Sri Lankan Economy
Growth: Sri Lanka’s economy grew 3.3% in Q3 of 2017, a decline from the growth of 4% in Q2 of 2017. While the services and industrial sectors recorded an expansion, the agriculture sector recorded a decline. The unfavorable weather conditions that prevailed during this period was the main reason for this weak performance.
IMF EFF Arrangement: The IMF disbursed US$ 251mn with the completion of the third review under the Extended Fund Facility (EFF) arrangement. As per the IMF, Sri Lanka’s performance under the EFF program has remained broadly on track.
FDI: According to the Board of Investment, FDI inflows were USD 796mn during the first nine months of 2017, which is 80% higher than the same period last year and has already exceeded the inflows recorded during 2016. FDI inflows have been led by China (including Hong Kong) accounting for 35% of the FDI Inflows while inflows from India were 16%.
Foreign Holdings: The local government securities held by foreigners increased by Rs 13bn during the first two weeks of December 2017. For the year so far, foreign holdings are up by Rs 62bn.
Reserves: Sri Lanka’s gross official reserves declined to US$ 7.3bn in November 2017 from US$ 7.5bn in October 2017. However, reserves are up by US$ 1.3bn so far in 2017 compared to the end of 2016 aided in part by the purchase of foreign exchange by the Central Bank of Sri Lanka from commercial banks.
Ratings: Moody’s Investor Services retained the sovereign rating at B1 while maintaining the negative outlook citing high government liquidity and external vulnerability risks.
Inflation: Headline inflation as per the Colombo Consumer Price Index (CCPI) eased to 7.6% Year-on-Year (Y-o-Y) in November from a record high of 7.8% in the previous month. However, core inflation continued to decline on a Y-o-Y basis to 5.2% from 5.8% recorded in October 2017.
The Global Economy
Global Growth: The Asian Development Bank in their latest Asian Development Outlook report marginally upgraded the growth outlook for developing Asia for 2017 to 6% from 5.9% driven by stronger exports and domestic consumption. Growth expectation for 2018 was held at 5.8%, similar to the last update.
Global Oil Prices: The OPEC Reference Basket rose near 10% to USD 60.74 per barrel in November. Oil prices edged up further in December with it rising towards US$ 64 per barrel by Tuesday 19th December. This was due to a North Sea pipeline outage, OPEC-led supply cuts and expectations of further declines in US crude inventories.
Fed Rates: The Federal Reserve raised interest rates as expected for the third time in 2017 during their last meeting for the year, referencing to an improving economy and labour market. Three more hikes are projected in 2018 according to the US Federal Reserve.
Industrial Production: The industrial production of US rose 0.2% in November compared to an expected 0.3% increase due to a rebound in extracting oil and natural gas after a stoppage due to Hurricane Nate. During the last 12 months, total industrial production of the US has increased by 3.4%.
External Sector Performance
Key Macroeconomic Indicators
Further Insights – Sri Lankan Economy
Sri Lanka GDP Growth Decline to 3.3% in Q3-2017
IMF Disbursed the Third Tranche of EFF
With the completion of the third review of Sri Lanka’s Extended Fund Facility (EFF) arrangement, the IMF disbursed the third tranche recently which amounted to USD 251mn. With this latest tranche the total IMF disbursement was recorded at USD 760mn. As per the IMF Executive Board, performance of Sri Lanka under the EFF program has remained broadly on track and the macroeconomic and financial conditions have been stable despite a series of weather related supply shocks. The IMF is satisfied with the fiscal performance with all targets until September being met. They highlighted the importance of further fiscal consolidation due to high debt burden of the country, large gross financing needs and weak financial performance of state-owned enterprises. Further it was recommended by the IMF for the Central Bank of Sri Lanka to maintain a tightening bias for monetary policy until clear signs emerge that inflation pressures and credit expansion have subsided. They also highlight the importance of further accumulation of reserves and enhance exchange rate flexibility to address Sri Lanka’s external vulnerability.
