‘Lankan economy shows positive signs of recovery’

Though the Agricultural sector expanded slightly by 0.8% YoY, elevated interest and tax rates dampened the Industrial and Services sectors by -23.4% YoY and -5 % YoY, respectively.

However, 6.7% QoQ growth in real GDP, has shown signs of recovery from the worst GDP contraction of -12.4% YoY recorded in 4Q2022.

With robust economic reforms underway, the overall contraction is projected to improve to (-3.0%) to (-4.0%) in 2023. Additionally, Sri Lanka’s rebounding tourism and business activities, particularly in financial services and professional services boosted the SL Service PMI for July-23 to its highest value since December-21 pointing to the third straight month of expansion in the sector.

However, the Manufacturing PMI remained below the benchmark marking its fourth consecutive month deep in the contraction territory due to decreased Production and New Orders resulting from subdued demand.

Moreover, orders received for the manufacture of textile and apparel sector remained at the same low level recorded in July-23, mainly due to suppressed global demand. Consequently, a monetary stimulus is necessary to prevent further economic decline and stabilize conditions.

Hence, considering the GDP forecasts by various agencies (World Bank -4.2%, ADB -3 %, IMF -3 %) and aiming for a gradual recovery from 2H2023, rate reduction could be a viable option for the CBSL to stimulate growth and achieve the 4Q2023 growth targets.

In July-23, private sector credit saw its first increase in 12 months, rising by Rs 73.8 Bn compared to the previous month. In July-23, Sri Lanka’s reserve position exhibited a strengthening trend, reaching USD 3.8Bn, a notable YTD increase of 98.2% from USD 1.9 Bn in December 22. This upward momentum was underpinned by an easing of pressure on the BOP (surplus of USD 2.0Bn in 1H2023) supported by the substantial 34.8%YoY reduction in the trade deficit in 1H2023.

Similarly, Remittances and Tourism receipts marked an impressive YoY growth rate of +75.3% and +28.8%, respectively which further bolstered the reserve position.

However, a deceleration in the MoM growth of the reserve position was observed in July 23 amidst the gradual relaxation of import restrictions initiated in May- 23. Inflation measured by the CCPI shows a consistent deceleration in inflation for the 11th consecutive month.

Moreover, with inflation declining in line with the CBSL envisaged targets (4%-6% by December 23) ahead of the IMF target of 14%-20% by September 23, we believe that CBSL may look to maintain rates and facilitate a smoother adjustment to inflation.

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