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Tuesday, January 31, 2023

Sri Lanka: Severe economic contraction looming

  • Stock broking firm CT CLSA forecasts shrinking of economy to be 9.3% in 2022 as against previous estimate of 8.7% 
  • Revision follows economy contracting by 11.8% in third quarter
  • Expects economy to contract by 2.1% in 2023

Stock broking firm CT CLSA Securities is forecasting a severe economic contraction in the fourth quarter and for the full year of 2022.

“Given the uncertainty in the nation‘s economic situation, we have revised the economic growth forecast to -9.3% YoY for 2022E (from -8.7% YoY previously) and -2.1% YoY for 2023E (from -3.1% previously),” CT CLSA said.

Its revision was following the 11.8% contraction of the economy in the third quarter.

In its World Economic Outlook (WEO) released in October the International Monetary Fund (IMF) estimated the Lankan economy to contract by 8.7% this year and by 3% next year.

The World Bank in its forecast estimated a contraction of 9.2% this year and 4.2% in 2023. In September, the Asian Development Bank (ADB) lowered Sri Lanka’s growth outlook to a negative 8.8% this year as opposed to a positive 2.4% estimated in April. ADB is also forecasting a 3.3% negative growth next year for Sri Lanka revising from a 2.5% positive growth previously estimated.

CT CLSA in its analysis said although relaxation in fuel quota and supply of fuel has been consistent in 4Q2022 compared to 3Q2022 it expects the economic activities to further contract given indicators such as PMI depicting highest contraction in index values for both Manufacturing and Services in the month of October 2022 at 38.4 and 47.9, respectively.

“Industrial activities are expected to be subdued for the rest of 2022 as the interest rates have remained broadly unchanged, coupled with demand constraints in consumption patterns. The Services sector is expected to slightly recover and the Agriculture sector is expected to contract YoY for 4Q2022 as well,” CT CLSA said.

It said with the current contraction in demand due to heightened inflationary pressures, the higher direct taxes to be effective from 2023 together with prevailing supply constraints in sourcing raw materials and woes in supply of electricity is expected to contract the economy in the 1H2023.

The completion of the Board Level Agreement with the IMF and other bilateral finances flowing into the country is expected to boost the economy in 2H2022E and we expect a slight recovery in GDP due to low base effect as well, CT CLSA added.

It recalled that the economy contracted by -11.8% YoY in 3Q2022 primarily due to energy and other supply side constraints.

The Department of Census and Statistics announced that Sri Lanka’s estimated Gross Domestic Product (GDP) recorded a contraction of -11.3% YoY in 3Q2022 (vs. -5.8% YoY in 3Q2021), driven curtailed industrial activity due to high input costs and energy costs together with contraction in demand.

The agriculture sector (7.5% of total GDP) declined -8.7% YoY in 3Q2022 (vs. a rise of +1.7% YoY in 3Q2021). The Industry Sector (28.3% of total GDP) recorded a contraction of -21.2% YoY in 3Q2022 (vs. a fall of +2.1% YoY in 3Q2021). The Services sector (62.3% of total GDP) contracted by -2.6% YoY in 3Q2022 (vs. fall of -1.6% YoY in 3Q2021).

FT

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