Policy measures in early 2012, including a tightened monetary stance and exchange rate flexibility, addressed emerging domestic and external imbalances in Sri Lanka. Growth slowed on weak external demand, drought, and floods, but the balance of payments improved. Growth is expected to edge up, with some reduction in inflation and the current account deficit. Given elevated public debt levels, sustaining rapid growth will require determined efforts to eliminate large losses in the energy sector and raise tax revenues to reduce budget deficits and borrowing.
Economic performance
After growing at a robust 7% in the first half of 2012, economic growth slowed in the second half to record annual expansion of 6.4%. This was the first time growth fell below 8% since the civil conflict ended, largely reflecting weak external demand, tight monetary conditions, and bad weather, as 15 of Sri Lanka's 25 districts suffered drought that affected agriculture and hydropower generation.
|
Selected Economic Indicators (%) - Sri Lanka |
2013 |
2014 |
|
Gross Domestic Product (GDP) growth |
6.8 |
7.2 |
|
Inflation |
7.5 |
6.5 |
Current account balance
(share of GDP) |
-5.0 |
-4.5 |
Source: ADB estimates.
Economic prospects
Private consumption expenditure, which accounts for about 70% of GDP, will remain the main engine of economic expansion, fuelled by rising incomes and remittances from Sri Lankans abroad. Investments are expected to expand further in 2013, with higher growth in construction buoyed by large infrastructure projects. Slow recovery in the euro area, Sri Lanka’s largest export market, would continue to constrain growth potential somewhat. Exports will have to wait at least another year for a stronger recovery because weak external demand will continue in 2013. From the supply side, expansion is expected in services, led by the hotels and other tourism-related activities, along with growth in external and domestic trade. Agriculture is expected to improve with normal weather.
Economic growth will be subject to constraint from the balance of payments. Larger imports associated with high economic growth will worsen the trade deficit and - unless financed by exports, workers’ remittance, and capital inflow - depreciate the currency. Because of the need to address inflation, the monetary policy stance set at the end of 2012 is not expected to be relaxed, which will restrain economic growth. As such, growth of Sri Lanka's gross domestic product is expected to edge up to 6.8% in 2013 and then advance by 7.2% in 2014 on better external conditions.
Source: ADB. 2013. Asian Development Outlook 2013. Manila.
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