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)