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EIU - March 2018


 Sri Lankan Economy 

GDP Growth: Sri Lanka’s per Capita GDP surpassed $4,000 during 2017. According to the provisional data released by the Department of Census and Statistics, Sri Lanka grew 3.1% in 2017 with per Capita GDP at $4,065. Annual growth recorded a slowdown in 2017, compared to the 4.5% recorded in 2016 driven by a contraction in the Agriculture sector while growth in the Services and Industry sector moderated. There was a notable downward revision in previously released data for the first three quarters.

Exports: For the 6th consecutive month in 2017 export earnings recorded a double-digit growth in December 2017. This was driven by the increase in exports of textiles and garments as it recorded the highest monthly earnings for 2017 in December. For the full year 2017, Sri Lanka’s exports recorded an all-time high of USD 11.4bn which is a growth of 10% compared to 2016.

Imports: For the first time in 2017, expenditure on earnings surpassed the USD 2bn mark in December. This was led by imports of fuel owing to increased prices and import volumes. Importation of rice increased further in December to fulfill the shortage in the domestic market. For the full year 2017, Sri Lanka recorded the highest ever import bill of USD 21Bn largely led by higher imports of fuel and rice.

Trade Balance & BOP: The deficit in the trade account expanded in December 2017 exceeding the USD 1bn mark for the first time since November 2012. Trade deficit for the full year 2017 also increased mainly due to higher import expenditure incurred by weather related factors, offsetting the notable increase in export earnings. Despite this, improved performance in the financial account enabled the BOP to record a surplus of USD 2Bn.

Inflation: CCPI headline inflation recorded a decline in February 2018 to 4.5% from 5.8% in January while CCPI core inflation remained unchanged. NCPI headline inflation for February 2018 declined to 3.2% from 5.4% in the previous month. NCPI Core inflation fell marginally to 2.0% from 2.1%.

FDI Inflows: Sri Lanka recorded the highest ever FDI inflows in 2017 (USD 1,710mn), growing by more than two times compared to the inflows in 2016. More details can be found in our infographic.

IMF Article IV Mission & 4th EFF Program Review: The review which concluded in the early half of March saw the IMF staff team expecting the economic recovery to continue while acknowledging that though reforms have progressed under the program, the economy remains vulnerable to shocks.

 The Global Economy 

Oil Prices: OPEC Reference Basket dropped by 5% M-o-M in February, a decline for the first time in six months, to average USD 63.48 per barrel. However, prices remain above levels seen in more than two years. 

China: Expected growth target for 2018 is 6.5% which is 0.4% lower than the 2017 growth rate with a shift towards the quality of growth than the quantity. 

Fed Rate hike: The US Federal Reserve in the first meeting under Chairman Jerome Powell, raised the benchmark lending rate by 0.25% citing improvement in the economic outlook. Federal Reserve official continue to see another two hikes this year while raising their projection for hikes in 2019 and 2020.


  External Sector Performance-December 2017


  Key Macroeconomic Indicators   


  Further Insights – Sri Lankan Economy   

GDP Recorded the Lowest Growth since 2001 
Annual growth slowed to 3.1% in 2017, recording the second lowest economic growth rate for last two decades from 4.4% recorded in 2016. Sri Lanka experienced the highest ever economic growth in 2012 and lowest-ever in 2001. Gross Domestic Product (GDP) for the year of 2017 at constant (2010) price has reached up to Rs. 9,315 billion from Rs. 9,034 billion in 2016. Per capita GDP recorded a 5.4% growth to USD 4,065 in 2017 compared to the previous year. 

The four major components of the economy; Agriculture, Industry and Services have contributed their share to the GDP 2017 at current price by 7.7%, 55.8% and 9.3% respectively. The agriculture sector of the economy was adversely affected by adverse weather conditions that have prevailed since 2016. As a result, the agriculture sector declined by 0.8% during 2017. During 2017, the highest growth rate of 3.9% was reported for overall industrial sector while the services sector has grown by 3.2% compared to 2016. 

Financial Services was the strongest contributor towards GDP growth in 2017 followed by whole sale and retail trade and other personal activities contributed 13% and 10% of the GDP. These three set of activities together contributed more than 40% of the country’s GDP. 



Sri Lanka Recorded Highest Ever Exports and Imports in 2017 
Exports of Sri Lanka reached a record level in 2017 registering a growth of 10% to USD 11.4Bn compared to USD 10.3Bn recorded in 2016. This is a new high for export earnings of Sri Lanka and has surpassed the previous high of USD 11.1Bn recorded in 2014.

