Sri Lanka broadly on track to meet 2013 forecasts: ADB

Thursday, 3 October 2013 00:52 - - {{hitsCtrl.values.hits}}

The Asian Development Bank (ADB) in its latest update on the region’s outlook has said that Sri Lanka appears to be broadly on track to meet forecasted growth. The Asian Development Outlook (ADO) of ADB released yesterday said it retains the April projection for GDP growth in 2013 at 6.8% and in 2014 at 7.2%. Retention of forecast of Sri Lanka is despite ADO downgrading the overall prospects for South Asia. It now estimates the region’s overall growth to be 4.7%, down from 5.7% estimated previously. In 2012, the region grew by 5.1%. The ADO also has revised South Asia’s growth in 2014 to be 5.5% down from 6.2% previously estimated. ADO said growth in Sri Lanka started to recover in 2013 from a dip in 2012. Power generation, which can constrain economic activity, picked up in May to grow by 9.2% but dropped slightly in June. Imports recorded positive growth in April and June. The deceleration in credit to the private sector shows signs of abating. GDP growth rebounded to 6.8% in the second quarter of 2013 from 6.0% in the previous quarter, driven by service sector recovery. Industry maintained high growth, while agriculture suffered under bad weather from late 2012. Inflation eased to 6.3% year on year in August from close to 10% in early 2013. Non-food inflation dropped below 4% in March-April 2013 but accelerated again to 6% in May as power tariffs rose. The Central Bank eased policy rates in December 2012 and again by 50 basis points in May, subsequently reducing in June the statutory reserve requirement by 2%. Bank lending rates decreased from 14.4% in February 2013 to 12.1% in June, easing the deceleration of credit to the private sector. Both exports and imports showed signs of recovery in the first half as the pace of decrease eased. The trade deficit shrank by 7.1% from the second half of 2012. Workers’ remittances and earnings from tourism partly offset the trade deficit, with remittances growing by 9% in the first half. Financial inflows have been strong, with Foreign Direct Investment amounting to $540.0 million. The rupee has been under pressure since June from greater import demand. Foreign holdings of government securities dipped in late August, which further weakened the rupee by 5% against the US dollar from the end of May to the end of August. Sri Lanka’s gross official reserves equalled 4.1 months of imports in June 2013, down from 4.5 months in March.

Looking forward, eased monetary policy, continued recovery in services, and improvements in agriculture assuming normal weather will support stronger performance in the second half. External trade is expected to remain weak. This Update retains the April projection for GDP growth in 2013 at 6.8% and in 2014 at 7.2%. As inflation is likely to be contained for the rest of the year as food prices remain stable, the inflation projection for 2013 is revised down to 7.0%. The 6.5% forecast for inflation in 2014 is maintained, as are current account deficit forecasts for both years. With regard to South Asia, ADO said the growth forecasts for the region’s countries are little changed. Forecasts for Afghanistan and Nepal are modestly upgraded for both years. Bangladesh, Bhutan, the Maldives, and Sri Lanka appear to be broadly on track to meet ADO 2013 forecasts. The newly-elected Government of Pakistan signalled ambitious economic reforms to address persistently slow growth, extensive power outages, declining investment, excessive budget deficits, and draining foreign exchange reserves. It began implementing a wide-ranging economic program supported by the International Monetary Fund to restore stability and enhance future growth prospects. A pickup in the economy will come, however, after this Update’s 2014 horizon, as imbalances are corrected and structural reforms take hold. Several factors mitigating price pressures in South Asia — low global commodity prices, a favourable monsoon, strengthened monetary policies, and slow growth in India — leave the inflation outlook generally benign. While recent downward pressure on South Asian currencies threaten to import inflation, monetary policies have become better focused on stabilising prices as countries have coped with price pressures caused by the rolling back of fuel and electricity subsidies. This Update forecasts inflation in South Asia at 6.7% in FY2013, less than the 7.4% forecast earlier. The decline reflects mostly the downward revision for India to 6.5%, but inflation forecasts for 2013 are trimmed for all South Asian countries except Afghanistan. The forecast for inflation in 2014 is, at 7.0%, only slightly below the 7.1% April projection. South Asia’s current account deficit forecast for 2013 is revised down to 3.2% of GDP from 3.7% earlier, almost entirely reflecting a lower deficit e

xpected in India. The forecast for Nepal is revised to show a comfortable surplus expected from higher remittances and earnings from tourism. Afghanistan’s current account surplus forecast, excluding official grants, is revised up to account for more grant assistance being channelled through the national budget rather than administered directly by development partners. Forecasts for other countries are little changed. The deficit projection for 2014 is slightly narrower as India trims its deficit further.