Business confidence strengthens for a second month but the horizon remains overcast

Sri Lanka faces a tight deadline to finalise agreements with creditors including bondholders to coincide with the anticipated disbursement of the third tranche of the IMF’s Extended Fund Facility (EFF). The next instalment of US$ 337 million is scheduled for June, following the third review of the programme.

Against this backdrop, a recent World Bank report on Sri Lanka notes that poverty has surged over the past four years, rising from 11 percent in 2019 to around 25 percent in 2024.

At the same time, President Ranil Wickremesinghe has advocated for the modernisation of the legal system to facilitate the effective implementation of the government’s economic reforms aimed at driving growth.

The Asian Development Bank’s (ADB) annual flagship economic publication, the Asian Development Outlook (ADO) – April 2024, pro­jects moderate growth for Sri Lanka. It forecasts a growth rate of 1.9 percent in 2024 and 2.5 percent in 2025, following two consecutive years of contraction.

However, the ADB cautions that there could be a downturn in the country’s economic prospects due to uncertainties surrounding the upcoming elections.

THE INDEX In April, the LMD-PEPPERCUBE Business Confidence Index (BCI) breached the 90 points threshold for a second consecutive month. The barometer registered a marginal in­crease of three basis points to reach 96, which is 11 notches higher than the median for the last 12 months (85).

However, the index continues to lag behind its all-time average of 123 and it is 12 points below where it stood a year ago (108), which was when the IMF framework was put to bed.

PepperCube Consultants attributes the relative positivity to an increase in optimism among corporates over the economy and their expectations of maintaining sales volumes over the next 12 months.

It asserts that despite acclimatisation to the higher value added tax (VAT), high taxes remain a challenge for businesses as is the interest rate regime.

PepperCube also notes that “despite the increase in political activity in the past month, economic pressures continue to overshadow politics and the political culture – this reflects the economic strain felt by the nation at large.”

SENSITIVITIES The reality is that the business community continues to grapple with key indicators such as high costs, taxes and interest rates.

Moreover, the global landscape is also fraught with uncertainties especially in the face of wars in Ukraine and Gaza with the dangerous prospect of an all-out Israel-Iran confrontation on the horizon.

In view of the above, the price of oil has continued to spiral towards US$ 100 a barrel, which in turn will see higher import costs for nations such as Sri Lanka – although the ongoing strengthening of the Sri Lankan Rupee may offset higher prices to some degree.

PROJECTIONS The trajectory of the index in the next six months or so is likely to remain uncertain, given the prospect of political turmoil ahead of the election season.

What’s more, as the ADB cautioned recently, questions remain as to where the national eco­nomy will head in the aftermath of the polls and whether the reforms that are underway will come to a grinding halt.