SRI LANKA’S ECONOMY SHOWS SIGNS OF A SOFT LANDING
Shiran Fernando weighs Sri Lanka’s economic performance in year 2016
Once a year in April, we’re treated to a recap of what went on in the economy in the prior calendar year from the flagship annual report compiled by the Central Bank of Sri Lanka (CBSL). Although we’re now at the halfway point of calendar year 2016, there are a few factors on which we should focus to assess the economy.
FOREIGN INVESTMENT A critical concern for much of 2016 was that foreign direct investment (FDI) was performing poorly in comparison to recent years. But the full year number for last year (which came close to US$ 1.1 billion) was not far off from the 1.2 billion dollars recorded in 2015.
By the end of the first three quarters of last year, FDI stood at a mere US$ 445 million. So it could be implied that more than a doubling of this level of inflows was seen in the last quarter of 2016. If this were true, and not a result of an accounting technique, it bodes well for that momentum to be maintained this year too.
GOVERNMENT REVENUE The proportion of government revenue as a share of GDP increased to 14.3 percent (its highest level since 2009) on the back of a surge in non-tax revenue.
According to the CBSL Annual Report, non-tax revenue increased to 1.9 percent last year (from 0.9 percent in 2015) due to profit and dividend transfers from state-owned business enterprises (SOBEs). Among the segments that contributed to this outcome were banking and insurance, as well as the Telecommunications Regulatory Commission of Sri Lanka (TRCSL).
BUDGET DEFICIT Sri Lanka managed to reduce its budget deficit to 5.4 percent of GDP last year, which represents a 2.2 percent fall from 2015. While this is commendable, it has been largely driven by the one percent increase in non-tax revenue as noted above, and lower expenditure.
Tax revenue for 2016 as a share of GDP remained at 12.4 percent, which is similar to the prior year. The government has been prudent in reducing expenditure on public investments, which declined by 0.5 percent of GDP. Cutting expenditure has been used in the past to meet deficit targets and last year was no different.
PER CAPITA GDP A key statistic that is often quoted both locally and internationally to rate a country’s progress and development is its per capita GDP. In Sri Lanka, this has been flat in the three calendar years to 2016.
Last year, per capita GDP contracted marginally to US$ 3,835 from the 3,843 dollars recorded in 2015. A key reason for this flatness could be the four percent growth witnessed in recent years, coupled with the depreciation of the Sri Lankan Rupee against the US Dollar.
BALANCE OF PAYMENTS Despite a US$ 700 million increase in the trade deficit in 2016, Sri Lanka’s Balance of Payments (BOP) shortfall fell by close to a billion dollars to register 500 million dollars.
This was helped by healthy earnings from tourism and remittance inflows, and improvements in the financial account thanks to the loan facility from the International Monetary Fund (IMF) and a successful issue of US$ 1.5 billion in dollar bonds last year.
NATIONAL DEBT A noteworthy development has been the overall decline in SOBE debt from 7.9 percent of GDP in 2015 to seven percent last year. This has been driven by some of the larger entities in this category such as the Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB), both of which saw their share of foreign and domestic debt decline during the year.
The sustainability of this decline in debt will be determined by reforms, particularly in terms of a pricing formula, with the benefits of the low commodity price environment waning.
TOTAL IMPORTS In a further sign of its influence on the local economy, China emerged as the main source of imports to Sri Lanka. It now accounts for 22 percent of the island’s import basket surpassing India, which had been the largest importer since 2001.
And China is also not far behind in becoming the leading source market for tourists, accounting for 13 percent of arrivals in the country on the heels of India’s 17 percent.
PROJECTIONS Overall, it seems that the economy performed reasonably well last year given the precarious situation it was in during 2015. The improvements on the fiscal front and external sector can be built upon with key reforms being enacted this year.
If FDI improves with exports possibly receiving a boost from the resumption of GSP+ tariff concessions and global debt markets remaining favourable for emerging markets, pressure on the currency and interest rates should ease.