GDP to grow 4.6% till 2022; Govt. to fall short of Vision 2025 goals: EIU

By Charindra Chandrasena

The Economist Intelligence Unit (EIU) has forecast that Sri Lanka’s Gross Domestic Product (GDP) growth will average 4.6% from 2018 to 2022, and its budget deficit will reduce to average 5.3% between 2018 and 2019, before rising again from 2020 onwards.

It also says the Government will fall short of three intermediate goals it has set for GDP per capita, exports and foreign direct investments (FDI), which are to be reached by 2020 as part of its ‘Vision 2025’ agenda.

This forecast is contained in EIU’s latest country report on Sri Lanka, published earlier this week. The EIU is a UK based business which provides forecasting and advisory services globally.


GDP Growth

The EIU states that real GDP growth will average 4% in 2018, up from 3.3% in 2017, and will spike to 4.7% in 2019. However, a 2020 technical recession in the US, Sri Lanka’s largest trading partner, will lead to lower growth that year before recovering from 2021 onwards alongside a global recovery led by the US.

“This (recovery) will spur the private sector to invest in new capacity. Meanwhile, the Government will relax fiscal spending restraints after the conclusion of the IMF programme, providing a lift to domestic demand.”

It said that additional FTAs will also help Sri Lanka boost its exports in the latter half of the forecast period. Sri Lanka currently has FTAs with India, Pakistan and Singapore, with more FTAs being negotiated with Thailand, Bangladesh and China.

EIU pointed out that growth would be even stronger from 2018 to 2022 if not for structural constraints such as a shortage of skilled labour, poor infrastructure and a low female labour-force participation rate. In factor-cost terms, the services sector, which currently contributes over 60% of GDP, is expected to expand at 4.9% to remain the largest contributor to growth and the agricultural sector’s share of GDP will continue to fall.


Budget Deficit

The report also forecasts that the budget deficit will narrow in 2018 and 2019 to 5.3% of GDP on average, from 5.5% of GDP in 2017, mainly due to the fiscal consolidation imposed by the current International Monetary Fund (IMF) programme, which runs till 2019.

“The government’s weak authority, partly linked to its coalition structure, means that building consensus for spending cuts will be hard. Efforts to cut the budget deficit will thus focus primarily on increasing revenue; the tax-to-GDP ratio in Sri Lanka is among the lowest in Asia. We expect some progress on this front as the government implements reforms under the IMF assistance programme.”

Sri Lanka has been in a US$ 1.5 billion Extended Fund Facility (EFF) Programme with the IMF since 2016, with US$ 1 billion already disbursed.

However, EIU believes the budget deficit will rise to average 5.5% of GDP between 2020 and 2022 as the government bows to political pressure and raises expenditure following the IMF’s departure.


Vision 2025 intermediate goals

The Government has laid down several intermediate goals for 2020 under its grand ‘Vision 2025’ programme. These include increasing GDP per head at market exchange rates to US$ 5,000 raising foreign direct investment (FDI) to US$ 5 billion per year and increasing merchandise exports to US $20 billion.

“We forecast that the Government will fall well short of meeting its targets on exports and FDI, but it will come close to reaching its goal on GDP per head.”

Sri Lanka’s per capita GDP stood at $4,065 in 2017, while the country recorded US$1.63 billion in FDI and $ 11.4 billion in exports.