The Asian Development Bank (ADB) has rated Sri Lanka’s economic growth as robust, encouraging it to keep its forecast for this year and next intact apart from indicating the post-war country is topping the growth league in South Asia.
“GDP growth was consistently robust in the first half of 2014: 7.6% in the first quarter and 7.8% in the second,” said the ADB in its Asian Development Outlook (ADO) Update released on Thursday.
“The projection of 7.5% growth in 2014 is maintained despite the downside risk that a prolonged drought could affect growth in the second half,” the ADO said in addition to retaining the same growth forecast for 2015 as well.
ADO said growth in agriculture slowed to 0.2% in the first quarter as drought prevailed through most of the country but rebounded by 5.9% in the second quarter largely on favorable weather in tea-growing areas. Faster growth in construction, textiles, and apparel maintained steady expansion in industry, which averaged 12.4% in the first half of the year. Services grew by 6.5% in the first quarter but slowed to 5.7% in the second as high growth in hotels and restaurants moderated, as did wholesale and retail trade.
Inflation continued to moderate in 2014 from 4.4% in January to 2.8% in June but reversed slightly in August to reach 3.5%. While non-food inflation remained flat, food inflation stepped up to 4.8% in August. Though the drought may accelerate food inflation further in the second half of the year, the forecast of 5.0% average inflation in 2014 is maintained.
The balance of payments markedly strengthened in the first 6 months of the year. Exports grew by 16.8% as imports fell by 1.2%, generating a 20.1% reduction in the trade deficit to $ 3.5 billion.
All major exports – garments, other manufactures, tea, and other agricultural products – recorded double-digit growth. Imports fell as moderate increases in consumer and intermediate imports could not balance a decline in investment goods.
With thermal power generation increasingly deployed to offset hydro generation shortfalls on account of the drought, oil imports are likely to increase in the second half of the year. Invisible earnings were buoyant, as tourism surged by 33.8% to $ 1.1 billion and workers’ remittances rose by 10.6% to $ 3.4 billion. Foreign direct investment doubled to reach $ 442.3 million. With a substantial overall surplus, gross official reserves increased to $ 9.2 billion by the end of June 2014.
Bank lending rates fell in the first half 2014, but real interest rates remained stable as inflation moderated. There was only a slight increase in credit to the private sector through midyear. Higher growth in credit to the private sector and investment in the second half of the year will be key to achieving sustained economic expansion as forecast at 7.5% this year and next.
For overall South Asia, ADO marginally revised the GDP growth forecast to 5.4% in 2014 from 5.3% previously but to a higher 6.1% in 2015 from 5.8%.
“As India is expected, despite a disappointing monsoon, to meet the forecast of GDP growth improving by 80 basis points over the previous year, and in light of unexpectedly strong growth in Bangladesh, Nepal, and Pakistan, this Update revises the forecast for growth in South Asia this year, but only marginally to 5.4% from the previous forecast of 5.3%,” ADO said.
“However, South Asia is now expected to show somewhat greater momentum in 2015, so the growth forecast is upgraded to 6.1% from the 5.8% forecast in April. Upward revision for growth in India to 6.3% accounts for the bulk of the 30 basis point increase for the sub-region, with positive revisions for Bangladesh and Pakistan making up the balance,” ADO added.
From: Weekend FT. Saturday, 27th September 2014. Front page.
