ADB overturns growth forecast for SL due to economic crisis

• Multilateral donor’s Developing Asia Growth Outlook update lowers overall forecast for Asia Pacific as global risks mount

The Asian Development Bank (ADB) has lowered Sri Lanka’s growth outlook to a negative 8.8% this year as opposed to a positive 2.4% estimated in April.

ADB is also forecasting a 3.3% negative growth next year for Sri Lanka revising from a 2.5% positive growth previously forecast.

For South Asia, ADB is forecasting a 6.5% growth this year, marginally lower than the 7% growth forecast in April. Growth for 2023 is 6.5% down from earlier forecast of 7.4%.

ADB said the new forecasts are mainly because of a modest downward revision to India’s projected growth due to higher-than-anticipated inflation and monetary tightening, and Sri Lanka’s sharp contraction as its economic crisis deepens.  

Inflation in South Asia is projected to rise to 8.1% in 2022 from the earlier 6.5% projection and to 7.4% from 5.5% for 2023. The upward revisions mainly reflect surging global commodity prices accelerating inflation in India, Pakistan, and Sri Lanka.

ADB said shrinking food supply in Sri Lanka and the removal of energy subsidies in Pakistan are affecting the inflation outlook for these economies. 

It also said South Asia’s current account deficit will widen further than the earlier projection. Wider current account deficits are expected in Bangladesh, India, and Pakistan on a combination of higher trade deficits and lower remittances. Sri Lanka’s deficit will narrow on severe shortages of foreign exchange, which have led to sharply lower imports. 

Separately ADB again lowered its forecasts for economic growth in developing Asia and the Pacific, amid mounting challenges that include increased monetary tightening by central banks, fallout from the protracted Russian invasion of Ukraine, and recurrent COVID-19 lockdowns in the People’s Republic of China (PRC).

The region’s economy is expected to grow 4.3% this year, compared with the bank’s projection in April of a 5.2% expansion, according to an update of the Asian Development Outlook (ADO) 2022, released last week. The growth forecast for next year has been lowered to 4.9% from 5.3%, while the region’s inflation forecast has been raised. Excluding the PRC, the rest of developing Asia is projected to grow by 5.3% in both 2022 and 2023.

Domestic consumer spending and investment are driving growth as economies in the region continue to relax pandemic restrictions, thanks in part to vaccination drives and declining COVID-19 mortality. However, the continuing invasion of Ukraine has heightened global uncertainty, worsened supply disruptions, and unsettled energy and food markets. 

More aggressive monetary tightening by the US Federal Reserve and the European Central Bank is denting global demand and rattling financial markets. Meanwhile, sporadic COVID-19 outbreaks and new lockdowns have slowed growth in the PRC, the region’s largest economy.

“Developing Asia continues to recover, but risks loom large,” said ADB Chief Economist Albert Park. “A significant downturn in the world economy would severely undermine demand for the region’s exports. Stronger-than-expected monetary tightening in advanced economies could lead to financial instability. 

“And growth in the PRC faces challenges from recurrent lockdowns and a weak property sector. Governments in developing Asia need to remain vigilant against these risks and take the necessary steps to contain inflation without derailing growth.”

The world’s major advanced economies are forecast to grow 1.9% in 2022 and 1.0% in 2023, slower than projected earlier this year. High inflation has prompted the US and the euro area to aggressively tighten monetary policy, weakening demand in these economies, which also continue to be affected by supply-chain disruptions and uncertainty from the invasion of Ukraine.

ADB raised its forecast for inflation in developing Asia this year to 4.5% from a previous projection of 3.7%. The forecast for next year is 4.0%, up from 3.1%. While inflation in the region remains lower than elsewhere, supply disruptions continue to push up food and fuel prices.

The PRC’s growth outlook for this year was downgraded to 3.3% from a 5.0% projection in April. This will be the first year in more than 3 decades that the rest of developing Asia will grow faster than the PRC. The forecast for India was lowered to 7.0% from 7.5%, due to higher-than-expected inflation and monetary tightening.

Robust domestic demand in Indonesia and the Philippines are contributing to an improved outlook of 5.1% growth this year for Southeast Asia, although weaker prospects for global demand have led to a downgrade in the forecast for next year. The outlook for 2022 has also improved for the Caucasus and Central Asia, which is expected to see 3.9% growth this year, and for the economies of the Pacific, projected to expand 4.7% as tourism continues to bounce back from the pandemic.

The update to the Asian Development Outlook (ADO) 2022 includes a theme chapter titled Entrepreneurship in the Digital Age. The chapter looks at how digital entrepreneurship can lead to greater growth and innovation, and how governments in the region can create an environment for digital entrepreneurs to thrive.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members – 49 from the region.