Growth in 2009 will narrow to 3.5% but will remain positive, according to a recent Central Bank (CB) report, which also pointed out that improving security in the Eastern area and the end of the conflict in the North will increase output and private consmption.
The August 2009 report titled “On recent developments in the Sri Lankan economy” states that the government’s stimulus package will provide some support to growth through export incentives, less taxes on rubber exports, support for rubber prices and credit incentives to tea farms.
The current account deficit is forecasted to reach 1.4% of GDP in 2009 according to the CB. The report said the current account deficit has risen over the past several years reflecting the widening of the trade deficit driven by increasing demand for intermediate and capital goods related to post-tsunami reconstruction as well as high world oil prices. With the oil price having halved since September 2008 and remittances flowing steadily into the country, the 1Q09 current account results show a sharp contraction in the deficit. This was further improved during the second quarter, resulting in a US$139 million current account surplus in the first half of 2009.
The report noted that the political landscape, economic situation, fiscal and external position and investor confidence has improved remarkably since 2007. It outlined the latest positive developments including US$600 million of government securities purchased by international investors since mid May 2009 up to 21 August 2009. The latest Sri Lanka Development Bonds (SLDB’s) offer was over subscribed by 1.3 times and the exchange rate which depreciated beyond Rs.120 per US dollar has appreciated and stabilized to around Rs.114.90. The report also stated that the price of Sri Lanka’s debut international bond improved by over 10% to the levels higher than the price level that prevailed before September 2008.
According to the report, foreign investors have been showing renewed interest in the last few months following the end of the civil war. As of June 2009, the Colombo Stock Exchange (CSE) has been working on obtaining investment from prominent investors which will help draw in still further foreign investment. The CB stated that market indicators suggest investor’s belief that Sri Lanka is well positioned to recover from the conflict impact and the global downturn.
The report states that cumulative export earnings and import expenditure during the first half of 2009 decreased by 18% and 37% respectively, reflecting a 60% contraction in the trade deficit compared to the corresponding period of 2008. Despite the adverse impact of the global crisis, exports of textile and garments, which accounted for about 50% of Sri Lanka’s exports, recorded a 6% growth in 1Q09 compared to 1Q08. Apparel exports indicate a recovery in the second half as order books look healthy for the rest of the year.
Several measures are also being taken to develop the Northern Province including the implementation of a well planned, integrated and accelerated development programme which includes sector/area based short term, medium term and long term (mega type) development projects in collaboration with the respective line ministries. The CB said immediate steps are being taken to provide basic infrastructure facilities, public utilities and welfare facilities required for resettlement. According to the CB, the end of the conflict will allow for better inter-regional flow of goods and services, enable tourism and investment and facilitate economic reforms. |
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