The Sri Lankan economy grew at a moderate pace of 3.2 percent year on year in 2018 compared to 3.4 percent in 2017 amidst headwinds from a challenging domestic and external environment, according to the Central Bank of Sri Lanka (CBSL).
CBSL notes that “favourable weather conditions that prevailed in the major cultivation areas enabled a strong recovery in agricultural activities throughout the year, resulting in a bumper paddy harvest during the year.” And the monetary authority states: “Services activities, which provided the highest contribution to the economy in 2018, were led by growth in financial services, and wholesale and retail trade activities, and were also supported by the spillover effects of the rebound in agricultural activities.”
“Industry activities slowed down, dampening economic growth, owing to the setback in construction and mining activities, and the moderate growth in manufacturing activities,” it adds.
SERVICES In calendar year 2018, services related economic activities (nearly 58% of GDP) expanded by 4.7 percent year on year in value added terms compared to the 3.6 percent increase in 2017.
According to the Central Bank, the uptick in the services sector during the year was primarily driven by robust growth in financial services.
CBSL also cites growth in other segments including personal services together with an expansion in wholesale and retail trade activities.
Moreover, it notes that growth in transportation activities, real estate, insurance, accommodation, professional services, education, telecommunications, human health and IT programming activities supported the performance of the services sector.
However, the Central Bank points out that public administration services, and programming and broadcasting activities, contracted in 2018. This dragged down the expansion in services activities, it notes.
INDUSTRY The value added of the industry sector recorded a marginal upside of slightly less than one percent in 2018 versus a 4.1 percent hike in the preceding year. This slowdown was largely attributable to the contraction in construction and mining activities.
Manufacturing activities recorded modest growth in 2018. Nevertheless, other industry sector related activities such as electricity; sewerage; waste treatment and disposal; and water collection, treatment and supply continued to register positive growth compared to the previous year.
AGRICULTURE Recovering from negative performances in the preceding two years, agriculture activities grew by 4.8 percent in value added terms in 2018 in comparison to the 0.4 percent contraction of a year back.
CBSL notes that “favourable weather conditions that prevailed in major cultivation areas throughout the year spurred the recovery in agriculture activities… Favourable base effect also contributed to the higher growth in the agricultural activities.”
VIEWPOINTS In its latest update to the Asian Development Outlook (ADO) report, the Asian Development Bank (ADB) in its commentary on Sri Lanka states that “2019 and 2020 growth forecasts are marked down because terror bombings in April 2019 caused tourism to fall sharply.”
In the fourth quarter of 2018, growth rebounded from 1.8 percent year on year to 3.7 percent in the first quarter of 2019. The rebound reflected 4.1 percent growth in services, 5.5 percent expansion in agriculture and recovery in industry mainly from a pickup in construction. The first quarter witnessed muted private consumption, continued tightening of government consumption and a near five percent decline in fixed investments. Net exports contributed to growth and a contraction of inventories subtracted from it.
The ADB remarks that “while growth in the first quarter aligned with the ADO 2019 forecast, the projection for growth in 2019 is marked down to take into account terror bombings in April 2019 as is the projection for 2020.”
Tourist arrivals fell sharply from 4.6 percent growth year on year in the first quarter of 2019 to a 41 percent contraction in the second quarter although visitor numbers picked up month on month since May.
“Budget revenue declined by four percent year on year in the first half of 2019, which along with growth below expectations, will likely make meeting the deficit target difficult without spending cuts,” ADB cautions.
The national consumer price index rose by an average 2.6 percent in the first seven months of 2019. To this end, the regional development bank observes: “Even as food prices dropped from a high base in 2018, non-food inflation rose with higher administered prices and Sri Lanka rupee depreciation at the end of 2018.”
It continues: “Inflation forecasts for 2019 and 2020 are reduced because inflation to date has been below expectations. The Colombo Consumer Price Index rose by an average of four percent in the first eight months of 2019, and is projected at 4.2 percent in 2019 and five percent in 2020.”
The Central Bank eased monetary policy on three occasions in 2019 in response to subdued growth, low inflation and a slowdown in private credit. It cut the statutory reserve requirement by 100 basis points in February, and standing deposit and lending facility rates by 50 basis points in May and August.
Sovereign bond issues worth US$ 4.4 billion helped increase gross international reserves to 8.3 billion dollars in July 2019. The rupee’s appreciation against the US Dollar by 3.6 percent in the first seven months of the year was offset by 2.5 percent depreciation “induced by global volatility in August,” the ADB remarks.
As for the external economy, the trade deficit shrank by 37 percent year on year in the first half of 2019 as exports grew by 4.7 percent and imports declined by slightly over 16 percent.
