Business Times

Sri Lanka’s economy rebounds sharply, says HSBC Economic Chief

By Bandula Sirimanna

Sri Lanka is expected to continue its economic growth benefiting from the exploration of previously untapped resources in the country especially in the North and East and positive sentiments about the outlook domestically and among foreign investors. Sri Lanka's Q2 GDP grew at a faster rate (8.2% y-o-y vs 7.9% in Q1 2011) led by a recovery in agriculture after the devastating floods early in the year.

Leif Lybecker Eskesen

Growth is projected to remain robust at 8 % for 2011, matching the 30-year high of 8 % achieved last year. The country’s economy has rebounded sharply since the end of the North-East war and the depression of the global financial crisis. Global economic downturns are set to ease the island nation’s export growth and capital flows could also be affected, but growth is expected to continue to remain at a considerable level although some restraint is expected in 2012.

These observations were made by Leif Lybecker Eskesen, HSBC’s chief Economist for India and ASEAN in an interview with the Business Times in Colombo on Friday. Before joining HSBC, he worked for close to 10 years at the headquarters of the International Monetary Fund (IMF) in Washington, DC, where he was a Senior Economist and a country mission chief.

He said the momentum in exports has eased due to a slowdown in key export markets in the West. This trend will likely continue as global economic prospects have weakened considerably in recent months.

However, Sri Lanka is not nearly as export-driven as peer countries in Asia. Therefore imports on the other hand, have gained in strength due to strong domestic demand. Moreover, the rise in commodity prices in the last six months has added to the import bill.

Imports should continue to remain solid as the nation-building efforts persist and this suggests a further widening of the trade deficit, Mr. Eskesen said adding that the deterioration in the trade balance will be partially offset by the improving outlook for remittances and services receipts. FDI inflows have picked up, with total inflows in the 1H 2011 reaching US$413 million, he said.

The loose monetary policy settings have spurred credit growth and growth more generally in the economy, but the Central Bank should stand ready to stem underlying inflation pressures. Fiscal consolidation is set to continue, which should help support macoeconomic stability. However, it may prove difficult to meet this year’s deficit target.

A further deterioration in the global economic conditions would pose downside risks to the growth outlook. He noted that the fiscal consolidation that Sri Lanka is undertaking actually supports growth because it effectively boosts investor and consumer confidence by demonstrating the Sri Lankan government's commitment to macroeconomic stability, he said.

He pointed out that accommodative macro-economic policy settings have supported the rapid economic growth. While fiscal policy has been geared towards consolidation, this has by itself boosted growth by underscoring commitment to macroeconomic stability. Monetary policy has also been very accommodative, with policy rates cut several times.

However, significant reforms are still needed to sustain the high pace of growth and cash in on the peace dividend. The economy needs massive amounts of investment to leverage this potential, and the government's nation building and infrastructure development efforts will be helpful in the long run, he added.

However, in light of global conditions and the recent easing in headline inflation, rate hikes could be held off until Q2 2012. With this outlook for inflation, the current macroeconomic policy settings are slanted towards supporting growth rather than addressing emerging demand-led price pressures he said

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