Achieving growth projections

Friday, 18 December 2020 00:00 - - {{hitsCtrl.values.hits}}

The long-awaited 3Q and 2Q results were finally released this week by the Government but had few surprises. As expected growth rebounded to 1.5% in the 3Q after a severe contraction of 16.3% in 2Q, while the Census and Statistics Department (CSD) also revised slightly down the 1Q growth from -1.6% to -1.7%.

The latest data indicates that Sri Lanka’s growth contracted 5.3% for the first three quarters for 2020 and could end the year with further downward growth given the partial curfews imposed due to the second COVID-19 wave in October. In its mid-year forecast the Central Bank predicted a contraction of 1.7% for the entire year while Budget 2021 has predicted a robust turnaround of 5.5% growth for next year.

Throughout the third quarter in the year 2020, the country experienced the normalisation of business activities and return to new normality in the day-to-day lifestyle of the people, after the first wave of the COVID-19 pandemic. This favourable condition resulted in economic activities performing well, especially in the third quarter and has resulted in recording 1.5% of positive growth rate in the economy for the first time for the year 2020.

However, what the latest data does not assuage is concerns over the performance of 4Q, which has also been affected by sporadic curfews. Whatever the final number may be it is clear that Sri Lanka will have to redouble its efforts to grow in 2021 not just in annual terms but sustainably. For this the Government will have to take a reforms based approach.

The achievement of this projected medium-term macroeconomic path is contingent upon implementing the identified reforms in the period ahead. Along with the establishment of a stable Government, the COVID-19 outbreak has created an opportunity to review macroeconomic policies and set appropriate policy priorities and long-term development goals for the country.

The Government’s drive to support and encourage domestic production to reach self-sufficiency in identified goods is likely to play a crucial role in Sri Lanka’s economic transformation, according to the Central Bank. However, the maintenance of quality standards of domestically-produced goods and ensuring availability at a reasonable price are vital to derive intended benefits in the medium to long term. This is imperative to boosting Sri Lanka’s competitiveness because import substitution will not be successful unless products move up the value chain and can also expand the country’s limited basket of exports.

Adequate investment in innovation and research and development (R&D), and the promotion of export-oriented Foreign Direct Investment (FDI) are needed to improve efficiency and enhance productivity, particularly in the SME sector. If Sri Lanka is to achieve the high growth predicted in 2021 it has to have improved access to international markets, so trade negotiations with existing and new partner economies must continue.

The current economic challenges before Sri Lanka make the Budget for 2021 of extreme importance. As the major policy document of the Government it will be a catalyst for achieving the rose-tinted projections of the Central Bank and Sri Lanka’s prospects in weathering the external challenges looming next year.

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