President Mahinda Rajapakse (Minister of Finance) and Nivard Cabraal Central Bank Governor at the launch of the 2012 Annual Report of the CBSL (Photo courtesy Yahoo News, Dinuka Liyanawatte/REUTERS)
Yesterday, the Central Bank of Sri Lanka (CBSL) released it’s 2012 Annual Report, revealing that the economy grew by 6.4% last year. Last year was not an easy year for the Sri Lankan economy. The country had to make some difficult choices on adjustment policies. The fuel and electricity price hikes in early 2012, to bring cost reflectivity in energy prices and help CEB and CPC consolidate losses. The interest rate hikes to curb rapidly rising import demand that put pressure on the Balance of Payments, and the rupee as a result. Adjustment is costly and painful in the short-term, but it’s needed for medium to long term stability and strength. Added to the adjustment costs were the pressures from unfavourable weather that affected agriculture – this also contributed to the growth slowdown. So 2012 was a bit clearer.
Now for 2013 the GDP growth forecasts are all over the place. All entities besides the CBSL give growth in 2013 as below 7%. Let me recap a few that I have come across so far. The most pessimistic of the lot is Business Monitor International (BMI), a London-based independent research and credit rating agency, that forecasts 2013 real GDP growth at 5.4% (down from their earlier 5.9%). Meanwhile, at the conclusion of an IMF Staff Mission to Sri Lanka earlier this year, the IMF forecast 2013 growth of 6.25%. The Asian Development Bank, in its Asian Development Outlook (ADO) for 2013-2014, put Sri Lanka’s 2013 growth at 6.8% (edging up to 7.2% in 2014). Meanwhile Standard Chartered Bank, in a comprehensive review, is forecasting 6.7% (down from its earlier 7.2%). The two forecasts that come closest to the CBSL one is by the Economics Intelligence Unit (EIU), a part of The Economist Group (publishers of the newspaper, The Economist), and RAM Ratings, an Asian credit rating agency with a Sri Lankan presence. Both EIU and RAM indicate their 2013 forecast for growth as be 7.0%.
At the Annual Report 2012 launch yesterday, the CBSL declared that the government’s projected growth in 2013 is 7.5%, substantially higher than all the forecasts by others we’ve seen so far. The government appears confident that consolidation measures on the fiscal front, growth generated from public investment projects in infrastructure booming tourism, etc., will carry growth forward, despite declining export growth. Nevertheless, 7.5% is ambitious. Especially in the midst of a global economic downturn that’s still persisting – affecting our export demand in key markets. Sustained growth for a small economy like Sri Lanka’s needs to come from export growth.
Meanwhile, the impending electricity hikes will no doubt put additional pressure on industries, tourist establishments, and consumers. This could affect growth. However, if inflation eases towards mid-year, it is likely that the CBSL would pull down interest rates, giving somewhat of a boost to the economy. Most banks are reporting that credit demand (i.e., demand by businesses and consumers for loans) has been quite slow in the past few months, mostly attributable to the high interest rates prevailing. So any cut in rates would certainly be a stimuli for both consumption and investment borrowing.
While I am surprised at the widely diverse forecasts, many of them have similar underlying bases for their lower projections. Domestic adjustments in the next few months – energy prices, interest rates, etc., the economic health of our export markets, progress on the fiscal consolidation (tackling the budget deficit) front will be some of the key determinants of how 2013 will eventually pan out. Many of the forecast reports acknowledge these very factors, and importantly, so does the Central Bank.
Growth forecasts for 2013 are aplenty. But to place all the forecasts in context – two things. 1) We grew at between 5-6% even during the years of the armed conflict and 2) the industrialized West would do anything for growth above 2-3% right now.
The Sri Lankan economy has an “X-factor” that continues to surprise…
(updated 9.40am, 10/04/2013)
The Curionomist 
Problem is policy rate cuts are not translating into lower lending rates. Doubt further cuts will do the same. What’s up with that?
Yes, strange how sticky the lending rates have been. This was especially evident in 2011/12. Given that banks are facing lower credit demand now though, the tendency to follow through policy rates into lower lending rates might be greater? Banks make money only if they lend, afterall. And lower credit demand isn’t great for them. We’ll have to wait and see…
Yeah, that points to an underlying weakness in business sentiments, which will only worsen as utilities increase in price. Which means stimulus facilitated by higher production costs is not really going to help.
You do not seem to have picked up on the ‘crowding out’ that credit growth to the SOE and govt sector have been doing to interest rates. With little liquidity being pumped in, and this crowding out taking place, rates will invariably remain sticky. The market clearing interest rate for the private sector will not transpire, until in simple terms, the supply of real money balances exist. The ‘crowding out’ is a result of the govt. decision to tap DCBU funding in this fiscal year, and the strains in the CEB and the CPC. With the corrections coming into play, you have a heightened risk to inflation from both a demand and supply perspective. If market rates correct and the CBSL aggressively coerces private sector credit growth we have amongst other pressures, demand side inflationary heat up, whilst on the other hand the utilities price correction will heat up inflation on a supply side sense. But on a pure statistical perspective, the CBSL has base effects on its side. Upto this point however, the CBSL has played a smart hand with its monetary management but slow.
no surprise that commercial lending rates have been so sticky when you look at the volume of govt activity in the market – in q1 2013 gosl accepted lkr 406 bn in bond and bill auctions compared to lkr 146 bn in q1 2012. this reduces supply of funds to lend to the private sector and keeps interest rates up. since mid march t bond/bill auctions have been smaller in magnitude, and with more commercial banks tapping cheaper off-shore sources, commercial lending rates will edge down from Q2.
You need to factor in the deterioration in governance, corruption is rampant and the rule of law is in very poor shape. The policy environment is topsy turvey will ad-hoc steps, based on shortsighted political need.
The assault on the Muslim community has frightened most minorities and will dent confidence, already weak still further.
Add to this the power hikes and tax hikes; I think something between 4-5% growth by the official statistics, is closer to the mark. (Ignoring the questions on the governments quality of stats and inflation measures)
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