Tsunami to Knock Less Than Half a Percentage Point off Sri Lanka's Growth

COLOMBO, SRI LANKA (6 April 2005) - ADB has trimmed its economic growth forecast this year for Sri Lanka because of the impact of the tsunami disaster triggered by an earthquake in December 2004.

The Asian Development Outlook 2005 (ADO), the annual flagship ADB publication that forecasts economic trends in the region, says the country's economy will grow by 5.2% in 2005 compared with 5.5% in 2004.

However, the impact of the tsunami should be less severe than initially estimated as rebuilding the destroyed fishery harbors and related facilities, roads, and municipal facilities such as market places will all present a boom to the construction sector, and none of the key economic infrastructure has been damaged. Thus, the impact on GDP would be relatively small, perhaps reducing expected growth in 2005 by less than 0.5 percentage point.

"Following the tsunami, there is now an elevated risk that key economic reforms and investment in infrastructure will receive less attention than before," ADO says, "as more resources of both the Government and other stakeholders are focused on reconstruction."

The tsunami struck more than 1,000 kilometers, or two thirds, of Sri Lanka's coastline, killing an estimated 35,000 people and damaging coastal infrastructure. Overall asset loss is estimated at 4.5% of gross domestic product (GDP), with reconstruction costs rising up to $1.6 billion.

Buoyed by strong expansion in the construction sector and quick recovery in tourism, the country's economic growth will likely bounce back to 5.8% in 2006 and 5.9% in 2007, ADO says.

The ADO analysis assumes that the Government should be able to finance the reconstruction costs without resorting to domestic borrowing to the extent it did in 2004. In addition, a one-year debt repayment moratorium, agreed upon by the Paris Club in March 2005, will give the Government considerable fiscal breathing space.

Inflation is projected to increase by about 2 percentage points, from an original 10% projected for 2005 to 12%. The Government's commitment to reducing fuel subsidies; the rise in utility tariffs; the substantial civil service wage increase in the 2005 budget; and the influx of donor funds that will put upward pressure on salaries, are all expected to drive up prices.

A higher oil bill and reconstruction needs will increase imports substantially in 2005, almost doubling the current account deficit to about 6% of GDP. However, the ADO notes Sri Lanka will not face a balance of payments crisis due to the expected large foreign assistance inflows.

"The greatest risks to growth stem, as in the past, from uncertainty in the peace process," ADO adds.

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