ADB lowers SL’s growth outlook in 2022

The Asian Development Bank (ADB) in its Outlook Supplement released this week, has lowered the growth forecast of Sri Lanka in 2022.

It said that Sri Lanka’s GDP grew by 12.3% in Q2, bringing growth in the first half of the year to 8%, surpassing earlier expectations with improvement in all sectors. 

“However, Sri Lankan growth prospects for 2022 are dampened by macroeconomic headwinds as reserves have declined and significant external debt repayments are due in 2022,” the ADB’s Asian Development Outlook (ADO) update said. 

It said the fiscal deficit for 2021 is likely to be higher than budgeted and low reserves have disrupted imports, and agriculture is likely to be affected by a ban on chemical fertilisers. 

“With these developments, growth forecasts are upgraded for 2021 but lowered for 2022,” it said without giving a specific figure. In the September update, Sri Lanka’s 2022 growth forecast was stated at 3.4% down from 3.6% estimated in April. 

The inflation forecasts for 2021 and 2022 for Sri Lanka have been revised up in anticipation of the removal of price controls, high global prices, and import disruption according to the latest update released this week. 

ADO update said South Asia is forecast to expand less than projected in the Update for 2021, reflecting a modest downward revision to forecast GDP growth in India with manufacturing now projected to grow more slowly than anticipated in the update. 

In contrast, other economies in the region have benefitted from higher global demand and rebounding domestic activity with COVID-19 largely contained across the subregion. On balance, the GDP growth forecast for the subregion in 2021 is lowered from 8.8% in the Update to 8.6% and maintained at 7% in 2022.

In India, a strong 20.1% growth rebound in Q1 of fiscal year 2021 (FY2021, ending 31 March 2022) was followed in Q2 by growth moderation to 8.4%, marginally below expectations as a chip shortage hindered the production and sale of automobiles and many electronic goods. GDP growth nevertheless remained strong, driven by growth in private consumption at 8.6% and in investment at 17.2%. On the supply side, growth was broad-based driven by strong expansion in services, particularly public administration and defence, and in mining. Agriculture remained resilient at 4.5% growth, while manufacturing growth moderated to 5.5%. Supply chain factors such as chip shortages and rising

semiconductor prices will continue to suppress economic growth, as reflected in double-digit contraction in motor vehicle sales in October and in e-way bills in November 2021. 

Notwithstanding this slowdown toward the end of Q2, the Indian economy is expected to rebound strongly in FY2021 as a whole, albeit marginally slower than expected in the Update, and grow by 9.7%. New COVID-19 cases remain at about 11,000 a day as of the end of November, but the Government aimed to have vaccinated the entire population with at least one dose by the first week of December. In 2022, growth is still expected to moderate to 7.5% as domestic demand normalises.

In Bangladesh, exports and imports grew more than projected in the Update thanks to a surge in global demand for clothing. Faster import growth widened the trade deficit, but growth will be supported by private investment with imports of capital machinery and raw materials for garments. 

The Maldives attracted over one million tourist arrivals from January to October, an increase of 139.3% over the year-earlier period. With the rebound in tourism expected to continue through the peak season in Q4, the 2021 GDP growth forecast is revised up, while the projection for 2022 is maintained. 

Economies elsewhere in South Asia look to be on track for previously projected recovery. In Nepal, agriculture grew by 2.4% in FY2021 (ended 15 July 2021) on a favourable monsoon season. With the spread of COVID-19 largely contained, services rebounded to grow by 2.5% in FY2021 after contracting by 4% in 2020. 

Growth prospects for FY2021 and FY2022 remain in line with Update projections. Similarly in Pakistan, cotton and sugarcane production increased with favourable weather, while services bounced back as mobility tracking measures recovered beyond levels in March 2020, before the pandemic. In Afghanistan, after the fall of the democratically elected Government on 15 August 2021, international assistance declined substantially, further squeezing the fiscal position of a country facing a major economic crisis. 

The inflation projection for South Asia is revised up from 5.8% to 5.9% in 2021 and from 5.1% to 5.3% in 2022 on the expectation that global prices for food and other commodities remain elevated and as domestic factors come into play in specific economies. In India, inflation in the first seven months of FY2021 averaged 5.2%, but some pressure is expected to build as chip shortages drive up semiconductor prices. The projection for the whole year is increased marginally to 5.6%.

The subregional inflation forecast for 2022 is revised up from 5.1% to 5.3% on similar expectations. Much of the forecast upgrade reflects a higher projection for Pakistan, where adjustments to energy tariffs and higher global commodity prices are expected to exert upward pressure on domestic prices. The 2022 forecast is raised for Bangladesh as well, as the expected implementation of fiscal and monetary stimulus adds to pressure from higher fuel prices.

The 2021 inflation forecast for the Maldives is lowered as subsidies on staples and utilities keep domestic prices in check despite higher global commodity prices.