Economic State of Sri Lanka

As a result of central bank and government implementing appropriate laws and regulations to bring the Sri Lankan economy, the economy showed some signals of adjusting. Nevertheless, because the global economy recovered slowly and also due to adverse weather conditions economy grew slower when compared to the previous year 2015. In this report, we have analyzed the economic state of Sri Lanka in 2016 compared to the year 2015.

Real Sector As indicated in the World Bank, Sri Lanka is a developing country with an increasing annual economic rate. After the end of civil war back in 2009, Sri Lanka has shown a significant growth within the past 10 years. There are 3 main sectors that contribute to Sri Lankan economy. Those are, The Services Sector The Industrial Sector The Agriculture Sector Services SectorAdding to more than 60% of Sri Lanka’s GDP starting in 2016, service sector contributes a large amount to the countries production. As indicated in the Central Bank of Sri Lanka, financial services (12.4% increase), wholesale and retail trade(2.5% increase), transportation activities(4.1% increase) played a major role in the service sector. The growth of financial sector was mainly due to the significant expansion in financial services.

Industrial Sector Industrial sector has contributed to more than 30% of Sri Lanka’s entire economic output. Contributing more than 17% manufacturing business has played a major role in the industrial sector. Aside from that, the construction industry contributed a lot to the industrial sector. This was mainly due to the ending of the civil war which led to more constructions. Other segments like mining and electricity contributed less. Agricultural Sector Since the majority of Sri Lankans’ livelihood is agriculture, it plays a major role in Sri Lankans’ economy. However, agriculture sector showed a negative growth this year. Mainly tea, rubber, and paddy showed a negative growth TeaFactors from the supply side and demand side contributed to the negative growth in the Tea industry.

The extended drought in tea growing areas at the beginning of the year 2016, changes in the climate and severe drought condition had a negative impact on tea production.Low worldwide 2 product costs and the decrease in oil and gas revenues of key tea importing nations adversely influenced the interest in tea in 2016. RubberDue to the reduction in extent under tapping and the number of tapping days. The decline of extending under tapping was mainly due to competition for land to cultivate other crops and also for real estate problems. Since the global demand for rubber decreased, rubber cultivation became less attractive because the profit margin was low. PaddyDecline in paddy productions were mainly due to few reasons.

In Maha season this happened because of a plant disease called blight and leaf-roll disease grew in certain paddy production areas. In Yala season this was mainly due to landslides and widespread occurred because of the severe tropical storms. Inflation Even though inflation stabilized during the latter part of the year, consumer price inflation moved upwards during the first half of the year. Headline inflation which is measured by year on year change in NCPI was subdued in the first quarter of the year due to low international commodity prices. However, inflation increased during the second quarter of the year, because of the disruptions of the domestic supply side.

Mainly due to tax adjustments and adverse weather conditions. Nevertheless, a decline in inflation was detected during the third quarter of the year due to the recovery of domestic side supply and halting the changes of the government tax structure. Although the execution of the new VAT rates strived an upward pressure on prices inflation remained generally stable thereafter. Following a similar pattern, Colombo Consumer Price Index based headline inflation ended the year with a 4.6% at the end of the year 2016 after reaching a peak of 5.8% in July 2016. Due to the effect of the changes in tax, drought conditions and increasing international commodity prices also because effected the changes in inflation at the beginning of the year 2017.

External Sector Exports Keeping up the development force, profit from exports expanded further keeping up the two-digit growth. Compared to 2016 there is a significant growth in 2017. This is mainly due to higher income from garment exports to EU and USA market. Earning from agricultural exports raised, especially tea exports compared to last year mainly because of increasing tea prices making Sri Lankan tea the most expensive tea in the world.Due to many reasons like adverse weather conditions, trade union activities which lead to lower production and lower demand further lead to decrease in earnings from tea exports in 2016. Earnings from seafood exports grew significantly mainly due to the lift of the ban on seafood exports from Sri Lanka to the EU in June 2016.

Imports Consumption on imports decelerated in October 2017 primarily because of the decrease in consumption on sugar imports owing to bring down costs and in addition, lower volumesFuel imports declined because of low unrefined petroleum imports in volumes regardless of an increment in costs. Since January 2017 to satisfy the deficiency of rice in the domestic market the volume of rice imports increased.

