Sri Lanka performing below potential, says ADB chief economist

Sri Lanka is clearly underperforming as its growth rates and targets indicate but as a top Asian Development Bank ( ADB) official stated if the country achieves its potential it could grow to over 5 per cent.

However, under the current circumstances, the ADB in its outlook report forecasts a growth rate of 3.6 per cent this year and a further increase to 3.8 per cent in 2020.

ADB’s Senior Country Economist Utsav Kumar speaking with the Business Times on the sidelines of a media briefing in Colombo on Thursday noted that given the fact that Sri Lanka has a higher potential than it could achieve it would be capable of achieving about 5-5.5 per cent growth. But due to the current situation in the country the growth rate is slower than its potential.

In this respect he noted that while the economy is projected to recover over the next two years, Sri Lanka still needs to accelerate growth, fiscal and structural reforms.

He refrained from comparing with other countries in the region that were recording over 5 per cent growth rates insisting that it was not possible to do so as the potential of each state is different compared to the other.

India is projected to step up from 7 per cent in 2018 to 7.2 per cent in 2019 and 7.3 per cent in 2020. Asia as a whole is expected to grow by 5.7 per cent in 2019 and 5.6 per cent in 2020. In the European Union growth is expected to slow slightly while the US will slow the most from 2.9 per cent in 2018 to 2.4 per cent this year and 1.9 per cent in 2020. China is also forecasted to moderate its growth rate that slowed from 6.8 per cent in 2017 to 6.6 per cent in 2018, 6.3 per cent this year and 6.1 per cent in 2020.

Mr. Kumar explained that the ADB findings indicate that agriculture this year is expected to grow at the same rate; tea that dipped marginally will turnaround based on climatic conditions; manufacturing is also likely to turnaround and the construction sector will grow with a higher budget allocation made for public investment.

Inflation in Sri Lanka is likely to be at 3.5 per cent this year and 4 per cent in 2020 due to the pick- up in economic activity and deflation and Mr. Kumar noted that the budget was positive in restoring the fiscal order.

An improvement in the agriculture and exports sector are expected in 2019 and the garment industry is set to expand at a slower pace, Mr. Kumar said.

He noted that Brexit could also have its implications on the trade from Sri Lanka since a sizeable share of the exports were to the UK.

Vehicle and durable imports are in check with the high taxes imposed on them as a result of which there is likely to be a slowdown in the importation of these items going forward, it was pointed out.

Some of the key risks were the political developments and a deeper slowdown internationally in some of the economies of the world that could impact on Sri Lanka.

Mr. Kumar observed that Sri Lanka needs to understand that fiscal and structural reforms are critical to sustain economic growth.

Sri Lanka’s reserves are also expected to stabilise after picking up to an all time high by September 2018 and then dropping by December.

The report also highlighted the key development challenges related to the weather pattern causing natural disasters with Sri Lanka found to be the fourth most affected country in the world in terms of weather-related disasters in 2016.

This clearly indicates that Sri Lanka is vulnerable to weather disasters and notably two rice cultivation periods were hampered due to natural disasters.

As a result the domestic food price had also increased by 14.4 per cent and the food bill had gone up as well.

The recurrent episodes of intense weather conditions and patterns show that the government must adopt preventive strategies in place to overcome these disasters.

The ADB noted that the budget had prepared for canal construction and tank rehabilitation alongside a Rs. 10 billion allocation for disaster management and disaster insurance.

It was also pointed out that the gains made in poverty reduction is lost as disaster continues to strike repeatedly, thus the government should take preventive measures to overcome the losses incurred from such disasters.