SL economy to grow at near 7% - rating agencies

RAM Ratings (Lanka) Ltd, owned by RAM Holdings of Malaysia, and US based Standard and Poor’s forecast the economy to grow by 6.8 percent and 6.5 percent respectively this year, clearly short of the Central Bank’s estimate for 7.5 to 8 percent growth.

RAM Ratings estimated that the growth rate would drop slightly to 6.5 percent in 2011, while Standard and Poor’s estimated 6.8 percent.

The International Monetary Fund’s (IMF) own growth forecast for this year and 2011 is 7 percent, and 6.5 percent in 2015.

Dr. Yeah Kim Leng, RAM Ratings Chief Economist, and Ms. Roopa Kudva, Standard and Poor’s Region Head, South Asia, were hosted by the Institute of Chartered Accountants of Sri Lanka to a breakfast meeting where they both presented Sri Lanka’s economic outlook.

Growth...

Dr. Leng said the forecast for annual average medium term growth for the 2011-2015 period was revised upwards from an earlier estimate of 5.5 percent to 6.2 percent while annual average long term growth for the 2016-2020 period was revised upwards from 6 percent to 6.1 percent.

"A quicker than expected reduction in Sri Lanka’s macroeconomic imbalances, a less severe effect for the global financial crisis on the domestic economy and rising confidence in the post-conflict economic rebound were reasons for the upward revisions," Dr. Leng said.

Ms. Kudva said Standard and Poor’s growth estimates were based on strong quarterly growth rates during the fist two quarters of this year propelled by broad-based growth across all sectors. The end of the conflict and expected fiscal reforms under the International Monetary Fund (IMF) helped raise investor sentiments and also Standard and Poor’s forecast.

Fiscal policy...

Both Ms. Kudva and Dr. Leng were optimistic about Sri Lanka’s prospects but they both warned fiscal reforms would have to take place if Sri Lanka was to realise its true potential.

Sri Lanka’s budget deficit in 2009 ballooned to 9.9 percent of GDP from a target of 7 percent and it is expected to be contained at 8 percent this year and gradually brought down to 5 percent of GDP by 2012.

The Central Bank, Institute of Policy Studies and economists have often pointed out the need for better fiscal discipline in order to achieve macroeconomic stability, but now with the war over, the government has a real opportunity to push through fiscal reforms and next Monday’s budget would be an indication of how the government hopes to achieve this.

To date, the government has overestimated revenue and underestimated expenditure when budgets were announced resulting in higher than expected deficits.

According to the Ministry of Finance, in 2007, the budgetary estimates provided revenue at Rs. 751 billion, recurrent expenditure at Rs. 588 billion and capital expenditure at Rs. 351 billion. The deficit was estimated at Rs. 654 billion. But the outcome was that recurrent expenditure expanded to Rs. 615 billion which exceeded revenue which declined to Rs. 584 billion. As a result, capital expenditure, or public investments, was cut to Rs. 262 billion at which expense the deficit was contained at Rs. 609 billion.

In 2008, revenue was estimated at Rs. 751 billion, recurrent expenditure Rs. 708 billion, capital expenditure 386 billion and the deficit Rs. 736 billion. The outcome was that revenue fell to Rs. 655 billion from the original estimate barely enough to cover recurrent expenditure which had increased to Rs. 736 billion from the estimated figure. Capital expenditure was again cut to Rs. 264 billion and the deficit expanded to Rs. 756 billion.

It was the same story in 2009. Revenue was estimated at Rs. 855 billion, recurrent expenditure at Rs. 825 billion, capital expenditure at Rs. 405 billion and the deficit Rs. 849 billion. The outcome was a sharp drop in revenue to Rs. 703 billion, recurrent expenditure expanded to Rs. 883 billion and capital expenditure fell from the original estimate to Rs. 350 billion. The deficit expanded to Rs. 1,046 billion, which was 9.9 percent of GDP.

Yesterday, Ms. Kudva said the risks to Sri Lanka realising its economic potential came from the fiscal side due to high public debt and interest burden, but she pointed out that the government’s fiscal performance this year showed signs of improving.

"Fiscal performance in the first quarter of this year is encouraging with revenue increasing by 26 percent, while expenditure increased by only 2 percent," Ms. Kudva said.

Latest data available from the Central Bank showed that the budget deficit for the first eight months of this year contracted by 9.25 percent to Rs. 314.6 billion from a deficit of Rs. 346.7 recorded during the corresponding period of 2009.

Total revenue, including grants, increased 17.94 percent to Rs. 502.9 billion from Rs. 426.4 billion a year ago. Tax revenue increased 18.04 percent to Rs. 441 billion from Rs. 373.6 billion a year ago.

Total expenditure increased by 5.74 percent during the first eight months of this year to Rs. 817.5 billion from Rs. 773.1 billion a year ago.

With Sri Lanka facing a savings to investment gap, needing to attract more foreign direct investments. Attracting such investments would require a stable macroeconomic environment.

"We are very concerned about the fiscal deficit but we expect it would be in order," Dr. Leng said. He said there was plenty of opportunity for public-private partnerships especially in infrastructure development.

"With confidence in Sri Lanka’s macro economy improves there would be a crowding in of private investments. For this to happen, businesses must start making sustainable profits," Dr. Leng said. For all this, a stable macro economic environment was crucial and the government has to contain high fiscal deficits. "It is better to show a reducing trend in fiscal deficits (rather than an increasing trend) and we believe this is happening and this is why our forecast for Sri Lanka is positive," he said.

Inflation not a concern...

Both RAM Ratings and Standard and Poor’s in their outlook for Sri Lanka’s economy said inflation was not a concern in Sri Lanka, although the rest of South Asia was facing prospects of inflationary pressure.

RAM Ratings forecast for annual average inflation is 5.8 percent this year and 6.7 percent in 2011 driven by external factors and domestic demand as the economy picks up. It expects some monetary policy tightening next year in order to keep price pressures in check as foreign investments increase.

  

  Courtesy - The Island