Standard Chartered Bank expects Sri Lanka’s economy would improve in 2013 with growth estimated to reach 7.2 percent. The fiscal deficit is likely to overshoot the 5.8 percent of GDP target for next year, but the Central Bank would be able to ease monetary policy as the government was more likely to make more commercial borrowings next year.
"Sri Lanka’s economy is on a stronger footing heading into 2013 thanks to policy tightening measures implemented in 2012. We expect GDP growth of 7.2 percent in 2013, supported by a pick-up in investment, strong remittance inflows, and steady growth in the tourism and construction sectors," the bank said in a report ‘Global Focus 2013: The Year Ahead’ released yesterday (29).
It said weak demand for the country’s exports from the US and EU would persist in 2013 but would see some moderate improvement later in the year while domestic economic activity was expected to compensate the slower exports growth.
"Sri Lanka’s fiscal position remains weak. Higher debt interest payments and the increase in non-interest expenditure on wages and welfare spending this year have contributed to fiscal slippage. In 2013, steps to reduce current expenditure, broaden the revenue base and improve efficiency of state owned enterprises will be needed to reduce public debt. We estimate the fiscal deficit at around 6.5 percent of GDP against the budget estimate of 5.8 percent," Standard Chartered said.
The budget deficit target for this year is 6.2 percent of GDP and by the end of August, the deficit had reached 6 percent and the Central Bank has already warned the government its monetary policy would depend on the government’s fiscal discipline. Standard Chartered Bank has estimated that the deficit would reach 7 percent of GDP by the end of this year.
"In 2013, the (monetary) policy focus is likely to shift to supporting growth from tracking high inflation and credit growth," Standard Chartered said.
"The most recent central bank statement expressed a clear intent to ease monetary policy given that credit growth has slowed, the trade balance has improved and inflation is expected to moderate by the second quarter of 2013.
We think this will the give the central bank sufficient room to cut monetary policy rates by 25 basis points in the first quarter of 2013."
The bank expects the rupee to appreciate to around Rs. 126.5 to a dollar by the end of 2013 as the trade balance stabilises and capital inflows pick-up on the back of improved investor sentiment.
"We are constructive on the government bond market in 2013 on the back of softening inflation, consequent monetary easing and the balanced demand-supply outlook. Although the government plans to increase its reliance on domestic market borrowing to finance the fiscal deficit in 2013, its estimate of foreign commercial borrowing is conservative. Given the success of previous sovereign bond issues, we expect the government to continue with such issuance, reducing domestic market borrowing. As such we remain Neutral on Treasury bond duration, as near term upside risks to inflation persist," Standard Chartered said.
It said the large fiscal deficit and the possibility of higher food and fuel prices in international markets during the first half 2013 poses serious threats to the Sri Lankan economy.