With the re-opening of economies and improvement in mobility post the COVID-19 pandemic, domestic consumer spending and investments are increasingly driving the growth of developing Asia. This is supported by recovering tourism and healthy workers’ remittances. However, export growth is showing signs of slowing down due to the easing of global demand. Regional Central Banks are raising their policy rates as inflation has now risen above pre-pandemic levels. This is contributing to tighter financial conditions amidst a dimming growth outlook and accelerated monetary tightening by the Federal Reserve, according to the Asian Development Outlook Update, published by the Asian Development Bank (ADB) in September 2022.
Developing Asia’s economic recovery is clouded by many challenges. The Russia-Ukraine conflict has heightened global uncertainty and upended energy and food markets. More aggressive tightening by the Federal Reserve and other Central Banks is denting global demand and rattling financial markets. Growth of the economic giant, China, is slowing significantly. The COVID-19 disease risk has reduced, as economies make further progress with vaccination and booster shots.
Considering these developments, the ADB expects developing Asia to grow more slowly, at 4.3% in 2022 and 4.9% in 2023. For the first time in more than three decades, the rest of developing Asia will grow faster than the economic giant, China. Inflation is expected to rise at 4.5% in 2022 and 4% in 2023, mainly due to higher energy and food prices.
Risks to the regional outlook remain elevated. A sharp deceleration in growth would severely undermine demand for developing Asia’s exports, as would stronger-than-expected monetary policy tightening in advanced economies with vulnerable fundamentals. An escalation of the war in Ukraine and its spillover on global commodity markets would further increase inflationary pressures and slow growth. A deeper-than-expected deceleration in China, due to recurrent lockdowns and other challenges in the property sector, will affect not just China but also economies that are closely linked to it via trade and supply chains. Negative COVID-19 developments, such as the emergence of new variants, remain a risk. Other risks include debt-related fragilities in some economies, food insecurity, geopolitical tensions, and climate change-related disruptions.
ADB revised growth forecasts downward from 2.4% to -8.8% for 2022 and from 2.5% to -3.3% for 2023, and with that, Sri Lanka becomes the country with the lowest expected growth for both 2022 and 2023 amongst its South Asian peers. The downward growth revision was mainly attributed to the deepening recession and accelerating pace of inflation.
The severe balance of payments and debt crisis that led to a default, a shortage of foreign exchange reserves, supply bottlenecks, and the need for fiscal tightening, will take a heavy toll on the Sri Lankan economy in this year and the next, expects ADB. The expected contraction of imports, driven by a contraction in domestic demand and a scarcity of foreign exchange, together with the recovery in exports, should help narrow the goods-trade deficit. Remittances are likely to be lower in 2022, however net income and service receipts may improve for the full year due to a decline in interest payments following the suspension of external debt service payments, and some recovery in tourism as travel advisories are relaxed. Considering the above factors the ADB expects a small ratios of the current account deficit to GDP in 2022 and 2023.
ADB identified a few downside risks to the outlook of Sri Lanka including, global economic headwinds, geopolitical factors, spillovers from sovereign exposure to the financial sector, external financing constraints, and political uncertainty.
The Central Bank of Sri Lanka expects the subdued performance in economic activity in 2022 to continue, and a recovery in 2023 in tandem with the envisaged improvements on the supply side along with the timely implementation of required reforms.
Sources: Asian Development Bank, Central Bank of Sri Lanka, International Monetary Fund, The World Bank
Saumya Amarasiriwardane, Senior Research Associate, Economic Intelligence Unit
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