Moody’s maintains 2.6% GDP growth forecast despite CBSL optimism

GDP growth will slow to 2.6% in 2019 from 3.2% in 2018 on declining tourist arrivals, Moody’s Investors Service predicted in a new report.

“Tourist arrivals declined sharply following the Easter Sunday attacks in Sri Lanka, but have started recovering and should support an improvement in GDP growth in 2020.” says Tengfu Li, a Moody’s Analyst.

Nevertheless, Moody’s points out that fundamental risks to Sri Lanka’s economy remain significant, given its twin deficits and the government’s high reliance on external debt.

Political risks could also resurface, with presidential and parliamentary elections scheduled for late 2019 and 2020, and previous bouts of political instability having triggered significant capital outflows and currency depreciation.

“Weak economic growth will in turn result in deteriorating asset quality, also on the back of excessive credit growth in recent years,” adds Li.

The Central Bank of Sri Lanka last week during its Monetary Policy press briefing foretasted that the 2nd quarter GDP growth will reach 2.1%, While overall GDP growth in 2019 will reach 3.1% in 2019. The CBSL however said  the potential for GDP growth stood at 5% .

In a monetary policy  press statement released last week, the  CBSL said the prevailing economic conditions and the developments observed in leading indicators point to modest economic growth during 2019.
“Although economic growth is expected to recover gradually towards its potential in the medium term, domestic and global headwinds are likely to delay this recovery.Therefore, it is essential that the available policy spaces are utilised to support productive economic activity without disrupting the improvements achieved in relation to macroeconomic stability.”