Prime Minister warns of slower growth on global slowdown

Economic downturnSri Lanka is likely to see sluggish economic growth, slow foreign inflows, and a possible reduction in commodity export revenue in 2016 due to the global slowdown, Prime Minister Ranil Wickremesinghe warned on Wednesday.

Analysts and economists said the country’s rupee currency and balance-of-payments (BOP) would be under pressure as dollar inflows are expected to be sluggish next year.

“There is going to be slower growth in emerging markets and increasing risk,” Wickremesinghe said at a ceremony in Colombo to mark 30 years of the foundation of the Colombo Stock Exchange.

Declining commodity prices could have an adverse impact on the Sri Lankan economy and there would be reduced inflows into emerging capital markets, he added.

Wickremesinghe’s comments came a day after he told Parliament that Sri Lanka would likely seek an IMF stand-by arrangement to fend off a risk that its economy will be hurt next year by repercussions from events affecting major economies.

A rate hike by the U.S. Federal Reserve and the impact of a sluggish Chinese economy could adversely hit emerging markets including Sri Lanka.

Wickremesinghe said the government has to maintain momentum to ensure a 6.5 percent growth rate, though he warned there could be some unforeseen circumstances that could pull down emerging market economies’ growth.

Sri Lanka’s growth is expected to be 5.7 percent this year from last year’s 4.5 percent on a new GDP index.

Amid a political transition after presidential and parliamentary elections within seven months, the Wickremesinghe-led government is struggling to switch from spending-boosted economic growth to a private sector-led job-creating expansion.

The new government announced some reforms in taxes and the banking sector, but there has been opposition to some of the new measures, mainly from the bloated public sector.

Analysts say sluggish economic growth and foreign inflows would hit the currency and the balance-of-payments position.

“The pressure on the BOP is obviously quite a lot with reserves falling this year. The only way to mitigate that has been expensive commercial borrowing,” said Amal Sanderatne, chief economist and CEO at Colombo-based Frontier Research.

“So they need to do some adjustments on the monetary side. Also, on the fiscal side we haven’t seen a much of a sign of it, but it’s better to go for the IMF and get that kind of a buffer and also get some confidence on capital markets and get another sovereign (bond) to deal with the issue.”

Sri Lanka’s foreign reserves have been dwindling as the central bank intervenes to defend the rupee.

Central bank data showed foreign reserves fell to $6.48 billion by the end of October from around $9 billion a year earlier. It also showed a $4.75 billion payment due for the previous loan before Oct. 31, 2016.

A $1.5 billion sovereign bond sale boosted the reserves to $8 billion by Nov. 3, but they have since fallen as the central bank props up the rupee while holding down interest rates.

Despite central bank intervention, the rupee has dropped around 8.4 percent so far this year and 5.9 percent since the central bank allowed it to float on Sept. 4, Thomson Reuters data showed. (Reuters)

 

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