As identified by Asian Development Outlook (ADO) 2016, which is a Report produced annually by Asian Development Bank (ADB), the developing Asia will continue to contribute at least 60% for the growth of the world. With slower growth in US and Euro zone together with transition taking place in China and reforms in India, ADO forecasts a growth rate of 5.7% in developing Asia for the year 2016 and 2017. Developing Asia consists of 45 economies listed under ADB.
The developing Asia is facing extreme challenges in the global conditions. Lower oil prices and commodities positively affected many economies in the world but the benefits were experienced in a much slower phase. Unpredictability of global financial markets led emerging markets to difficult situations and monetary conditions in US was adding more to the global slowdown, thus developing Asia growth rates are in much of a challenge. But India and China together with some of the ASEAN nations will keep the upbeat.
Growth of major industrial economies namely US, Euro zone and Japan are still picking up without greater expectations. In total, said economies would reach 1.8% this year and would be slightly be better by 2017 reaching 1.9%.
Japan experienced a zero growth in 2014 and reached 0.5% in 2015, still lacking the growth momentum. The main problem was lack of public investment and private consumption.
Over the past four years commodity prices have declined. Oil prices are expected to drop slightly in 2016 and recover with increase of demand and reducing of oil supply from non OPEC. International Energy Agency predicts that oil supply will exceed demand again this year (2016) but might be difficult to maintain the same supply volume as last year. Prevailing low oil prices have pushed oil producing companies to slow down investments and exploration activities, which will be a limiting factor for the oil supply. Any way demand for oil would be lower than last year due to lower global industrial growth and slowdown of China.
For the fourth consecutive year, agriculture prices have declined by 13% together with food prices. The reasons being prevailing low energy prices creating a favorable supply condition. To be specific palm oil, soybean meal and soybeans prices were dropped by 20%. Prices for wheat, maize, and rice also declined in 2015 with bumper harvests.
Sri Lanka’s performance
As mentioned in ADO 2016 Report, widened budget deficit and drop of the foreign exchange reserves is challenging for Sri Lanka and it is vital for authorities to realign fiscal policy towards putting the country on a high and sustainable growth track.
By 2015, 5.3% growth was visible on services sector whilst industry sector growth declined. Acceleration in financial activities and goods & passenger transportation contributed to the expansion of the services sector. Agri sector had a growth of 5.5% with a higher paddy, fruits and vegetable harvest. It is note worthy that tea and rubber output were lower and below expectations. The reason for the apparel sector to stagnate was that the external demand was lower. Even the construction sector recorded a decline of almost 1%.
Due to decline in exports and lower remittances from the overseas workers together with capital outflow, the balance of payments came under pressure. Lower oil import bill and the increased tourist arrivals eased out the situation to some extent. The rupee was getting weaker towards late 2015 when the Central Bank stopped interfering on the foreign exchange market. As a result rupee depreciated considerably against USD in 2015. The weak demand for export crops and low prices will continue to put pressure on balance of payment. By February 2016 Fitch rating downgraded Sri Lanka to B+ from BB- due to increasing risk of refinancing and weaker public finances.
IMF is engaged on discussions to ease out the situation by offering financial assistance to face expected external imbalances. In an environment where exports will continue to suffer, GSP+ and lifting of fish export ban to EU, could be a positive expectation for the Sri Lankan economy. The government’s commitment to fiscal consolidation is critical to ensure capital inflow to the economy, ADO 2016 report says.
As per the ADO 2016, the slowdown in the world economy stresses the importance of having structural reforms in Asia.
It is the responsibility of the authorities in each country to bring in reforms that are required to reach the potential growth. The priorities and objectives could be different from country to country. China would be interested in making their labour market more flexible where India might be keen in strategies on public infrastructure Investment. Sri Lanka could be more interested on a national development strategy that will facilitate investment, both domestic and foreign, together with job creation and rural development. Every economy should be more concerned on short-term risks such as hikes of US interest rates in the near future which will create difficulties for global financial market and challenges that could arise for the Agriculture Sector due to adverse weather conditions. The authorities may also be challenged by unfamiliar risks such as producer price deflation, which has recently emerged in some economies in the region.
(The writer is the Secretary General/CEO of the National Chamber of Commerce of Sri Lanka)