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EIU forecasts 4% growth; Vision 2025 targets to be missed

4 years ago

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The Economist Intelligence Unit (EIU) has forecast Sri Lanka’s Gross Domestic Product (GDP) growth rate to be 4.1% in 2019 while expecting a current account deficit equivalent to 3.4% of GDP in 2019. The report also notes that the government will fall short of four key intermediate goals of its 'Vision 2025' plan to be reached by 2020. This forecast is contained in EIU’s latest country report on Sri Lanka, published earlier this month. The EIU is a UK-based business which provides forecasting and advisory services globally. Growth Structural constraints such as shortage of skilled labour, low female labour, and poor infrastructure will preclude stronger economic growth, according to the report. EIU forecasts the budget deficit to average the equivalent of 5.3% of GDP in 2019. Owing to the country’s high import needs relating to fuel and textile inputs, the current account balance is expected to be 3.4% from the previous forecast of 3.7% despite the strong inflows and tourism receipts. Pressures from the current account deficit and unstable political situation will underpin the rupee depreciation during the year and the EIU expects the rupee to average 182 against the USD. EIU has revised down the external sector forecast as they expect oil prices to decline in 2019 which will have a moderate impact on import growth. Along with the new Inland Revenue Act, which facilitates direct tax revenue through simplified tax structures and wider tax base, the introduction of the fuel formula in May 2018 is expected to aid fiscal consolidation in 2019 and thereby budget deficit to narrow modestly in 2018-2019 to the equivalent of 5.3% of GDP on average from 5.5% of GDP in 2017. EIU expects the fiscal consolidation process to slow or even freeze in 2019 as there is a risk of a spike in Government spending for elections but does not expect the budget deficit to widen as a share of GDP from the estimated level of 5.3% in 2018. Consumer price pressures in 2019 are expected to be higher due to weaker exchange rates which will raise imported inflation and exports consumer prices to rise by an average of 5.6% in 2019 compared to the estimated increase of 4.4% in 2018. Vision 2025 Under its Vision 2025 programme, the Government has set several goals for 2020 which includes increasing GDP per head at market exchange rates to $ 5,000 from $ 3,930 in 2016, creating one million jobs, raising FDIs to $ 5 billion per year and doubling merchandise exports to $ 20 billion from $ 10.3 billion in 2016. Driven by political uncertainties three of these four intermediate goals are expected to be impeded. “Political turbulence will impede the implementation of policies, designed to support this agenda in the near future. We forecast that the country will fall well short of meeting its targets on exports, job creation, and FDI but will come closer to reaching the goal on GDP per head,” report notes.

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