Sri Lanka seen growing faster in 2013 but problems remain : SCB
View(s):Sri Lanka will grow faster, though slightly, this year against 2012 but issues remain in the economy particularly inflation and recovery of key export markets, according to the Standard Chartered Bank (SCB).
In a report on Asian economies titled “Transforming, rebalancing, outperforming”, the bank said that it was less optimistic on the growth rebound while the fiscal deficit target remains challenging
“We see three reasons for a slower-than-expected recovery as the economy adjusts to bold central bank policy measures aimed at addressing growing imbalances: (1) more fiscal consolidation is required; (2) inflation is elevated, limiting room for near-term policy easing; and (3) the recovery in Sri Lanka’s main trading partners, the EU and US, remains slow,” the report said. SCB said it was less optimistic than the Finance Ministry’s GDP growth expectation of 7.0-7.5 per cent this year, citing several reasons for this.
“Inflation is high, public debt remains elevated at c.80% of GDP, and tax revenue collection is less than 11.5% of GDP (among the lowest in Asia) as a consequence of falling imports and tax administration issues. The government relied heavily on capital spending cuts and delays in cash payments to achieve its fiscal deficit target of 6.2% of GDP in 2012; this is a concern, as lower capital spending may stifle growth. The 2013 deficit target of 5.8% of GDP will be challenging to meet unless significant revenue-generating reforms are implemented. In light of these concerns, we lower our 2013 GDP growth forecast to 6.7% from 7.2%; this also reflects the fact that 2012 was a likely 6.5%, below our most recent 6.8% forecast,” it said.
SCB said it expects inflation to moderate from Q2-2013 onwards, largely due to base effects and improved food supply. This should counter potential fuel price rises expected in the coming months, it said. The slowing of credit and domestic demand growth to a more sustainable pace has created some room for monetary easing. However, high inflation continues to limit this near-term. “We expect further rate cuts in 2013 to stimulate growth (following a 25bps cut in December 2012), taking the repurchase rate to 7.00%. However, we now expect a 50bps rate cut in Q3-2013, versus Q2-2013 previously, amid concerns that further policy easing could fuel inflationary pressures,” it said.
But it pointed out that that the balance of payments (BoP) is likely to remain in surplus in 2013. The report said the Central Bank expects US$500 million BoP surplus, marginally higher than the $100 million surplus achieved in 2012, as lower imports narrow the trade deficit further and higher tourism earnings and workers remittances continue to offset weak export demand.
It said the rupee against the US dollar would be at Rs126.5 (per 1$) by end-2013.
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