The ADB informs that “measures introduced in 2018 to restrict imports were eased in May 2019. Despite a marked reduction in tourism earnings as expected after the terror attacks, the current account deficit is now forecast to be less than projected in ADO 2019, reflecting trade developments to date. The deficit forecast for financial year 2020 is trimmed as well but is still projected to widen marginally.”
eanwhile, the IMF forecasts that the Sri Lankan economy will grow by 2.7 percent in 2019, and 3.5 percent and 4.8 percent in 2020 and 2024 respectively, according to the October 2019 edition of its World Economic Outlook (WEO) report.
Following discussions that ended in September with Sri Lankan officials on economic developments and policies underpinning the IMF arrangement under the Extended Fund Facility (EFF), an IMF team prepared a Staff Report for its Executive Board’s consideration in November.
And at the conclusion of the Executive Board’s latest review of Sri Lanka’s extended arrangement under the EFF, the IMF noted that Sri Lanka had successfully completed the sixth review, enabling the next disbursement of supporting funds.
It also stated that “sustaining policy discipline remains critical to strengthen resilience, and support strong and inclusive growth … Mobilising revenue will be central to place public debt on a downward path while preserving space for social and investment spending.”
FISCAL AFFAIRS Government revenue declined in the first four months of 2019, according to the Mid-Year Fiscal Position Report 2019 published by the Ministry of Finance and Mass Media.
This is attributed to the decline in revenue generated from excise tax on petroleum and motor vehicles, the telecommunications levy and cess, together with a contraction of 17.4 percent in imports and a drop in non-tax revenue.
However, revenue from income tax increased on the back of a simplification of the tax structure, strengthened administration and audits in line with the new Inland Revenue Act effective from April 2018.
The decline in non-tax revenue reflects “the nonreceipt of Central Bank profit transfers in the first four months of 2019 compared to the corresponding period of 2018,” according to the Finance Ministry report.
Total revenue from income tax grew to Rs. 104 billion in the first four months of 2019: corporate and non-corporate income tax increased by 10.2 percent to 43 billion rupees; revenue from PAYE tax grew by 19.2 percent to Rs. 18 billion; and inflows from the Economic Service Charge (ESC) rose by 11.3 percent to 27 billion rupees. Meanwhile, revenue from tax on interest declined to Rs. 17 billion, the Mid-Year Fiscal Position Report 2019 reveals.
Moreover, the ministry report asserts that “the impact of the Easter Sunday attacks on the fiscal policy operations are twofold – i.e. the impact of fiscal revenue generation and… government expenditure.”
Government expenditure amounted to Rs. 962 billion during the first four months of 2019, reflecting an increase of marginally in excess of 10 percent compared to the equivalent period of the preceding year. This included recurrent expenditure of 756 billion rupees and capex of Rs. 211 million.
“Recurrent expenditure increased by 9.4 percent, reflecting the increase in salaries and wages of government employees, and interest payments, while capital expenditure increased by 12.8 percent in the review period. The bills brought forward from the previous year had an impact on this increase,” the Mid-Year Fiscal Position Report 2019 notes.
In the December edition of LMD, economist Shiran Fernando evaluates how global risks could shape Sri Lanka’s economic outlook: “Sri Lanka is likely to post the second weakest growth in South Asia this year. This outcome is set to improve marginally in 2020 as its growth supersedes that of Pakistan and Afghanistan.”
As he explains, “Sri Lanka’s macroeconomic variables are stable at best but sensitive to global and local stress. Political stability, which has been deeply desired in recent years, is expected to materialise once a parliamentary election is held in the first half of next year.”
“The nation has had to scale back public investment (i.e. what the government can provide through its annual financial plan) to keep the budget deficit in check. There is a lack of fiscal space to manoeuvre this to spur higher public investment. Therefore, an enabling environment is required for private investment to thrive,” Fernando asserts.
He is of the view that Sri Lanka has to manage its debt burden carefully in the next few years: “The country’s high debt as a share of GDP has been in the spotlight for some time. But much like it is with a business or company, it’s the management of cash flow that matters.”
This has been achieved somewhat diligently by the Central Bank of Sri Lanka, enabling the state to honour its refinancing commitments, Fernando believes. And he states that “the Central Bank has been compelled to time its entry into international capital markets and ensure it raises the right amount of debt at competitive rates.”
He continues: “These inflows prop up reserves in the short term, which reduces as debt outflows come into play … What’s more, the Central Bank requires favourable global financial markets for its reserves management to be successful.”
COMPETITIVENESS Sri Lanka is placed 84 in the Global Competitiveness Index 4.0 2019 ranking compiled by the World Economic Forum (WEF), which notess that the country is the most improved in the region.
The accompanying report reveals that from a South Asian perspective, Sri Lanka exceeds the regional average for several indicators including its institutions, infrastructure, ICT adoption, health, skills and the labour market.
