Sri Lanka Business Forecast Report Q2 2014

Business Monitor International
February 26, 2014
41 Pages - SKU: BMI5213112
Countries covered: Sri Lanka

Sri Lanka Business Forecast Report Q2 2014

Core Views

Although the US is pressing for a UN inquiry into war crimes in SriLanka that allegedly occurred during the final stages of the country'scivil war, the island state will continue to receive strong political andeconomic support from China, its strategic partner. Even if a UNresolution is passed, President Mahinda Rajapaksa's governmentwill remain strong, and the current economic growth momentum willnot be derailed.

We are forecasting a healthy real GDP growth rate of 6.8% year-onyear(y-o-y) in 2014, as we expect public investment in infrastructuredevelopment to continue supporting growth and the gradual recoveryin the US and European markets to bode well for goods exports.

In addition to a potential bottoming out of private sector credit, therecent rise in public sector credit could have inflationary consequencesover the coming months. Economic growth continues tobe on a sound footing, and the Central Bank of Sri Lanka will remaincautious of further rate cuts and will likely keep rates steady for aprolonged period. We are forecasting the reverse repo rate to endthe year at its current level of 8.00%.

We expect the Sri Lankan rupee to remain fairly stable against theUS dollar over the course of 2014, as the recent improvement seenin the external sector will lend support to the currency.

Even though the Sri Lankan government remains committed toconsolidating its fiscal account, the pace of consolidation will beslow due to the marginal impact of ongoing tax reforms and thedownward rigidity in government expenditures. As such, the fiscaldeficit as a share of GDP will likely stay elevated over the course ofthe next few years, and we are forecasting it to come in at 5.8% in2014 before falling marginally to 5.7% in 2015.

Major Forecast Changes

We have recently upgraded our 2014 current account forecast to-5.0% of GDP, from -5.4% previously.

Key Risks To Outlook

Upside Risks To Current Account Deficit: Risks include the potentialfor adverse global commodity price movements (especiallythat of oil prices) and a flare-up in sovereign risk in the EuropeanUnion.

Risk To Rupee Outlook: Sri Lanka's current account deficit continuesto be largely financed by government borrowing from abroad,as its foreign direct investment is inadequate to finance the largedeficits. This is unsustainable in the long run and is bearish for thecurrency, as the government is already burdened by high externaldebt.

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