Financial Flows The low record of FDI that Sri Lanka saw in 2016, is relied upon to recuperate by the start of 2018. Sri Lanka has achieved the US $ 1.5 billion in foreign direct investments in 2017 and it is expected to be the US $ 2-3 billion from 2018 onwards. There are lots of reasons for the reduction of FDI in Sri Lanka mainly due to the unstable political environment but with the great development in the real estate business, the government is intending to add fuel the development of the Lankan economy through FDIs.Many government policies like eliminating VAT on real estate transactions, easing of cash restrictions and proposed mortgage law have caught the eye of foreign investors. Furthermore, Information Handling Services has released a report recently saying that Sri Lanka has ranked among the top 10 FDI hotspots in the Asia Pacific Region. Within the next 3 years according to Vision 2025 FDI is expected to rise up to the US $ 5 billion per year. Balance Of Payments Due to managing the government's revenue and expenditure efficiently Rs 21.9 billion surplus was able to achieve in primary balance of the fiscal accounts during first 10 months in 2017. This was after 63 years. This is a sign of positive economic growth and this will help to manage the debt payments in Sri Lanka.

Tourism According to the latest report released by Sri Lanka Tourism Development Authority, tourist arrivals to Sri Lanka has increased significantly (3.2% growth compared to previous year). Although there was a reduction in a number of tourists in Sri Lanka due to the partial closure of the Bandaranaike International Airport, during the end of the year Sri Lanka was able to recover the loss. Fiscal Sector As a result of an increase in Government revenue arose from the expanded tax base,reforming the structure of the tax administration and also government’s contribution to strengthening the fiscal policies fiscal sector improved significantly in 2016. The deficit of the current account decreased to 0.6% of GDP. Government revenue which increased in 2015 continued to increase in 2016 recording it as 14.2%. This was mainly due to the increment of non-tax revenue in 2016. As a result of increased profits in dividend transferred from state-owned businesses, the non-tax revenue increased by 1% compared to last year. The increment of profits was mainly because of the performances of banking and insurance sector have improved. As a percentage of GDP recurrent expenditure decreased to 14.8% from 15.5%, compared to the previous year 2015.

However, in nominal terms, it increased by 3.3% in 2016 mainly because there was an increase in interest payments. Out of total financing, 61.2% was contributed by foreign sources while the remainder was contributed by domestic source. At the end of 2016, the outstanding debt of central government increased to Rs.9,387.3 billion in nominal terms even though there are some improvements in fiscal sector, there are also some drawbacks. This was mainly because the reformation of the tax administration was inactive and also current expenditure remained high throughout the year. Furthermore increased interest rates in international and 6 domestic market because of the increment of the cost of borrowing and also the rupee being depreciated against main foreign currency affected the financial sector to some degree Monetary sector Due to an extreme extension in credit to both private and government sector monetary aggregate grew faster than forecast.As a result, the central bank initiated a tight monetary policy. With the intention to absorb liquidity surplus in the domestic money market, statutory reserve ratio was raised by the Central Bank on licensed commercial banks. Furthermore because of the increase in inflation Central Bank increased Standing Deposit Facility Rate and Standard Lending Facility Rate by 50 basis points.

The liquidity of rupee in the domestic market was Rs. 84 billion at the beginning of the year and declined up to Rs. 9 billion during March 2016. The high value at the beginning of the year was mainly due to the term repurchase agreements being matured, Central Bank purchasing Treasury bills and also because the bank provided provisional advances to the Sri Lankan government. However, because of new term repurchase agreements and repayments of foreign loans the declined happened in the latter part of the year Financial Sector Even though the banking sector managed to maintain minimum statutory capital and liquidity levels due to tight monetary policies the banking sector grew slower when compared to the previous year. As a result of increments in loans and advances banking assets grew by 12%. The main income of banking sector was the interest income but because of the decrease in foreign currency borrowing, there was a decline in borrowings from the banking sector. Due to the high-interest rates in US stock market and domestic stock market, the stock market in Sri Lanka was a little bit slow moving. As a result, there is a decrease of 3% compared to 2015 in market capitalization.

By looking at the performance of the economy in Sri Lanka, it is high time to think about the issues we have and to think about the solutions to Sri Lanka can improve its’ economy. The attempt the government has taken with the help of IMF to regulate policies to focus on these issues is admirable. It is important to implement such policies so the efficiency and the productivity can be enhanced, therefore we can attract foreign direct investments and also can increase investments from the domestic private sector. The obstacles we face have been regularly highlighted by the central bank, international development agencies and also from regular reports published by the governments. It is time to closely observe these issues without delay so there will be a continuous progress in the country.