SL Inflation to remain single digit - ADB

ADB’s flagship annual economic publication Asian Development Outlook 2013 (ADO 2013), 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 Generalized 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 nonfood 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 stabilization. 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. 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.