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ICRA lowers 2021 GDP forecast

03 Aug 2021

  • Reduced to 3.4% from 3.6% earlier
  • Serious damage to agri output expected
  • Monthly exports to remain above $ 1 b in H2
ICRA Lanka yesterday (2) downgraded its previous GDP growth forecast of 3.6% which was predicted prior to the release of 1Q21 GDP growth rate, to 3.4% assuming there will be no major shocks in 3Q21 and 4Q21.  “Sri Lanka’s growth in the medium-term is expected to hover around 4%. Structural weaknesses, external sector vulnerability, and absence of substantial real investments makes it difficult for the country to achieve a satisfactory growth level. We expect Covid-induced shocks to last through 2H while their magnitude diminishes relatively faster over the next few quarters. Thus, the economy will operate with excess capacity during this time.”  ICRA Lanka believes abrupt banning of chemical fertilisers and weedicides and indiscriminate introduction of organic fertiliser could do serious damage to the output level of the agricultural sector. The adoption of organic fertiliser should be done in phases spread across an adequate time span to avoid disruption to agricultural output, ICRA Lanka added.  However, in terms of exports, Sri Lanka’s key export destinations are expected to have a stronger second half this year. Thus, monthly exports may consistently stay over and above $ 1 billion for the remainder of 2021 beginning from June to bring total exports to $ 12.3 billion by the year end, ICRA Lanka noted.  “Before the Covid crisis, Sri Lanka’s tourism brought about $ 300-400 million in forex revenue on average per month. If Sri Lanka can meet its target for vaccination coverage, then there is a glimmer of hope that tourism may resume. But when the country will be open for tourism remains uncertain. Sri Lanka now has a more diversified source of foreign currency remittances across many continents helping to bring sizable forex inflow to the country.” Remittances are expected to have a robust second half contributing about $ 6.7 billion in net forex inflows to the country in 2021. ICRA Lanka expects the total import bill to reach $ 20.3 billion in 2021. With gradual normalisation of industrial activities in China ($ 3.6 billion imports in 2020), its industrial output is expected to go up steadily. India ($ 3.1 billion) is also a critical source market for industrial inputs for Sri Lanka.  However, the current Covid situation in India has derailed its recovery creating supply bottlenecks. In addition, Sri Lankan manufacturers have been experiencing supplier delays since 2020 due to various logistical issues in the global supply chain, and still there is no sign of improvement. Impact of import restrictions on the exports sector is relatively moderate as the government has accommodated some leniency for exporters in order to ensure uninterrupted production. The burden of the restrictions has directly fallen on the consumers in a way of rising prices of imported items and is expected to have a stronger contribution to inflation in 2H. To lessen the impact on the GDP, the government should consider relaxing import restrictions by imposing it on a narrower range of products, it added further.  “It will be challenging to curb expansion of Sri Lanka’s trade deficit especially in the midst of faster-than-expected rise in commodity prices in the global markets.Sri Lanka’s terms-of-trade will continue to deteriorate despite having import restrictions. We expect the trade deficit to widen to $ 8 billion by the end of 2021. Inflows to the capital (financial) account will continue to be weak in 2H. As of the end of 1H, total foreign ownership in equities and treasuries was Rs. 29 billion which roughly translates to about $ 132 million.”  

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