Sri Lanka is expected to sustain a strong growth momentum of 6.6% on average throughout years 2011-2015, with a growth of 7.8% this year and 7.6% in 2012, Chief Economist at a top rating firm projected. Dr Yeah Kim Leng, Group Chief Economist at Malaysian based RAM Holdings Berhad, the parent company of RAM Ratings (Lanka) Ltd, says the forecast growth would boost the country’s standing in terms of GDP per capita among its peers rated the same or even a notch or two higher and in turn, strengthen Sri Lanka’s financing ability - while attracting more foreign investment - thereby boosting the progress of its economic development.
“After a robust growth of 8.0% in 2010, the Sri Lankan economy maintained its growth momentum in 1H 2011, clocking up an 8.0% y-o-y growth. Given official estimates of 8.3% growth this year, we expect its momentum to continue in the second half on the back of its robust industrial and services sectors, bolstered by healthy private consumption. We project a marginally lower growth of 7.8% this year, given the downside risks of persistent uncertainties in the external environment. We expect the Sri Lankan economy to expand 7.6% in 2012, i.e. slightly above its potential output level, on the back of continued capacity-building activities,” the November 2011 report titled ‘Sri Lanka’s Economic Outlook 2012 : Strengthening domestic resilience against global headwinds’ of the renowned rating firm stated.
However, according to Dr Leng the persistent uncertainties plaguing the global economy remain a key downside risk for developing economies as currently, more than half the nation’s exports are still centered on the US and EU markets.
“Given this, a shift away from its present dependence will help cushion growth in light of the apparent downside risks,” the Chief Economist said.
From the domestic viewpoint, he said that further policy initiatives are needed to rationalise the government’s moderately high budget deficit, to maintain sustainable growth and achieve the medium-term growth estimates for continued economic development.
“On a more positive note, both the current account and fiscal deficits are expected to be reduced as brighter economic prospects will shift the burden of growth and employment creation to the private sector, on the assumption that the government maintains its fiscal consolidation,” the economist at RAM Ratings pointed out.
He noted that although inflationary pressures have increased this year, they are expected to moderate next year.
“However, Sri Lanka is highly susceptible to volatile commodity prices (for energy and food); unexpected supply shocks remain of utmost concern to policy makers and industry players. Moving forward, the country is anticipated to show strong improvement in its management of price stability while its average consumer price inflation is expected to be halved over the next 5 years,” he opined. He added another risk factor in Sri Lanka’s inflation is a possible surge in foreign capital flows into the country. “While investors’ risk appetite may be tempered by recent events in the advanced economies, a significant amount of global capital has been flowing into higher-yielding emerging economies through most of the year. These sizeable flows can exert upward pressure on the prices of Sri Lanka’s asset markets, thus accelerating the pace of inflation. That said, the imposition of more stringent capital controls or a renewed pessimism among global investors may reduce the likelihood of this occurring.”