IMF on Sri Lanka’s recent economic developments

The International Monetary Fund (IMF) on Saturday said Sri Lanka’s macroeconomic performance in 2015 reflected a positive underlying growth momentum mitigated by the negative impact of unbalanced domestic policies and an increasingly difficult external environment. 

Real GDP growth was 4.8% in 2015 (broadly unchanged from 2014), on the basis of strong growth in services (particularly tourism), continued growth in agriculture, and a positive (albeit declining) contribution from manufacturing. 

The negative growth in construction and weaker growth in manufacturing were indicative of a slowdown in public and private investment, as well as the negative effects of slowing world trade. The economy is currently estimated to be operating slightly below its potential, while the unemployment rate remains at 4.3% in end 2015, close to the historical norm.

The government fiscal deficit expanded to 6.9% of GDP in 2015. While revenue increased by 1.5%age points to 13.1% of GDP, this mostly reflected one-off measures and tax collections from a temporary surge in vehicle imports. Expenditures rose by 2.1%age points to 19.9% of GDP, on account of a post-election wage hike, a higher interest bill, additional spending on goods and services, and an increase in income transfer programs.

The overall balance of payments deteriorated significantly in 2015 despite an improvement in the terms of trade. The current account deficit was contained at 2.5% of GDP in 2015—the same level as in 2014. Capital flows have also been a key driving force behind the deterioration in the balance of payments. The capital and financial account position has weakened due to foreign exit from government securities, lower FDI inflows, and slow implementation of externally financed public and private projects. Investor sentiment has worsened, reflecting global market volatility and concern over domestic policies.

Tougher external conditions in the wake of China rebalancing and unwinding of unconventional monetary policies were not outside Sri Lanka’s past experience. However, spillovers were magnified by domestic imbalances, as evidenced by higher volatility around the two elections (January and August 2015), and the official budget passed in November 2015. The rupee continues to face downward pressure—largely reflecting capital flow developments. The foreign exchange and government bond markets were volatile in March 2016. highlighting rigidities in both systems.