The 66th Annual Report of the Monetary Board of the Central Bank of Sri Lanka was presented to President Maithripala Sirisena last week

• GDP growth slows to 4.8% in 2015
• Budget deficit grows to 7.4% of GDP
• BOP deficit nears US$ 1.5 billion
• Debt to GDP at 76% by end 2015

Sri Lanka’s economic growth, which slowed to 4.8 per cent in 2015, compared with a 4.9 per cent growth witnessed in 2014 is expected to improve by 5.8% in 2016, the Central Bank of Sri Lanka projected last week.

Addressing a press conference to announce the release of the Central Bank’s 2015 Annual Report, Governor Arjuna Mahendran said that in 2015, the slowdown in the growth of demand in Sri Lanka’s traditional export markets had impacted the growth of the export sector while a strengthening of the US economy prompted short-term capital outflows from the country. He, however, pointed out that 2016 statistics released thus far has indicated a rosier outlook in the global economy, particularly with worker remittances growing at a healthier pace while there are signs of resurgence in exports, FDIs and tourism inflows

Below is a summary of the economic performance in 2015 as detailed in the Central Bank Annual Report.

Agriculture-and services-related activities grew by 5.5 per cent and 5.3 per cent, respectively, while industry related activities grew at a slower pace of 3.0 per cent during 2015.

Agriculture activities, which account for 7.9 per cent of GDP, expanded by 5.5 per cent, mainly due to the significant growth in growing of rice (23.3 per cent) and vegetables (24.9 per cent), amidst the contraction in fishing (-2.7 per cent), growing of rubber (-10.1 per cent) and growing of tea (-2.6 per cent).

Services activities, which account for 56.6 per cent of GDP, grew by 5.3 per cent, buttressed by the growth in financial services (15.8 per cent), real estate activities (9.6 per cent), transport activities (5.5 per cent) and wholesale and retail trade (4.7 per cent).

• Despite the minor slowdown in construction (-0.9 per cent) and mining and quarrying (-0.9 per cent) activities, industry activities, which account for 26.2 per cent of GDP, grew by 3.0 per cent, mainly supported by the growth in manufacturing activities (4.7 per cent).

Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (CCPI) was recorded at 2.8 per cent, compared to 2.1 per cent at the end of 2014. Correspondingly, core inflation, which switches out energy and selected food items from the CCPI basket, grew from 0.8 per cent, on a year-on-year basis in February 2015, to reach 4.5 per cent at the end of the year. Annual average headline inflation declined from 3.3 per cent in 2014 to 0.9 per cent in 2015.

Budget deficit grew to 7.4 per cent of Gross Domestic Product (GDP), as against the targeted deficit of 4.4 per cent. At the end of 2014, the Budget Deficit was recorded at 5.7 per cent of GDP.

• The modest performance of the current account, together with the decline in inflows to the financial account, in the form of foreign direct investments (FDI) and loans to the government, banking and private sectors and the withdrawal of foreign investments from the government securities market, resulted in the balance of payments (BOP) recording a deficit of US dollars 1,489 million, in comparison to the surplus of US dollars 1,369 million in 2014.

• The current account deficit, which reflects government dis-savings, increased to 2.2 per cent of GDP in 2015 from 1.2 per cent in the previous year, while the primary deficit, which excludes interest payments from the overall deficit, increased to 2.9 per cent of GDP from 1.5 per cent in 2014.

Current account deficit expanded marginally in 2015, although as a percentage of GDP, the current account deficit reduced marginally to 2.4 per cent in 2015 from 2.5 per cent in 2014.

Gross official reserves declined to US dollars 7.3 billion by end 2015 from US dollars 8.2 billion at end 2014.

The rupee, which remained broadly stable during the first eight months of the year, depreciated at a faster pace from early September with the Central Bank’s decision to allow greater flexibility in the determination of the exchange rate, based on market forces. Accordingly, as of end 2015, the rupee had recorded a depreciation of 9.03 per cent against the US dollar.

• The Central Government debt to GDP ratio increased to 76.0 per cent in 2015 from 70.7 per cent in 2014, reflecting the relatively high budget deficit, lower nominal GDP growth and the impact of exchange rate variation.

