019 00:00 - - {{hitsCtrl.values.hits}}

This year will be a crucial one for Sri Lanka, given its high debt repayment commitments and elections. However, the expectation for a growth recovery after a disappointing 3% growth in 2018 will also pose challenges, given the projected slowing of the global economy.

Global growth is expected to slow to 2.9% in 2019 compared with 3% in 2018, the World Bank said this week, citing elevated trade tensions and international trade moderation. The World Bank outlook comes as the United States and China have been engaged in a bitter trade dispute, which has jolted financial markets across the world for months. The two economies have imposed tit-for-tat duties on each other’s goods, although there were signs of progress on Tuesday as the two countries prepared to enter a third day of talks in Beijing.

Growth in the United States is likely to slow to 2.5% this year from 2.9% in 2018, while China is expected to grow at 6.2% in the year compared with 6.5% in 2018, according to the World Bank. Emerging market economies are expected to grow at 4.2% this year, with advanced economies expected to grow at 2%.

In South Asia regional growth is expected to accelerate to 7.1% in 2019, underpinned by strengthening investment and robust consumption. The modest good news is that Sri Lanka is anticipated to speed up slightly to 4% in 2019, supported by robust domestic demand and investment boosted by infrastructure projects.

Even though rains in the last two months of 2018 has boosted agriculture prospects for Sri Lanka, which is likely to spill over into agro food processing industries, there is still concern over other structural reforms needed to boost growth. Higher volumes of food production is a positive to keep inflation under control, as data shows that locally-produced food tends to be price-competitive, allowing some level of relief to consumers. Nonetheless, limiting consumption-related imports will continue to be important, and if this route is taken by policy makers it is also likely to hit the construction sector, which while boosting growth, also tends to put pressure on reserves if it is not kept in check.

Another positive is that both India and Bangladesh are expected to grow by about 7%, which is the main reason why South Asian is the fastest-growing region in the world. India is forecast to accelerate to 7.3% in FY 2018/19 as consumption remains robust and investment growth continues. Bangladesh is expected to slow to 7% in FY2018/19, as activity is supported by strong private consumption and infrastructure spending. But increasing trade with both these regional economies bodes well for Sri Lanka as it gives local companies to also tap into the resources and younger working populations, especially in Bangladesh.

Only Pakistan’s growth is projected to decelerate to 3.7% in FY2018/19, with financial conditions tightening to help counter rising inflation and external vulnerabilities. Nepal’s post-earthquake momentum is forecast to moderate, and growth should slow to 5.9 % in FY2018/19. Even with Sri Lanka’s 4% growth, it remains the second slowest growing country in the world’s fastest growth region. Sri Lanka is literally surrounded by opportunity. It simply needs to know how to tap into it.