Meanwhile, Sri Lanka has moved up in the Doing Business 2020 index, advancing one place from the prior year to No. 99 of the 190 economies ranked. The latest rankings published by the World Bank Group reveal that Sri Lanka has achieved a Doing Business score of 61.8, which is the same as in the previous year.
In the report’s analyses, the island also stands as the leader in the South Asian region when it comes to registering property, which is one of 10 topics considered in ranking an economy’s doing business environment. Meanwhile, the LMD-Nielsen Business Confidence Index (BCI) reflected an improvement in biz sentiment in November following a slump in the immediate aftermath of the Easter Sunday terrorist attacks earlier in the year.
POLICY REVIEW The State of the Economy 2019 publication released by the Institute of Policy Studies (IPS) in October focusses on ‘Transforming Sri Lanka’s Economy in the Fourth Industrial Revolution (4IR).’
This year’s State of the Economy 2019 report examines the numerous segments of the national economy– viz. world of work, education, migration, gender, health, financial inclusion, trade, agriculture and climate change amongst others – where 4IR technologies will come into play as defining features of Sri Lanka’s future economic prospects.
The IPS’ annual flagship report on Sri Lanka provides a critical assessment of the country’s economic performance, and near term outlook for growth and macroeconomic stability. It also examines crucial medium-term policy priorities to achieve sustained growth and strengthen socioeconomic development outcomes for the nation.
In its analysis, IPS notes that “the Sri Lankan economy is making a slow recovery after a series of setbacks – a devastating terror attack in April 2019, preceded by a political crisis in the third quarter of 2018.
“With sluggish GDP growth of around three percent and high foreign debt settlements, the overall positioning of the economy in 2019 is weak. This is despite significant gains from macro reform measures in fiscal, monetary and exchange rate policy management from mid-2016,” it adds.
IPS also notes that “fiscal reforms in particular have had some success in restoring stronger macroeconomic fundamentals through a period of often painful adjustments … But worries about the economy are not just confined to the heavy overhang of government debt. The sluggish pace of economic growth is a major concern.”
The economic policy research institution affirms that “as Sri Lanka prepares the groundwork for a fresh phase of economic growth and development on the back of decisive elections in 2019 and 2020, new tools to assess and understand competitiveness must be heeded.”
It continues: “Transformative technologies such as AI, robotics and 3D printing – under the banner of the Fourth Industrial Revolution – are proving to be invasive, complex and disruptive. For countries with ageing populations like Sri Lanka that must rely on productivity as a key driver of future growth, the challenges need to be understood and opportunities grasped.”
The IPS report indicates that Sri Lanka’s readiness for 4IR– in digital, human capital and economic agility – is low; only a third of the population uses the internet, the national computer literacy rate is 23 percent with a gender gap in internet usage of 40 percent and significant regional disparities in IT literacy (urban – 37%; rural – 22%; and estate – 9%).
On the plus side, 70 percent of the population owns a mobile phone with a 95 percent mobile cellular network cover across the country, it adds.
“In human capital, there are significant deficiencies despite high literacy rates… As the global competition for tertiary educated skilled workers rise, many leave the country for better opportunities abroad,” the policy think tank laments.
Moreover, it points out that “the production structure of the Sri Lankan economy has changed very little over the decades; only around seven percent of manufacturing value addition is estimated to take place through medium hi-tech and hi-tech industries.”
Therefore, IPS concludes that Sri Lanka is a nascent economy in its preparedness for the Fourth Industrial Revolution.
Its report also observes that “for policy makers faced with more immediate concerns on Sri Lanka’s economic front, the transformative appeal of the 4IR might seem a long-term project. But the application of rapidly evolving technologies can hasten or slow down the process of the already overdue structural transformation of the economy.”
The policy think tank warns that the trends “do not bode well for an economy that must solidify a resource switch to make economic growth more reliant on tradables. Technological change will inevitably be a critical part of the policy adjustment. The fact that the 4IR is not merely limited to technological adoption but that it also introduces new tools to assess and understand competitiveness will help in this process.”
It remarks: “Concepts such as entrepreneurial culture, disruptive ideas, multi-stakeholder collaboration, critical thinking, meritocracy and social trust, along with more traditional components like ICT and physical infrastructure, macroeconomic stability, property rights and education, are defining features of economic success in the 4IR.”
“Now is the time for these ideas and concepts to be understood, and factored in, as Sri Lanka prepares the groundwork for a fresh phase of economic growth and development,” it concludes.
THE BOTTOM LINE The nation and its economy are presently in transition following the 16 November presidential election and evolving changes in the wake of its outcome. And as the newly appointed ‘caretaker government’ and 16 member cabinet of ministers work their way through the changes they deem necessary, both the people and business await the forthcoming general election. While what transpires at the parliamentary polls may or may not lead to further changes to the status quo, they will at the very least see an end to what has been an extended period of ‘wait and see’ – and that can only be good for business. In that sense, there’s hope on the horizon.