Sri Lanka's GDP seen up 5.3-pct in 2016, investment to rise, says ADB

Mar 31, 2016 (LBO) – Sri Lanka’s gross domestic product (GDP) growth is expected to rise to 5.3 percent in 2016 as private sector investment picks up once fiscal reforms are committed , a new Asian Development Bank (ADB) report says.

“Fiscal consolidation is to be put back on track by a revision of the 2016 budget,” said Tadateru Hayashi, Senior Country Economist at ADB’s Sri Lanka Resident Mission.

“IMF support, once agreed, will protect against expected pressures from external imbalances as it builds international confidence and facilitates fiscal consolidation and tax reform. A national development strategy will facilitate investment, both domestic and foreign.”

Inflation is expected to increase moderately under monetary tightening, picking up to 4.5 percent in 2016, and further to 5.0 percent in 2017 as growth picks up.

Though domestic demand remains restrained, the depreciation of the rupee will exert upward pressure on import prices, the report says.

“In addition, dissipation of the base effect of several energy price cuts in 2015 will add to the upward movement in inflation in 2016,”

“Balance of payments will continue to be under pressure with weak exports as a result of the global slowdown and slack workers’ remittances from the Middle East affected by low oil prices.”

The expected renewal of GSP+ concessions from the European Union in 2016 is a positive factor for exports, with receipts from tourism also growing, following the trend since the end of the conflict.

The report says, this would help maintain the current account balance at -2.0 percent in 2016, and see it improve to -1.8 percent in 2017 as exports pick up.

A low revenue ratio has been a major challenge to Sri Lanka’s fiscal consolidation process and to maintain social expenditure and public investments.

A tax to GDP ratio of 12 percent is the lowest among the countries with a similar level of development, it said.

However, it is encouraging to note that the government has taken steps in the right direction to enhance revenue in the proposed amendments to the 2016 budget.

The report notes that to further improve the tax system, it is necessary to strengthen policy analysis and build the capacity of decision-making.