Domestic savings declined to 22.6 per cent of GDP in 2015, from 24.0 per cent of GDP in 2014. This, together with the deterioration of net primary income from the rest of the world, along with a reduction in earnings on investment and increased outflows, dampened national savings in 2015, although remittances increased marginally, in rupee terms.

National savings declined to 27.8 per cent of GDP in 2015 from 29.5 per cent of GDP in the previous year. Meanwhile, as the decline in investments as a percentage of GDP was higher than the decline in national savings as a percentage of GDP, the savings-investment gap narrowed during 2015.

• The unemployment rate increased to 4.6 per cent during 2015, compared to 4.3 per cent recorded in 2014, amidst a marginal increase in labour force participation, particularly by females. The female unemployment rate increased from 6.5 per cent to 7.6 per cent, while the male unemployment rate declined from 3.1 per cent to 3.0 per cent in 2015, compared to 2014.

• The labour force participation rate increased to 53.8 per cent in 2015, from 53.3 per cent in 2014, with increased participation of rural sector females in the labour force.
• Labour productivity increased during 2015, with positive contributions from all three sectors of the economy.

• A sharp decline of 12.4 per cent was observed in the total number of departures for foreign employment, which could partly be attributed to escalated geo-political tensions and the slowdown of economic activity in the Middle East.

Broad money (M2b) growth accelerated during 2015 due to the expansion in credit to both public and private sectors. M2b increased by 17.8 per cent, year-on-year, by end 2015 compared to a growth of 13.4 per cent at end 2014, while the average broad money growth was 15.2 per cent during the year.

Net credit to the government (NCG) extended by the banking system increased substantially by Rs. 323.6 billion, exceeding the levels envisaged in the government budget.

• Expansion in credit obtained by public corporations from the banking sector moderated marginally to Rs. 76.9 billion in 2015 in comparison to the increase of Rs. 80.9 billion observed in 2014.

Credit extended to the private sector by the banking system increased by 25.1 per cent on a year on year basis, compared to the 8.8 per cent growth recorded at end 2014. In absolute terms, credit to the private sector increased by Rs. 691.4 billion during the year compared to the increase of Rs. 223.9 billion in 2014.

Tourist arrivals recorded 1.798 million arrivals, almost achieving the revised target of 1.8 million arrivals set for the year. The highest growth of 67.6 per cent to 214,783 of tourist arrivals was recorded from China, followed by both Netherlands and Denmark, recording a growth of 35.3 per cent, to 32,742 and 15,203 arrivals, respectively.

Earnings from tourism in 2015 increased by 22.6 per cent to US dollars 2,981 million, compared to US dollars 2,431 million in 2014. The average spending by a tourist per day increased to US dollars 164.1 in 2015, from US dollars 160.8 in 2014. The average period of stay of a tourist was recorded at 10.1 days in 2015.

Total foreign direct investment (FDI) inflows, which include foreign borrowings of BOI companies, reduced significantly in 2015. Total FDI inflows with foreign loans to BOI companies amounted to US dollars 1,161 million, while the FDI, excluding foreign loans to BOI companies, amounted to US dollars 681 million in 2015. This was a sharp moderation compared to the US dollars 1,635 million and US dollars 894 million, respectively, recorded in 2014.

• The top 5 countries of direct investments, based on immediate country of investment, were Hong Kong, Mauritius, the Netherlands, China and India.

Net inflows from foreign loans in 2015 amounted to US$ 734 million, compared to US$ 1,713 million in 2014. Loan inflows in the form of government project loans amounted to US dollars 1,268 million in 2015, compared to US dollars 1,439 million in 2014.

• The Central Bank continued to make repayments due under the IMF-SBA facility. Accordingly, US dollars 507 million was made as principal payments of the IMF-SBA facility in 2015, which was disbursed from 2009 to 2012. The total amount received under the facility is scheduled to be fully settled by July 2017.

(Compiled by Azhar Razak)

The report was later presented to Prime Minister Ranil Wickremasinghe and Finance Minister Ravi Karunanayake by the Central Bank Governor Arjuna Mahendran
The report was later presented to Prime Minister Ranil Wickremasinghe and Finance Minister Ravi Karunanayake by the Central Bank Governor Arjuna Mahendran