Apr 28, 2020 (LBO) – Sri Lankan economy recorded a subdued growth of 2.3 percent in 2019, compared to the growth of 3.3 percent in 2018, as per the provisional estimates of GDP of the Department of Census and Statistics (DCS).
All major sectors of the economy recorded positive, but modest growth rates, releasing its Annual Report for 2019, the Central Bank said.
According to GDP estimates based on the expenditure approach, growth in 2019 was driven by consumption growth and the improvement in the external balance of goods and services.
Reflecting subdued economic activity, the unemployment rate increased to 4.8 percent in 2019 from 4.4 percent in 2018.
Male and female unemployment rates rose to 3.3 percent and 7.4 percent, respectively, during 2019, from 3.0 percent and 7.1 percent, respectively, in the previous year.
Despite transient supply-side disturbances, both headline and core inflation moved broadly in the desired range of 4-6 percent during 2019, mainly as a result of subdued demand conditions and well-anchored inflation expectations.
External Sector Developments
Policies to curtail import expenditure resulted in a notable improvement in the trade and current account balances. Gross official reserves improved by end 2019, supported by significant inflows to the government and the Central Bank, despite large foreign currency debt service payments by the government in 2019. The exchange rate remained broadly stable during 2019, supported by a significant improvement in the current account, despite some transient volatility experienced amidst outflows of portfolio investment, responding to domestic and global developments.
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Fiscal Sector Developments
The process of fiscal consolidation faced significant challenges in 2019, amidst the notable decline in government revenue and the rise in government expenditure.
Central government debt as a percentage of GDP rose to 86.8 per cent by end 2019 from 83.7 per cent at end 2018, reflecting the impact of higher net borrowings to finance the budget deficit and the relatively modest growth in nominal GDP in 2019.
Monetary Sector Developments
In an environment of muted demand driven inflation pressures and well anchored inflation expectations, the Central Bank adopted an accommodative monetary policy stance in 2019 to support the revival of economic activity and address the sluggish growth in credit extended to the private sector.
Broad money growth (M2b) continued to decelerate during 2019, with the moderation of the growth of net domestic assets (NDA) of the banking system. Growth of credit to the private sector recorded a sharp deceleration in 2019 amidst high market interest rates, policy uncertainty, dented business confidence especially after the Easter Sunday attacks, and subdued economic activity during the year, although a recovery was observed in absolute credit disbursements towards the end of the year supported by the measures taken by the Central Bank to ease the monetary conditions.
Financial Sector Developments
Performance of the financial sector moderated in terms of assets base, credit quality and profitability of financial institutions due to the challenging business environment created by subdued economic growth, policy uncertainty, and the deterioration of investor sentiments stemming from the Easter Sunday attacks. The banking sector, which dominates the financial sector, displayed a moderate expansion during the year, compared to the previous year, reflecting the impact of the low demand for credit and tightened credit screening in an environment of deteriorating credit quality. The performance of Licensed Finance Companies and Specialised Leasing Companies deteriorated, owing to unfavourable market conditions and sector weaknesses. Meanwhile, the Financial Action Task Force (FATF) delisted Sri Lanka from its Grey List in October 2019, recognising the significant progress made by Sri Lanka in improving its Anti Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regime.