SL GDP growth 6.5% this year, 7% in 2013 : RAM
View(s):Sri Lanka’s Gross Domestic Product (GDP) growth will be at 6.5 per cent in 2012 followed by 7.0 per cent in 2013, according to a report published last week by ratings agency RAM.
The report, entitled “Sri Lanka Economic Outlook 2013″, further elaborated, saying; “Despite Sri Lanka’s stellar growth in recent years, global headwinds and policy measures to curb demand remain key considerations through the rest of 2012 and next year. As such, we have revised our GDP growth forecast to 6.5 per cent for this year, followed by 7 per cent in 2013 as a clearer resolution to the global crisis emerges”.
Additionally, RAM’s report also revealed that “Sri Lanka is expected to post a medium-term average growth of 6.0-6.5 per cent for the remainder of this decade. This expectation is primarily based on a favourable demographic profile, where the young-age dependency ratio – the ratio of the population aged under 15 years against those aged between 15 and 64 – stands at nearly 40 per cent. This ensures Sri Lanka’s medium-term consumption and labour-supply growth, thus providing an underlying basis for economic expansion”.
On the other hand, it was also suggested that the “primary risk to this growth estimate stems from the Sri Lankan regulatory environment. Although the World Bank has noted that the country’s business environment has indeed improved, there is considerable scope for further progress. This is especially true with regard to the bureaucratic or regulatory costs involved in obtaining construction permits, registering property, paying taxes and enforcing contracts”.
Meanwhile, in commenting on trends pertaining to private sector borrowing, the report added; “Personal loans and loans for consumer durables soared a respective 40 per cent and 100 per cent in 1Q 2012. However, their share of total loans remained unchanged, indicating that the lofty growth rates are solely due to an overall improvement in the domestic economy, rather than any significant shift toward consumerism. In the first 7 months this year, the growth of M2 far outpaced that of M1, by 20.7 per cent y-o-y to 4.2 per cent. This implies that if there is indeed such a shift in consumerism, it has been to the opposite direction of saving.
Due to a general slowdown in growth, we expect private expenditure to decelerate to 8.7 per cent in 2012. Going forward, we expect to see the tight monetary policy spill over from this year into the next due to a delayed transmission mechanism, alongsidecontinued external weaknesses that will further retard growth to 8.0 per cent in 2013″.
In terms of the country’s balance of payments deficit, it was noted that 2012′s anticipated fiscal consolidation would lead to public sector expansion of “only 2.9 per cent in 2012. As of July, the government had spent 62.7 per cent of its budget allocation for recurrent expenses, with the bulk of the increase going to emoluments. We expect a reduction in expenses for 2H 2012, due to further consolidation as part of the terms agreed with the IMF for its US$ 2.6 billion loan.
The budget for 2013 is reportedly 13.5 per cent larger, with a considerable portion going to the Ministry of Defence and Urban Development. While the demarcation between actual defence spending and infrastructural development remains unclear, it is understood that the defence budget must remain large to repay installments on arms purchases made during the war.
Although the Education Ministry will also receive a welcome injection of funds, up 14 per cent from the previous year, it is also unclear if the budget will be spent on infrastructure. RAM Economics expects public consumption to expand 2.2 per cent in 2012, picking up to 5.1 per cent in 2013″.
Further, RAM’s report also opined; “Inflows of foreign direct investment(‘FDI’) have been encouraging, climbing 13.3 per cent y-o-y in the first 4 months of 2012. While this has been the case since the cessation of the civil war, investment levels have only just begun approaching pre-cessation levels, which had only collapsed at the peak of the fighting… Tourism, traditionally a strong growth area for the economy, is still expected to expand given the government’s announced development goals for the sector.
As one of the few sectors permitting full foreign ownership of assets, it is also expected to drive FDI inflows, although this may yet be tempered by the hastily approved Revival of Underperforming Enterprises and Underutilised Assets Act. The colloquially dubbed ‘Expropriation Act’ may undermine previous reformist measures, with a particular body, i.e. American government agency Overseas Private Investment Corporation, reporting that the Act has essentially added a 2-5 per cent premium on political risk insurance on loans for projects in the country.”
(JH)
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