Macro economic outlook 2008
Despite hopes that inflation would reduce from the elevated levels it had hit in the previous year, it accelerated further. However, though headline economic growth slowed, it still remained at a relatively high level and for the first time growth exceeded 6per cent for three consecutive years.
Apart from the usual concerns with regard to the war, poor infrastructure and timely implementation of appropriate macro and sector policies, in the year ahead, the Sri Lankan economy will also have to face the impact of a global slowdown and recession in the US. Globally increasing food and commodity prices are also likely to affect Sri Lanka's economic prospects though agricultural exports benefit from the trend of higher commodity prices.
Though the Balance of Payments was positive for the third successive year, the current account deficit was only bridged through an increased reliance on commercial and short term borrowing. Both rating agencies have highlighted risks of this dependence in recent negative outlooks on the economy. Therefore in the coming years there is an increasing risk on the stability of the balance of payments should the flows of commercial capital reverse or slow down sharply.
The economic growth forecast for 2008 at 6.4 per cent by the IMF and 6 per cent by the ADB are lower than that achieved in 2007 while the CBSL forecasts a 7per cent growth for 2008. However, agency forecasts do see a moderation in inflation pressures with the CCPI annual average reducing to 11 per cent as per the IMF and
16.2 per cent as per the ADB.
Year that Was
The GDP growth slowed to 6.8 per cent in 2007, a drop from the previous year's 7.7 per cent. Growth in all three sectors declined, with services, the largest component of the economy, growing by 7.1 per cent compared to 7.7 per cent last year. This growth was led by posts & telecommunications, cargo handling, transport and financial services segments. The hotels and restaurants segment contracted chiefly due to the country's security situation and the slowdown in import and domestic trade activities.
The industrial sector grew by 7.6 per cent compared to 8.1 per cent last year with the factory industry sector growing by 6.7 per cent. Construction, export manufacturing, and mining & quarrying activities also performed well in this sector. Growth in the Agriculture sector fell to 3.3 per cent from 6.3 per cent last year. The sharp drop was primarily on account of 2006 growth been boosted by the post tsunami rebound of fisheries. A drop in production in tea, paddy and tobacco also negatively affected the agricultural sector.
The annual unemployment rate fell further to 6.0 per cent, the lowest reported unemployment rate, whilst the per capita income rose to US dollars 1,617. Gross National Product grew by 7.1 per cent yoy in 2007.
Over the year, there was a slowdown in real domestic aggregate demand, with growth in consumption and investment demand in real terms reducing to 4.9 per cent and 8.7 per cent in 2007 from 7.1 per cent and 13.4 per cent respectively in 2006. However the export of goods and services increased by 6.8 per cent in real terms compared to 3.8 per cent in 2006
The New Colombo Consumers' Price Index (CCPI(N)) continued its climb, with an annual average increase of 15.8 and a point to point percentage change of 18.8 per cent in 2007, compared to 10 per cent in 2006. By March 2008 the yoy growth had reached 23.8 per cent while on the old CCPI the yoy increase was 28.1per cent. The government attributed the soaring inflation to the result of global fuel and food price increases, while some outside agencies placed government borrowing from the banking system in the middle of the year as a possible factor. Interest rates in all markets increased in line with a tightening of monetary policy. Call money rates fluctuated widely ranging from a low of 12.36 per cent to a high of 42.25 per cent during 2007.
Export earnings in 2007 increased by 12.5per cent to USD 7.74 billion. Agricultural and industrial exports grew by 16.6 per cent and 10.0 per cent respectively over the previous year. Industrial exports continued to be dominated by textiles & garments, but stronger growth in other industrial exports led to continuation of the recent trend of falling reliance on garment exports. Other categories of industrial exports that grew within the year were food, beverages & tobacco, rubber products, diamonds & jewellery and machinery & equipment. Tea export earnings surpassed USD 1 billion in 2007.
Imports increased by 10.2 per cent to USD 11.3 billion, mainly on account of import of investments goods, petroleum, textiles, clothing and chemicals. Petroleum contributed to 40 per cent of the growth in imports over the previous year. However, exports outgrew imports and this helped limit the expansion of the trade deficit.
Despite the widened current account deficit, the balance of payments recorded a surplus of USD 531 million largely due to the sovereign bond issue of USD 500 million. The gross official reserves excluding ACU receipts rose to USD 3.06 billion . About 70 per cent of the trade deficit was financed by continued strong worker remittances. This combined with the increase in services account surplus helped contain the current account deficit. Gross FDI inflows rose to USD 734 million.
Tourist arrivals during 2007 fell significantly by 11.7 per cent to 494,008 from 559,603 in 2006. The ongoing security situation and unfavourable travel advisories from the main tourism generating countries led to the poor performance in this sector. Though gross tourist receipts remained flat when compared against 2006, earnings from tourism fell to USD 385 million in 2007. Of the tourists, 67 per cent came for holiday purposes followed by 11per cent for business purposes.
The All Share Price Index (ASPI) declined by 6.7 per cent yoy to 2,541.0 points from 2,722.4 points in 2006, whilst the Milanka Price Index (MPI) fell by 11.3 per cent yoy to 3,292 points. During the first three months of 2008, despite global markets falling sharply, the ASPI ended the quarter slightly higher at 2,550 though the MPI lost ground to end at 3,181.
