Sri Lanka needs near term moderate growth for stability: IMF output gap study

Mar 12, 2014 (LBO) – Sri Lanka has a potential gross domestic product growth of about 6.75 percent a year after the end of a civil war and near term moderate growth may help keep the economy stable, an International Monetary Fund Study has suggested. Proponents of the so-called ‘output gap’ believe that an economy has an inherent potential growth rate and if the actual growth rate is higher (a positive output gap or demand outpacing supply) it leads to inflation.

In a pegged exchange rate regime it can lead to a balance of payments crisis.

Spending Gap

A negative output gap on the other hand will lead to price stability or even deflation if the gap is very wide giving an opening to print money or to ratchet up spending by rulers.

Estimating Sri Lanka’s Potential Output a working paper by Ding Ding, John Nelmes, Roshan Perera and Volodymyr Tulin used multiple methods to calculate Sri Lanka’s potential output after the end of a civil war in 2009.

Looking at inflation, GDP growth and unemployment in Sri Lanka from 1997 to 2013 the authors said growth averaged about 6.25 percent. Prior to the global financial crisis in 2008 growth averaged 5.75 percent.

But after the end of a 30-year civil war in 2009, gr