Sri Lanka’s economy to recover in 2013-14: ADB

ADB’s flagship annual economic publication Asian Development Outlook 2013 (ADO 2013), released yesterday, says Sri Lanka’s economic growth is expected to recover gradually to 6.8% in 2013 and to 7.2% in 2014.

Sri Lanka’s performance in 2012 reflected a strong showing in industry, which grew by 10.3%, driven by a doubling of growth in construction. Services sector growth, however, slowed down due to subdued international trade and the impact of tightened monetary policy measures. The agriculture sector suffered from drought and floods.

Earnings from garments fell due to slackened economic conditions in the US and European Union and the loss of the Generalised System of Preferences Plus facility, while tight monetary policy, Sri Lankan rupee depreciation, and high tariffs led to a decline in consumer and intermediate goods imports. Foreign direct investment inflows in 2012 are estimated to remain at $1 billion level which is same as in 2011.

Merchandise exports are projected to grow at a slow pace of 4% in 2013 and 5% in 2014, while imports are projected to grow by 6% in 2013 and 10% in 2014 without widening the current account share of GDP. ADO 2013 notes that Sri Lanka’s policymakers will need to address the challenge of narrowing the budget deficit by improving tax efficiency and widening the tax base.

Inflation continued to remain in single digits at 7.6% during 2012, although non-food price rises came from increases in government-administered prices for fuel and electricity and rupee depreciation. The 2012 budget deficit estimated to meet the target, which was achieved by reducing current expenditure.

Inflation is expected to improve marginally in 2013 to 7.5% due to declines projected for global commodity and oil prices and exchange rate stabilisation. As further energy price adjustments are expected to address the current operating losses of the Ceylon Electricity Board, the monetary policy stance will most likely remain as set in end 2012 to limit inflation expectations.

Asia’s Energy Challenge, the special theme chapter highlights the complex balancing act the region faces to deliver energy to all its citizens while scaling back its reliance on fossil fuels. Sri Lanka achieved remarkable progress in the power sector by increasing the national electrification ratio from 29% in 1990 to an estimated 94% in 2012.

However, high costs still plague the sector. Due to their intermittent nature and technical constraints, unconventional renewable energy sources cannot contribute significantly to the electricity supply. Therefore, ADO 2013 recommends that Sri Lanka strengthens its energy sector by diversifying its traditional energy mix and by improving cost reflective tariff mechanism.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region.

In 2012, ADB approved four new projects for a total of $ 352 million in urban, water and energy sectors for Sri Lanka. ADB’s portfolio performance continued to improve in 2012, disbursing over $ 300 million. This contributed to achieve the highest disbursement ratio (24.4%) for the country during last five years.

As of 31 March 2013, ADB approved a total of 164 loans, with cumulative lending of $ 5.676 billion to Sri Lanka. In addition, ADB provided $ 358 million grant assistance (including ADB administered co-financed grants) for projects and $ 120.6 million through 256 technical assistance grants.

The current portfolio includes 49 ongoing loans for 29 projects with a net loan amount of $ 2.3 billion with cumulative contract awards and disbursements of $ 1.423 billion and $ 1.138 billion, respectively. The ongoing portfolio primarily is for transport, urban and water and energy sectors, which contribute for 84% of the loan amount.