- The Invisible
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Sri Lanka’s growth slowed in 2019 as the economy was recovering from a currency collapse in 2018 and was just starting to stabilize in early 2020 in a cyclical recovery, though attempts to ‘stimulate’ the economy through tax cuts triggered alarm among investors and rating agencies.
On top of a widening budget deficit, the central bank cut rates on January 30 and liquidity injections started just before a Coronavirus crisis hit analysts have shown.
..[T]he outbreak of the COVID-19 pandemic, the containment measures adopted by all countries including Sri Lanka, and the resultant projected contraction in the global economy, triggered further uncertainties regarding the country’s economic performance in 2020,” the central bank said releasing its 2019 annual report.
“In the near term, the economy is likely to be impacted severely in terms of its growth, fiscal, external, and financial sector performance, while causing hardships to all stakeholders of the economy.”
The IMF had said Sri Lanka’s growth would contract 0.5 percent but would recover the following year from a low base.
The central bank is forecasting growth to recover to 4.5 percent and gross domestic product (at market prices) to end the year at 15,925 billion rupees from 15,016 billion rupees in 2019.
Annual average inflation is forecast at 4.5 percent in 2020 from 4.3 percent in 2019. There is no forecast for year-end inflation.
The central bank is forecasting the 2020 deficit to be 7.9 percent of GDP from 6.8 percent in 2019 and central government debt to spike to 9.2.4 percent from the current 86.8 percent.
Imports would shrink by 4.5 billion dollars to 15.4 billion US dollars while exports would fall 3.2 billion US dollars to 8.7 billion US dollars, the central bank has said.
Imports are driven not just by hard goods export income but also remittance, tourism, and net borrowings of the government. Any fall in dollar income would lead to a fall of imports in the absence of money printing.
Any printed money whether for monetary policy or deficit finance however would drive imports especially shortly after money is printed and pressure the currency.
The rupee had come under severe pressure in recent weeks amid record liquidity injections. (Colombo/Apr28/2020)