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Sri Lanka can ‘no longer’ postpone economic reforms, Central Bank says

25 April 2019 - 528   - 0

Sri Lanka can no longer afford to postpone its reforms agenda, if it is to progress along a high and sustainable growth trajectory over the medium term and catch up with countries that were behind Sri Lanka several decades ago, the Central Bank said its 2018 annual report released on Thursday.

Stating that real GDP growth (economic growth) grew by 3.2 per cent in 2018, lower than 3.4 per cent in 2017, the report said that the “timely implementation of these reforms will not only improve Sri Lanka’s economic outlook and its prospects as a highly sought after destination for investments given the country’s strategic location in the Indian Ocean, but also would be essential to uplift the overall standard of living and quality of life of its people”.

The report was handed over to Finance Minister Mangala Samaraweera by Central Bank Governor Dr. Indrajith Coomaraswamy on Thursday.

“Amidst efforts to maintain the country’s macroeconomic stability over the past several years, the postponement of much needed structural reforms has moved the Sri Lankan economy to a modest growth path. Sri Lanka’s graduation to the middle income status almost a decade ago required far reaching policy reforms to move towards higher income status by avoiding the so-called middle income trap. However, delays in addressing barriers to growth and introducing growth enhancing reforms in the areas of export promotion, attracting FDI, reducing budget deficits and debt levels, reforming factor markets, strengthening public administration, and ensuring the rule of law have largely contributed to Sri Lanka’s economic stagnation, while peer economies have progressed rapidly as a result of growth supporting reforms,” the report.

It said that the vulnerability of the Sri Lankan economy to global and domestic disturbances became increasingly visible in 2018, with a modest expansion in real economic activity amidst a low inflation environment during the year. 

GDP growth was largely supported by services activities that expanded by 4.7 per cent and the recovery in agriculture activities, which recorded a growth of 4.8 per cent. Industry activities slowed down significantly to 0.9 per cent during the year, mainly as a result of the contraction in construction. According to the expenditure approach, both consumption and investment expenditure supported growth. Investment as a percentage of GDP stood at 28.6 per cent in 2018 compared to 28.8 per cent in the previous year, while the savings-investment gap widened during the year indicating increased dependence on external resources to fill the shortfall. 

The total size of the Sri Lankan economy was estimated at US$88.9 billion, while the per capita GDP was recorded at $4,102 in 2018, which was marginally lower than in the previous year. Amidst the moderate growth in economic activity, a marginal increase in the unemployment rate and a decline in the labour force participation rate were observed during the year, the report said.

While the external sector of the economy was volatile during the year due to both global and domestic factors, Sri Lanka also experienced these headwinds, particularly from mid-April 2018, which were exacerbated following the political uncertainties and the downgrade of the country’s Sovereign rating in the fourth quarter of the year. “Domestically, the trade deficit surpassed $10 billion for the first time in history with higher growth in import expenditure outpacing the growth in export earnings, which were at a record level in nominal terms. Although services exports are estimated to have grown substantially, the deficit in the merchandise trade balance, stagnant workers’ remittances and rising foreign interest payments resulted in a widened current account deficit of 3.2 per cent of GDP during the year,” it said.

The financial account benefitted from increased foreign direct investment (FDI) inflows which recorded its historically highest level in 2018, as well as borrowing from abroad, particularly through the issuance of International Sovereign Bonds (ISBs). The combined result of these developments was a deficit in the overall balance in the balance of payments (BOP), the report said. 

In spite of the sharp depreciation of the rupee and the introduction of the pricing formula for domestic petroleum price adjustments, headline and core inflation remained well anchored in low single digit levels during the year, supported by proactive monetary policy measures, improved domestic supply conditions, and also due to subdued aggregate demand conditions, it said. 

Fiscal operations during 2018 demonstrated some improvements with a higher primary surplus and a lower budget deficit, notwithstanding the decline in revenue mobilisation. The government revenue declined to 13.3 per cent of GDP in 2018 while expenditure and net lending declined, particularly due to lower public investment, which was affected by political tensions that prevailed towards the end of the year resulting in delays in the implementation of budgetary operations. Reduced capital expenditure also contributed to a dampening of economic activity. 

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