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Our economy needs tactful and skillful management in 2021

04 Jan 2021

By Dinesh Weerakkody   2020 was a year of ultimate disruptions across the widest spectrum, which no expert saw coming: The virus and its devastating impact on lives, livelihoods, society, and governments. Although 2021 remains uncertain, there are reasons for hope, with the recent breakthroughs with the vaccines, the unprecedented level of fiscal and monetary stimulus, step-change in innovation and digitisation across sectors, and a refreshed US administration beside a post-Brexit EU.  Many economists anticipate a mixed economic recovery for Sri Lanka in 2021. As the economy bounces back from the pandemic, the recovery may be patchy, as some local outbreaks and lockdowns will come and go throughout 2021.  Locally and globally, there will be aggressive multilateral disputes over the distribution of vaccines. As the vaccines become available in quantity, the focus will shift to the task of distributing them. Vaccine diplomacy will be required to manage the distribution. The gap between the strong and the weak will likely widen for countries, companies, and individuals.  

Economy and business

  It is anticipated that the economy will recover during 2021, with a projected growth of approximately 4.3% on the back of the lower base in 2020. With such anticipated growth in the economy and the consequential increase in loan demand, interest rates are likely also to edge up next year, providing for better interest margins in the banking sector.  However, a critical factor would be the ability of borrowers to service their loans post-moratoria, which will determine the trend for non-performing assets (NPAs) and credit impairments in the industry. With the authorities remaining hopeful of combatting the growth in Covid rates to much more manageable levels next year, and with the expected growth in the economy, businesses would recover by mid-2021 and loan recovery rates will be strong.  The financial sector has been affected by the slowdown in the economy, resulting from the impact of the Easter Sunday attacks last year and the Covid pandemic since March this year. The NPA of the industry has increased over the last 12 months, and credit costs have also risen significantly. These have also impacted loan growth and fee income-generating activities of banks. Loan growth, which was averaging between 15-20%, has dropped to a single digit, and the fall in interest rates, especially this year, has resulted in contracting margins.  Notwithstanding the drop in profitability, the industry remains well regulated and resilient, since most banks have strong capital levels and have recorded modest returns, despite the challenges in the environment. However, 2020 will end with negative growth in the economy for the second time post Independence.  

Expectations

  A well-planned initiative to roll out an effective vaccine for Covid-19 could be the catalyst to kickstart the economy next year. The Central Bank will need to watch their Monetary Policy closely once the economy takes off, to curb trends that can fuel a rise in inflation and exert pressure on our external reserves and Forex rates. The rating downgrade of the sovereign will certainly make it more difficult and expensive for banks to obtain foreign funding in 2021.  We need, therefore, to attract Foreign Direct Investment (FDI) and drive up export income to fill the savings-investment gap and enhance investments in the country. Sri Lanka will have to stabilise the debt burden, and post-Covid, opportunities will emerge to restructure its debt.  In the final analysis, given the significant debt overhang and the economic scarring from the lasting impact of Covid globally on the services sector, especially on Sri Lanka’s post-pandemic tourism, economic growth could be lower than that – possibly closer to 4% in the medium-to-longer term. Therefore, managing our external relations tactfully is a must, as there is a growing momentum among several leaders of the world’s biggest economies to diversify their sourcing, production, and distribution to countries and allies with similar interests. In addition, we need to skillfully manage the soft side of the economy that will help us fast track our economic recovery.  
Main indicators 2018 2019 2020 (e) 2021 (e) 2022 (e)
GDP (billions USD) 88.39 84.00 81.12 86.69 93.22
GDP (Constant prices, annual % change) 3.3 2.3 -4.6 5.3 5.0
GDP per capita (USD) 4 3 3 3 4
General government gross debt (in % of GDP) 83.8 86.8 98.3 98.3 97.8
Inflation rate (%) 4.3 4.3 4.7 4.7 4.9
Current account (billions USD) -2.78 -1.81 -2.94 -2.81 -2.39
Current account (in % of GDP) -3.2 -2.2 -3.6 -3.2 -2.6
  Source: IMF – World Economic Outlook Database (October 2020)

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