Key Takeaways
Expedited vaccine rollouts in many major economies have enhanced global growth outlook for 2H 2021. Sri Lanka which was earlier expected to be a laggard, is now among the countries with the fastest vaccination rates in the world. First quarter recorded a modest economic growth (4.2%) but the rapid escalation of the third wave of COVID infections stalled the momentum telling us that the pandemic will continue to cast a longer shadow over the economy. In this context, we slightly downgrade our initial 2021 GDP projection to 3.4%.
Monthly exports may consistently stay over and above USD 1 Bn for the remainder of 2021 beginning from June to bring total exports to USD 12.3 Bn by the year end but the troubles in the external sector will be far from over. Sri Lanka’s terms-of-trade will continue to deteriorate despite having import restrictions due to rising commodity prices. We expect the trade deficit to widen to USD 8 Bn, current account balance to reach USD 1.4 Bn, and gross official reserves would fall to USD 3.8 Bn by the end of 2021.
We expect the state revenues to weaken to 9.1% of the GDP in 2021 from 9.2% in 2020 amid the current subdued domestic economic situation. However, the GoSL may observe gradual normalization of revenues in 4Q 2021. The overall expenditure in absolute terms may expand at the expense of capital expenditure. In this context we expect the fiscal deficit to improve to 10.7% of the GDP while the debt stock will further increase to 104.8% of the GDP.
ICRA Lanka views 2H to have a relatively higher inflation level than 1H due to number of reasons – (1) vaccination rollout is expected to add a boost to the consumer spending; (2) rising commodity prices; (3) scarcity of goods rendered by the import restrictions and speculative element that comes with it; (4) weaker rupee which makes imported goods even more expensive; and (5) vagaries of weather which results in supply shocks to agricultural produce. Thus, we revise our CCPI (Y/Y) average inflation forecast to be between 5-to-6% for 2H.
Due to external sector vulnerability, potential acceleration in credit, and expected rise in inflation, we do not believe the CBSL has scope for a further easing of the policy rates in 2H. Gradual recovery of the economy and rising inflation expectations is driving the treasury yields higher which ICRA Lanka believes will resist downward adjustment of retail lending rates in the medium-term. We feel, T-bills may potentially move up by another 10-20 bps in 2H. Therefore, we expect the AWPR to fluctuate in a relatively broader range between 5.50-to-6.50% for the rest of the year.
https://www.icralanka.com/wp-content/uploads/2021/08/1H-2021-economic-update.pdf