The governor of the Central Bank of Sri Lanka, Dr. Indrajit Coomaraswamy last week said Sri Lanka’s economy is expected to grow at a faster rate next year (2017) as projections for this year, signals that the island would achieve a slower growth of 5.0 to 5.3 percent by year end.
“Next year we might achieve a higher growth and this is because various projects that are expected to kick off and there are indications that foreign investments will grow,” he said.
According to the Department of Census and Statistics (DCS), the Sri Lankan economy is provisionally estimated to have grown by 2.6 per cent, year-on-year, during the second quarter of 2016 compared to the growth of 7.0 per cent recorded in the same period of 2015. Meanwhile, growth in the first quarter 2016 was revised from 5.5 per cent to 5.2 per cent.
However, Coomaraswamy said that based on present indications, the island’s economic growth is set for a major rebound in the second half of 2016 (second and third quarters).
“A combination of improvements in the Purchasing Managers’ Index (PMI) and business confidence as well as favourable base effects in the fourth quarter of 2016 are expected to contribute to a rebounding of growth in the second half of the year,” the Central Bank said.
In the second quarter of 2016, services related activities grew by 4.9 per cent while Industry related activities recorded a moderate expansion of 2.2 per cent. Agriculture related activities, which were affected by adverse weather conditions, recorded a contraction of 5.6 per cent in the second quarter of the year.
Coomaraswamy explained that economic growth in the second quarter fell due to two reasons, of which, one is the strong base effect of high growth of 7.0 per cent achieved in the second quarter of 2015.
“On top of that, drought followed by the floods hit both the agriculture and the industrial sectors. Remember these floods also affected some industrial parks which include some of the industrial zones and their production fell due to that,” he said.
Revision in numbers
However, Coomaraswamy said that despite there being good reasons why growth might have slowed down, the growth figure of 2.6 per cent in the second quarter, is likely to however be significantly revised upwards, due to a number of mitigating factors.
“You know every quarter, the growth figure is usually revised and that is natural.Now although there are good reasons why growth might have slowed down in second quarter, in my view, there are also other reasons why growth might have not slowed down as much as 2.6 per cent.
“If you look at proxies for growth, like availability of cement for construction sector, electricity consumption, credit growth of about 25% in second quarter while inflation was low the chances are that this figure will be revised upwards,” the Central Bank governor said.
Meanwhile, according to the Central Bank Sri Lanka’s broad money expansion continued to remain high at 17.8 per cent in July 2016, on a year-on-year basis, compared to 17.0 per cent recorded in the previous month. The growth of credit granted to the private sector by commercial banks was at 28.5 per cent, year-on-year, in July 2016, compared to 28.2 per cent in the previous month.
“We expect credit growth will taper off by year end. From the last quarter of this year, the expectation is that credit growth by the end of the year will end up at 20%. So it will start tapering down,” the governor said.
He noted that this is because the transmission mechanism in Sri Lanka works in such a way that changes in interest rates and other monetary instruments takes about 6-12 months to achieve the desired effect.
When questioned as to which sectors he feels, the relatively high credit growth figures in recent months may have channeled into, the governor explained that in his view a majority might have gone into construction and real estate as credit going into consumption at that time had already begun to taper off.
“That is another reason why we feel second quarter growth rate might be revised,” he said.
Achieving faster growth
Commenting on the future economic growth prospects, Coomaraswamy said that Sri Lanka could easily scrape through the 5 percent growth rates in the short to medium terms, as the island’s economy even during the conflict period had averaged 5% growth.
However, he said Sri Lanka’s real challenge is to get the rate up to 7 and 8% and in his view, the country still does not have the framework in place to do that as yet.
“We need to persist with the fiscal consolidation measures and ensure that the macro fundamentals are strong. We need to do work on the Ease of Doing Business Index, investment policies, investment promotion, trade policy, trade facilitation. There are a lot to be done,” he said.
FDIs and exports, twin pillars
The governor noted that if you look at the successful countries in the East and South East Asia, the twin pillars for economic transformation has been Foreign Direct Investments and exports.
“Now we are performing below par but if we do those trade policy aspects I talked about above, we can move faster,” he said.
He however added that if Sri Lanka could sign the trade agreements it is currently negotiating with India, China, Singapore and restore the GSP plus, it will give the island a market of 3 billion people.
“So if we have them, say by this time next year, then we have preferential access to a market of 3 billion people and we are right in the middle of China’s Maritime Road, we are 20 miles away from India which is the fastest growing economy, then we should be growing by 7-9%,” he said.
Leveraging strong bilateral relations
The Central Bank governor also underscored the importance of Sri Lanka leveraging its strong bilateral relations to tap investment since the country now has excellent relations with the capitalists of the Asian region like China, Japan, Singapore, and South Korea.
“There is every prospect of leveraging those strong bi-lateral relations to attract investment. Because in those countries, governments are able to encourage companies to invest in sectors which they attach priority to and that would give us a much needed boost,” he said.