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Economic Review

Global Economic Trends

The global economic upswing that began in mid-2016 continues to gather strength across most advanced and emerging economies. The International Monetary Fund (IMF) in its World Economic Outlook (WEO) for October 2017 projected that the World economy would rise to 3.6 percent in 2017 and to 3.7 percent in 2018. According to Goldman Sachs, the world economy is outperforming most predictions for the first time since 2010.

Source: IMF World Economic Outlook, Oct 2017

While the overall outlook is positive, growth remains weak in certain regions and inflation remains below target in most advanced economies. With the objective of meeting its long-term target inflation of 2%, the Federal Open Market Committee (FOMC) increased its target federal funds rate thrice in 2017. Rising Fed rates were traditionally being viewed as unfavourable for emerging markets as higher US interest rates mean a strengthening USD, which depresses emerging market currencies, making it difficult to service their external debt. However, with recent structural adjustments, emerging market economies are believed to be well prepared for the Fed rate hike this time, in contrast to the situation in 2013.

The Sri Lankan Economy

As highlighted in the Road Map 2018 of the Central Bank of Sri Lanka (http://www.cbsl.gov.lk/pics_n_docs/latest_news/speech_20180103e.pdf), the economy had a challenging yet resilient year in 2017. The Central Bank implemented several proactive policy measures during 2017 in order to achieve the core objectives of maintaining economic and price stability and financial system stability. Three frameworks have been put in place to improve the country’s overall macroeconomic conditions. The Central Bank is working towards implementing a Flexible Inflation Targeting (FIT) framework by 2020 to conduct monetary policy in a proactive and forward-looking manner. It has also adopted a more flexible exchange rate policy that promotes export competitiveness. The government is also committed to a revenue based fiscal consolidation programme, which intends to bring down budget deficits and debt levels progressively.

GDP growth was moderate in the third quarter of 2017 to 3.27% . However, there were significant improvements in many areas through several policy measures. The government was able to achieve Rs 21.9 billion surplus in the primary balance of the fiscal accounts during the first ten months of the year 2017, after a lapse of 63 years since this feat was last achieved.

Headline inflation, as measured by the National Consumer Price Index (NCPI) remained elevated throughout the year 2017, reflecting the impact of higher food prices. Core inflation, which excludes more volatile food and energy components in the consumer price index demonstrated a downward trend, reflecting the effectiveness of the tight monetary policy stance during last two years.

Benchmark Interest Rates in the market that escalated in 2016, continued to remain in the higher trajectory in 2017, in response to further monetary tightening. The Central Bank of Sri Lanka increased its key policy rates by 25 bps in March 2017. However, during the second half of the year, the yields on government securities have shown a downward movement from peak levels.

The Sri Lankan Rupee which depreciated approximately 4.0% in 2016, weakened its value against USD only by 2.0% in 2017. However, the Monetary Policy Review published by CBSL has highlighted that the sustained inflows to the CSE, the Extended Fund Facility (EFF) Programme of the IMF and divestment of Hambantota Port has helped to strengthen the Balance of Payments(BOP) position. Gross official reserves improved to USD 7.95 bn by end 2017.

FDI inflows, according to the Board of Investment, were USD 796mn during the first nine months of 2017, which is 80% higher than the same period last year and exceeded the full-year inflows recorded during 2016.

Foreign Holdings: The local government securities held by foreigners increased by Rs 13bn during the first two weeks of December 2017 with foreign holdings are up by Rs 62bn for the year.

The IMF Extended Fund Facility: With the completion of the third review of Sri Lanka’s Extended Fund Facility (EFF) arrangement, the IMF disbursed the third tranche recently which amounted to USD 251mn. With this latest tranche the total IMF disbursement was recorded at USD 760mn. The IMF Executive Board has stated that the performance of Sri Lanka under the EFF program has remained broadly on track and the macroeconomic and financial conditions have been stable despite a series of weather related supply shocks.