Following the re-election of the United National Party in August polls, and the return of political stability, Sri Lanka’s economy will likely see a slight pickup in growth over the coming quarters. As such, we maintain our forecast for Sri Lanka’s GDP to come in at 6.5% in 2015, and 6.7% in 2016.
The formation of a national unity government will be constructive for Sri Lanka’s foreign policy and Sinhalese-Tamil reconciliation. While the consensus resolution adopted by Colombo and the international community indicates that progress will continue to be made, we believe that the reconciliatory process will continue to be a challenging one.
Major Forecast Changes
The Central Bank of Sri Lanka (CBSL) will likely keep its policy rate on hold over the coming months as it remains hamstrung by the country’s rising fiscal deficit, high public debt-to-GDP ratio, weakening current account balance, and a depreciating currency. Meanwhile, in order to ease downwards pressure on its foreign reserves, the CBSL appears to have devalued the unit by 2.2% on September 7. We now forecast the rupee to weaken further against the dollar, taking the exchange rate to LKR142.00/USD by end-2015, down from our previous forecast of LKR135.00/USD.
The depreciation of the Sri Lankan rupee will likely provide some level of support for the island-nation’s trade position over the coming quarters. Coupled with strong growth in the tourism sector and steady inflow of remittances, these factors will likely prevent the current account deficit from widening too much. As such, we have revised our forecast for Sri Lanka’s current account deficit to come in at 3.1% of GDP in 2015, and 3.4% in 2016, versus our previous forecasts of 3.4% and 3.7%, respectively. (BMI)