SL anticipates ‘economic revival’ in 2021
The year 2021, as predicted by countless economists and market experts, is going to be economically daunting and overall challenging for countries the world over. Being a developing nation, Sri Lanka certainly has a long way for economic recovery, and the Government is seen to be taking measures to “revive” it.
Speaking at a press conference held on 12 February 2020, Central Bank of Sri Lanka (CBSL) Governor Prof. W.D. Lakshman stated that Sri Lanka is expecting a growth rate of 5.5% to 6% in 2021 following the negative growth recorded at 3.9% during 2020 due to the adverse impact of the first and second waves of Covid-19.
“This positive thinking is due to a number of reasons. Firstly, unlike in the first wave of Covid-19, in the second wave, it appears to be the decisions of the health authorities and the Government to limit the closure of the economy. Secondly, the vaccination process has started giving positive signals to the entire population that they will get this facility sooner than later. Thirdly, it is also due to the change in policies, which will be adapted in the following year,” he noted.
In accordance with the International Monetary Fund (IMF), there is an expected global recovery of 5.5%. Adding to this, Prof. Lakshman said that for Sri Lanka, there is also the so-called “base effect”. “We started off from a negative growth rate in the previous year, so that low base will give us the benefit of achieving a higher positive rate by the end of this year 2021,” he added.
The tourism sector, which was inactive after the local outbreak of the virus in March 2020, is currently picking up. In this regard, the Governor said that various incentives have been provided to the sector to come up with the reopening process.
According to Prof. Lakshman, one of the most important sectors that is likely to generate a lot of foreign exchange in the time to come is the information and communication (IT) sector, as it was the least affected sector during the Covid-19 outbreak.
Commenting on the domestic investment environment, Prof. Lakshman said that there are clear signs of domestic industrial investments picking up due to low tax base, the low interest rate environment, and also forward-looking business confidence indices, purchase managers businesses at present.
The rise in general price level in Sri Lanka has remained stable and subdued due to the large output gap in the country. “So far, the inflation rate is estimated at 3% in January 2021, although one could see the volatile crude prices,” Prof. Lakshman said.
Adding further, he said that it is crucial to note that the Government is interested and determined to move away from the existing heavy dependence on food imports. This is indeed a significant long-term policy approach, in spite of the fact that in the short run there could be some adverse impacts on the prices.
As we are aware, the interest rate is an extremely significant component in regard to promoting economic growth in the country. In this context, Prof. Lakshman said the prime rate last week was at 5.59%, adding that “in any case, almost all interest rates are at single-digit levels and this has been there at that level for quite some time”.
Commenting on this subject, the Governor said that Sri Lanka has an excess amount of liquidity in the market estimated at more than Rs. 100 billion. He attributed this to be a positive factor in their attempt to promote lending to private sector parties, particularly business lendings by the banks.
Meanwhile, adding to this section, Prof. Lakshman said that another important policy CBSL looks into is financial sector stability. “Although we have heard of a couple of difficulties in the sector in the recent past, we find that the financial institutional sector is resilient and remains stable right now,” he added.
Commenting on balance of payment (BOP), Prof. Lakshman highlighted an important, rare component which had happened in the year 2020.
“If we consider the earnings of inflows, a very rare thing which happened, although being affected by Covid-19, is that we achieved a decline in the current account deficit; in the third quarter, there was a surplus in the current account. If you go through past data, current account surpluses were observed in Sri Lanka in 1951,1954,1955, and 1977 and nothing after that. Throughout we have been experiencing negative in the current account deficit till they become extremely large in more recent times,” he explained.
During this year, the improvement will continue under careful administration as well as careful surveillance of developments. Accordingly, it is expected for the trade deficit to come down and services exports to grow – particularly tourism, IT, and logistics with the additional incentives provided recently and workers remittances through the formal channels.
Furthermore, commenting on Sri Lanka’s cash inflow and outflow, he mentioned that the import restriction on unnecessary or unessential imports will be continued as long as the BOP requirements dictate. “No one should be thinking of a complete long-term import restriction regime, but some import restrictions or a system of import rationalisation has to continue as long as the BOP so requires,” he emphasised.
“We expect further improvement and we are indeed expecting a marginal surplus in the current account by the end of this year, and also to be able to achieve the rare surplus again during this or at least by next year. But conditions will further improve in the medium term,” the Governor assured.
In regard to foreign direct investments (FDIs), Prof. Lakshman said that direct investments are likely to grow as a result of some opportunities available within the domestic economy, such as “Port City infrastructure investment and various manufacturing investments that are currently being opened up, money that has already come for several investments in manufacturing activities – for example, the recently opened up rubber-tire factory, etc.”.
Explaining the policies that will be implemented, he noted that there is a deliberate policy of reducing debt-related inflows or debt-creating investments. “Whenever there is excess foreign exchange liquidity in the market, CBSL will purposely purchase that foreign exchange liquidity and add into the CBSL official reserves. This we have been doing for the last several days over the last week.”
Accordingly, the official reserves remain at $ 4.8 billion at the end of January 2021.
Debt servicing is another key priority in any economy. Commenting on this, Prof. Lakshman revealed that Sri Lanka has already paid large chunks of due debts.
“We will be continuing to maintain our unblemished record in debt repayment. These doomsday predictions are based on their dependence on some of the second-half of the 2010s period developments like decline in growth, low level of growth, high interest rates, high depreciation rates on exchange rate, and high fiscal deficit in spite of high of all the rhetoric of fiscal rationalisation than foreign financing of foreign deficits. However, these are all being changed and we expect better results,” he noted.
Commenting further, Prof. Lakshman said that a number of negotiations currently ongoing with overseas agencies to raise the required foreign exchange inflows through swaps and loans mechanisms with overseas central banks and other multilateral agencies, except for the IMF.
“We are hopeful that these policies, in order to fill the gaps negotiations for foreign loans and other swaps and other arrangements, will enable us to move through these couple of years to go in for the required rapid-shared growth kind we expect to establish by 2024-2025,” he added.
Giving the concluding remark, the CBSL Governor said that this is the period of which something different has been adopted in order to change the way this country has moved over the last 40 years, adding that it is going to be a different, market-oriented approach guided by the State.