ADB revises down growth forecast for Sri Lanka in 2016 and 2017

Manilla: Asian Development Bank (ADB) has lowered the economic growth forecast for Sri Lanka Tuesday saying growth prospects for Sri Lanka edge lower on weak industrial performance and fiscal consolidation.

In an update of its flagship annual economic publication, Asian Development Outlook 2016 (ADO 2016), released today, ADB lowered the GDP growth rate to 5.0% for Sri Lanka in 2016 from the 5.3% it projected in March this year. The growth in 2017 was lowered to 5.5% from the 5.8% projected six months ago while the inflation will remain 4.5% this year and 5.0% in 2017. The growth forecast for Sri Lanka in 2016 is revised down on unexpected weakness in the second quarter, which held growth in the first half to 3.9%. GDP grew by 5.2% in the first quarter and then slumped to 2.6% in the second to hold growth in the first half of 2016 to 3.9% year on year.

Agriculture was hit by dry weather that cut tea production in the first quarter and by heavy rain and flooding in the second quarter that markedly reduced agricultural output by 2.5% in the first half.

However, the ADO 2016 update noted that the weak economic performance in the first half came mostly from an unexpected slowing of industry in the second quarter, mainly in manufacturing and construction. As other industry indicators show stronger performance, recovery is expected in the second half.

The forecast for growth in 2017 is similarly lowered because of tight monetary and fiscal policies to achieve economic reform objectives amid the continued lacklustre global demand.

On expectations that food production will revive under normal weather and that monetary tightening will curb demand pressures, inflation is expected to moderate in the second half of the year. On balance, ADO 2016 forecasts for inflation are retained.

As tourist earnings continued their strong performance in the first half of 2016, and remittance inflows strengthened, their combined earnings offset the trade deficit by a larger margin than in 2015. Accordingly, the ADO 2016 forecast for the current account deficit is retained for 2016 but it is widened for 2017 on oil prices rising more than expected earlier and possible adverse effects on exports from Brexit.

The update says prudent debt management is required in Sri Lanka, where general government debt ratios have long been high by regional standards. “For Sri Lanka, where a significant share of debt is external, additional pressure is likely to come from the interest rate cycle of the US Federal Reserve,” the ADO 2016 update predicted.

The growth projections for next year are retained for all economies in South Asia except Pakistan, which is higher, and Sri Lanka, which is lower.