Sri Lanka’s economy is expected to grow below 3 percent in 2019 after the Easter Sunday attacks dampened growth prospects, the research arm of First Capital, an investment house, said.
“The Easter Sunday attack is expected to have a detrimental impact on the economy possibly further slowing down the sluggish economy,” FC Research said.
“We expect the recovery would require at least a one year period, forcing a downward revision to our 2019 GDP growth projection to below 3.0 percent from the previous 4.3 percent,” it said.
Even before the bombings, the economy showed signs of further slowdown, due to an extended period of liquidity shortages, and falling private credit, with banks witnessing higher bad loans.
“Falling below the CBSL credit growth projection of 13.5 percent, private sector credit growth decelerated at an alarming rate to record a year-to-date growth of 0.5 percent during the first quarter leading to a contraction in financial sector asset base,” FC Research said.
In the December quarter, growth had been 1.8 percent, as a political crisis and liquidity shortages, especially in the construction sector, suppressed growth.
FC Research said that the central bank is almost certain to cut policy rates to spur growth.
Sri Lanka’s central bank is at the moment keeping overnight rates up using term repo deals to withdraw cash instead of outright sales of bills.
“First Capital Research allocates a 95 percent probability for a policy rate cut in May 2019 as we are of the view that policy intervention is inevitable to revive the overly sluggish economy and credit growth,” the firm said.
FC Research said that a 50 basis point cut is most likely (60 percent likelihood), followed by a 75 basis point cut, whereas a 25 or 100 basis point cut are less likely.
The last statement from the monetary board in April had said that there was a possibility of a rate cut in May, while Central Bank Governor Indrajit Coomaraswamy, in two seperate occasions over the past 10 days, has said a rate cut was on the cards.
FC Research said economic stability had improved with the International Monetary Fund balance of payment support program being extended till June 2020, and foreign reserves remaining above 7 billion US dollars despite outflows in April. (Colombo/May28/2019)