Tea recorded a growth of 20.5% in 2017 compared to 2016 mainly due to higher prices in the international markets and enhanced access to Middle Eastern markets. Fisheries exports were benefitted from both the lifting of the EU ban in June 2016 and the restoration of GSP plus concession in May 2017. As a result, this category recorded a growth of 41.9% on Y-o-Y basis in 2017. 44% of Sri Lanka’s exports comprised of textiles and garments which recorded a growth of 3% in 2017 compared to 2016. 

Biggest market for Sri Lanka’s exports was USA, accounting for one-fourth of total exports of the country followed by UK, India, Germany and Italy which purchased 9%, 6%, 5% and 5% respectively. 

Import expenditure of Sri Lanka recorded the historically highest value of USD 21Bn in 2017 and this was a growth of 9.4% compared to 2016. This growth was largely led by higher imports of fuel and rice. Fuel imports increased by 38.2% whereas cereals and milling industry products increased by more than 14 times compared to imports of the same in 2016.  

India is the top import origin of Sri Lanka’s imports accounting for 21.4% followed by China (18.8%), UAE (7.5%), Singapore (6.2%) and Japan (5%). These five countries together accounted for 59% of total imports of Sri Lanka. 
Two Landmark Trade Related Bills Passed by Sri Lanka 
During the first week of March 2018, Sri Lanka enacted legislation on Anti- Dumping and Countervailing Duties and Safeguard Measurers which significantly advances the country’s standing in global trade. With this move, Sri Lanka joins the league of WTO members who keenly look to offset possible adverse impacts on their domestic industries from trade liberalization processes, as stated by the Department of Commerce. These two new legislations will empower the Director General of Commerce of the Department of Commerce to initiate investigations relating to unfair business practices under these legislative provisions of Trade Remedy law and effect additional duties, countervailing duties, safeguard action against imports which enter the country under unfair business practices.


Sri Lanka Recorded Highest Ever FDI in 2017 


  Further Insights - Global Economy   

Trump Imposed Steel Tariffs 
President of US, Donald Trump announced a general tariff on US imports of steel and aluminum. The proposed tariff on steel imports is 25% and that on aluminum imports is 10%. These tariffs were imposed with the purpose of reducing imports and to protect domestic producers. As per the IMF spokesman, these import restrictions by US are likely to cause damage not only outside the US, but also to the US economy itself, including to its manufacturing and construction sectors which are major users of steel and aluminum.  

India wrested back the Mantle of Fastest Growing Economy in the World 
With the recording of GDP growth of 7.2% in the third quarter of financial year 2018, India regained back the mantle of being the fastest growing economy in the world from China. This was on the back of a rebound in industrial activity, specially manufacturing, construction and an expansion in agriculture. China grew 6.8% in the quarter and is expected to grow at a slower pace than this in 2018. India’s 2018 growth projection was revised marginally upward to 6.6% from 6.5% estimated previously, compared with 7.1% in financial year 2017.  Heralding an improvement in the investment climate, real gross fixed capital formation is estimated to grow at a robust pace of 7.6% for financial year 2018. The GDP trend is consistent with robust growth in indicators such as the Purchasing Managers index (PMI), Index of Industrial Production (IIP), and consumer demand. 

UK’s GDP Growth of Q4 of 2017, Revised Down Unexpectedly 
The UK’s GDP growth in the fourth quarter of 2017 has been unexpectedly revised down by the Office for National Statistics (ONS). The economy expanded by 0.4% in the three months to December 2017, down from the preliminary estimate by ONS last month of a 0.5% expansion. However, GDP growth for the third quarter of 2017 was revised upward from 0.4% to 0.5%. Annual growth between the fourth quarter of 2016 and the fourth quarter of 2017 was 1.4%, lower than any member of G7 except Canada, which is yet to release its estimate. 

Appreciation of Japan Yen is a Bad News for the Inflation Target 
Central Bank of Japan is expecting to reach the inflation rate of 2% in 2019. However, as the yen continues to strengthen, this target is less likely to achieve as per Credit Suisse Group, Japan. Japan’s inflation rate is still sensitive to currency exchange changes. Appreciating yen would lower the chance for the country’s consumer price index to hit 2% in the foreseeable future. Japan is still far from its target with the core consumer inflation rate at 0.9% in January. As per a Japanese economist, it would be tough for inflation to grow to 2% by 2019 or even in 2020, although the Olympic Games hosted by Tokyo in 2020 could change that. In that event, tourist inflow into Japan could be a boom for the economy and may help inflation to pick up.






The Ceylon Chamber of Commerce

Economic Intelligence Unit

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