COLOMBO, SRI LANKA – An improved external environment, higher investments, and a recovery in domestic consumption will sustain a rapid pace of GDP growth in Sri Lanka in the next two years, according to Asian Development Outlook 2014 (ADO), the flagship annual economic publication from the Asian Development Bank (ADB).
ADO forecasts growth to reach 7.5% in 2014 and remain at that level in 2015.
“Sri Lanka’s economic performance will further strengthen with the improvement in the external environment over the next two years” said ADB’s Senior Country Economist for Sri Lanka, Tadateru Hayashi. “Domestic conditions, with relatively low inflation, improving consumption demand, and a falling fiscal deficit all augur well for a higher growth trajectory.”
Sri Lanka’s economy recorded 7.3% growth in 2013, supported by strengthening domestic demand on an eased monetary policy and a pickup in exports and tourism. Faster growth in wholesale and retail trade, hotels and restaurants, transport, banking, insurance and real estate lifted performance in the large service sector providing the impetus for the rebound. Favorable weather helped maintain agricultural growth.
Inflation is expected to remain in the mid-single digits in 2014 and 2015. Broadly steady international fuel and stable food prices assuming normal weather will help to keep inflation in check over the next two years.
Exports are expected to strengthen with better economic performance in the European Union and the US, Sri Lanka’s main export destinations. After declining in 2013, imports will pick up in 2014 as domestic demand materializes.
Workers’ remittances expanded in 2013 as a result of an increased labor migration under the professional and skilled category, the expansion of formal channels for remitting money, and the introduction of a swift web-based money transfer system. Continued strong performance in remittances will help contain the current account deficit at 2.6% and 3.5% in 2014 and 2015 respectively.
The fiscal deficit steadily shrank to 5.8% of GDP in 2013, from a peak of 9.9% in 2009. However, while the government has reduced expenditures and attempted to improve revenues to narrow the deficit, the revenue ratio did not pick up as expected. Better economic performance and more imports are expected to catalyze higher revenue collection in 2014 and 2015.
Continued policy action is also needed, together with improved revenue administration, to achieve a higher revenue ratio.