Presenting the key findings of the Outlook 2019 report compiled by the EIU CCC Chief Economist Shiran Fernando noted that Sri Lanka is likely to see 3.5%-4% growth this year. Economic expansion is likely to come from personal services activities, wholesale and retail trade as well as an increase in household consumption from populist policies usually implemented during an election year.
However, Fernando expressed concerns over currency depreciation and called for structural reforms to continue to put Sri Lanka on a sustainable growth trajectory. He also noted that Sri Lanka’s Foreign Direct Investment while increasing was limited to “big ticket items” such as the Hambantota Port and Port City that depends on bilateral relations and less on non-state linked foreign investors.
“Global growth is on a downward trend and normalising interest rates could pose difficulties for Sri Lanka. Sri Lanka is also facing high debt repayments and elections. So this outlook is focused on shifting gears from stability to resilience. We expect growth to be moderate and for the rupee to remain under some pressure though possibly not as much as what was seen this year,” Fernando said.
Looking at Sri Lanka’s top exports, Fernando opined apparel would depend largely on the rupee outlook while both rubber and tea are facing supply side constraints. Tourism needs to recover from political instability but is expected to continue its growth path.
Central Bank Governor Dr. Indrajit Coomaraswamy delivering the keynote address at the event outlined plans to raise the bulk of the $ 5.9 billion needed to repay Sri Lanka’s debt and said the recent Government delegation to visit Washington for talks with the International Monetary Fund (IMF) focused on creating fiscal space for the Gamperaliya and Samurdhi programs.
The Governor said efforts were already underway to raise funds from India, China and through an International Sovereign Bond. The Central Bank aims to raise about $ 5 billion in the first quarter of 2019 to offset any political uncertainty that may pop up later in the year. The Central Bank is likely to announce its growth projections for 2019 next month.
“There are two significant headwinds in 2019. One is our reservoirs are full, which means that we can have good harvests and use hydro power. The second is low oil prices. If you take those two factors together, output can improve. Depreciation can give a boost to growth in the short term but a lot of other things need to come together as well. But you can’t keep depreciating the currency so we have to get away from that and hopefully remedial action has been taken. The exogenous factors of oil prices, normalisation of interest rates and dollar appreciation we cannot do much about but domestically the trade balance has been reduced by curtailing gold and vehicle imports,” he said.
The Governor cautioned against using monetary policy to spur growth and called for structural reforms including fiscal consolidation, reform of State Owned Enterprises, legal and regulatory reforms to attract investment and measures to boost exports, to continue.
“My fear is that most of the attention in 2019 will be on politics,” noted Institute of Policy Studies (IPS) Executive Director Dr. Dushni Weerakoon, speaking during the panel discussion after the release of the report.
“Risks are about the currency and I take the point that a near-20% depreciation is not such a bad thing in terms of providing some kind of a boost to export competitiveness. But that will be short lived, it is not long term. To me the main issue is that we are in a low growth environment and a 20% depreciation today means that risks are not in terms of inflation, I see the problem in terms of debt. Sri Lanka is carrying foreign currency denominated debt of 60% of GDP, with 36% of that debt held by the central government, 3% by the Central Bank and another 20% by the State-Owned Enterprises. So a sudden, sharp depreciation means our debt numbers and outlook changes overnight and when you factor in the low growth momentum, those numbers start to look more alarming. So in that context Sri Lanka moving into a critical debt repayment period till about 2021 does not provide a very positive outlook,” she added.
KPMG Managing Partner Reyaz Mihular noted recent political instability would take time to dissipate and called for pragmatic policy making that would stabilise the economy and focus on long term growth.
“What happened in the last quarter created doubt in the minds of investors about the political stability in this country. I talk to a lot of investors and when they look at a country like Sri Lanka they take what we do for the most part as par for the course. But what happened is something that completely disturbed them because they suddenly realized the entire thing can get topsy-turvy and that can create a lot of uncertainty about their future plans, especially for long term investors, and I think that will hang over us for some time,” Mihular said.
“We need to get realistic about our satiation. We are eternally optimistic. We think no matter what happens life will go on but it doesn’t work like that. Everything we do there is a cost to pay for it, there is nothing called a free lunch. There is a need to explain in simple terms to the public the real situation of the country.”
Mihular commended selective Government policies such as the effort to establish a single window for exports and a land bank, but insisted the reforms needed to continue for them to have stronger impact.
Hayleys Strategic Development Head Manohari Abeysekera was upbeat about Sri Lanka’s economic prospects in 2019, pointing out that as the Central Bank had clear plans on debt repayment, it was less of a concern to the private sector.
“We are quite optimistic of 2019. The agriculture sector has improved, which is a big positive for us. Hayleys is in agriculture, industries and services, so it can be taken as a barometer for Sri Lanka’s economy. The Central Bank has its plans to raise funds to repay debt and Sri Lanka has never defaulted on a payment, so I don’t think it’s all doom and gloom. Although we could have some political instability, I am optimistic that 2019 would be a better year for the country. Even the political instability that happened in October and November gave a message to the politicians that they need to listen to the public,” she said.
Abeysekera noted that when Hayleys acquired Singer Sri Lanka, which is the largest retailer in the country with 450 consumer retail shops countrywide, they found as much as 30% of the retail output comes from the farming community.
“When we bought Singer we thought demand would be from the Western Province and the middle class, but when we drill down we realised the knock-on effect of agriculture. Even though agriculture has limited GDP contribution, 30% of Sri Lanka’s population relies on agriculture. The Government should encourage exports as that would be beneficial and even with debt Sri Lanka still has potential to benefit from its geographical location and other attributes.”