Shiran Fernando scrutinises the Central Bank’s 2023 annual report and assesses the economic outlook

The 2023 Central Bank of Sri Lanka Annual Report, which was released in April, highlights important developments in the year past and provides the regulator’s outlook going forward.

In line with the new law governing the monetary authority, the inaugural Annual Economic Review 2023, and the Financial Statements and Operations of the Central Bank 2023, were also published.

BUILDING BETTER Despite a real growth contraction of 2.3 percent last year, a stable currency and growth in nominal GDP mean that the size of the economy grew from US$ 76.8 billion at the end of 2022 to 84.4 billion dollars a year later.

Sri Lanka was at the same level in 2020. As a result, per capita GDP also increased to US$ 3,830 last year – from 3,464 dollars in 2022.

For 2024, the bank is expecting three percent real growth, which will propel per capita GDP to above US$ 4,000. Institutions such as the IMF, World Bank and Asian Development Bank (ADB) are forecasting real GDP growth of 1.8 percent, 2.2 percent and 1.8 percent respectively.

This indicates that the consensus among multilateral organisations is below the Central Bank’s target. And to achieve this, the growth momentum seen in the second half of 2023 will need to be repeated by way of an acceleration of agriculture and tourism, and a rebound in the industry sector.

The growth path of the economy is a crucial factor in the ongoing renegotiation of external debt with Sri Lanka’s creditors – i.e. bondholders. Structuring of macro-linked bonds will be based on forecasts for GDP in the next four to five years.

From a South Asian perspective and based on ADB forecasts, Sri Lanka will be among the slowest to grow this year, trailing countries such as India and Bangladesh, which are expected to accelerate by between six and seven percent.

According to the IMF, India’s growth path will enable it to surpass Japan to become the fourth largest economy by 2025.

CURRENT ACCOUNT With a slowdown in imports – and improvements in remittances, and higher inflows from tourism and services – Sri Lanka was able to register its first current account surplus since 1978. It is typical for countries that undergo debt or economic crises to promptly record a surplus with a contraction of growth and tapered imports.

The Central Bank expects to maintain a current account surplus in 2024 as well despite higher imports – imports were up 18 percent in the first two months of this year relative to 2023.

Meanwhile, the export of services related to transport (e.g. air and maritime), IT and construction are expected to grow this year, and thereby support the current account balance. Outbound goods are also expected to grow but will be outpaced by increased imports. And tepid export growth is anticipated on the back of a continued global economic slowdown.

According to the United Nations Conference on Trade and Development (UNCTAD), global growth will slow to 2.6 percent in 2024 – this will make it the third consecutive year that growth is below the pre-pandemic rate, which averaged 3.2 percent between 2015 and 2019.

There continues to be concern about inflation, tightening of interest rates by global central banks and trade disruptions that are unlikely to support any near-term rebound in growth. Elections in key export markets such as the US and UK are also risks to
look out for from a consumer demand point of view.

MONETARY BALANCES The annual report of the Central Bank also highlights the correction in monetary balances, particularly borrowing by government and public corporations.

Borrowing by public corporations declined by Rs. 980 billion last year, due to the improved performance of state-owned enterprises (SOEs) and transfer of foreign currency debt obligations by corporations to the government.

And borrowing by the government on a net basis in 2023 was 814 billion rupees, which is half the sum borrowed in the previous year. This was mainly driven by a decline in borrowing by the government from the Central Bank due to the offloading of Treasury bills held by the monetary authority because of improved rupee liquidity.

Credit to the private sector contracted in absolute terms in 2023, reflecting largely weak growth conditions in the first half of the year. However, credit to the private sector has been recovering since the second half of 2023 and the Central Bank is expecting an 8.5 percent increase this year.

A low interest rate environment coupled with an uptick in economic growth will support this recovery.

According to the Central Bank and other forecasters, the outlook doesn’t signify an acceleration of Sri Lanka’s economic trajectory anytime soon. Their expectations mainly centre on building on the achievements of the fiscal and external sectors while complying with the IMF programme.

In its report, the Central Bank warns that any derailing of the current progress before or after an election can trigger a deeper crisis than experienced in 2022.