FDI Picked Up to USD 800mn in the First Nine Months, Exceeds 2016 Total
As per the Ministry of Development Strategies and International Trade (MoDSIT) and based on the data from the Board of Investment, Foreign Direct Investments (FDI) inflows recorded a significant uptick to USD 795.5mn during the first nine months of 2017. The manufacturing and services sector recorded the highest inflows (USD 397mn) followed by infrastructure and utilities sector (USD 353mn). The highest amount of FDI came from China accounting for 35% of the total FDI inflows, followed by India (16.4%). Netherlands, UK, Japan, Malaysia, Sweden and Australia were the other top countries.
More than One Out of Five Households Owns a Computer
According to the recently released Computer Literacy Statistics by the Department of Census and Statistics, for the first half of 2017 more than one out of every five households owns either a desktop or a laptop computer (which is 23.5% of households in the country owns a computer). The highest availability was recorded from the Western Province and the lowest from the Uva province. The survey results show that, overall computer literacy in the 1H 2017 was 28.3% which was an increase of 0.8 percentage points from the same period of 2016. Colombo is the district with highest computer literacy rate (48.9%) while Kilinochchi recorded the lowest computer literacy rate (6.7%). The survey results show that, males have higher computer and digital literacy than females while those who are within the age of 15-19 years hold the highest computer and digital literacy rate. With regard to internet usage, Colombo district showed the highest percentage (44.6%) while Badulla district recorded the lowest (4.9%). Internet usage rate for Sri Lanka was registered at 21.3% and the rate of email usage is at 11%.
Inflation Seen Rising High in 2018
According to the latest Asian Development Outlook (ADO) produced by the Asian Development Bank, inflation in Sri Lanka is expected to remain high next year as anticipated fuel price hikes will push up other prices. The NCPI inflation had already been pushed up beyond anticipated levels owing to higher food prices.
Further Insights - Global Economy
A Firmer Growth Outlook for Asia
As per the latest update of the Asian Development Outlook (ADO), the growth outlook for developing Asia for 2017 is upgraded to 6%, or 0.1 percentage points higher than the rate envisaged in the last update of the ADO in September 2017. As stated in the report, the trade expansion has helped firm the outlook for developing Asia.
South Asia’s growth projection for 2017 is revised down from 6.7% to 6.5%, with India now seen expanding by 6.7% in this fiscal year, or 0.3 percentage points less than previously forecasted. The growth expectation for 2018 for South Asia is unchanged at 7%.
Consumption and Innovation will be the Major Growth Drivers in China
As per JPMorgan Chase and Co., consumption and innovation will be the two key growth drivers in China in the years ahead. In the next three years, China’s consumption will grow from current USD 4 trillion to USD 6 trillion according JP Morgan. On innovation, the Chinese government is not only encouraging technology companies to go abroad, but also urging old industries to adopt new ways of doing business that will result in lifting China’s growth prospects.
Three Major Tensions in China’s Financial System
The International Monetary Fund has identified three major tensions of the China’s financial system that could derail the world’s second largest economy.
The first tension is, the rapid build-up in risky credit that was partly due to the strong political pressures banks face to keep non-viable companies open, rather than letting them fail. Such struggling firms have taken on more debt to achieve growth targets set by authorities. The overall debt-to-GDP ratio of China, grew from around 180% in 2011 to 255.9% by Q2 of 2017. The second tension is that risky lending moved away from banks to the less-regulated parts of the financial system, commonly known as “shadow banking” sector. That adds complexity to the financial sector and makes it more difficult for authorities to supervise activities in the system.
The third tension identified is, “moral hazard and excessive risk-taking” because of the mindset that the government will bail out trouble state-owned enterprises and local government financing vehicles.
3.1 Colombo Consumer Price Index (CCPI) Base Year 2013
3.2 National Consumer Price Index (NCPI)