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DEFICIT MANAGEMENT HOLDS THE KEY
Shiran Fernando delineates what’s in retailer for yr 2024
Sri Lanka acquired IMF board approval for the second tranche of its Prolonged Fund Facility (EFF) in December. This can assist increase confidence amongst worldwide donors within the quick time period because it affirms that the as soon as bankrupt nation is on the trail to reformation.
Nonetheless, this path is difficult given the expectation of elections this yr, and impression that a few of the tax and price reflective tariff pricing measures are having on the general public.
As seen in previous programmes with the Worldwide Financial Fund nonetheless, the stabilisation element of the reform agenda is often carried out effectively however its continuance for lasting impression hardly ever eventuates.
It’s mandatory due to this fact, to assessment a few of the key areas of progress and exterior sector stability within the reform course of.
ECONOMIC GROWTH Following six quarters of financial contraction, the third quarter of 2023 (July-September) registered 1.6 p.c progress. Although unimpressive at a headline degree, this noticed the agriculture, business and companies sectors registering progress.
Regardless of considerations about drought situations within the latter half of the second and early third quarters, agricultural actions grew by three p.c. This was pushed by manufacturing within the rice and fisheries subcategories.
The companies sector noticed a modest 1.3 p.c progress within the third quarter of 2023, which was supported by an enchancment in tourism and its impression on associated sub-activities.
Business superior marginally (by 0.3%) however this was the primary signal of progress following steep contractions prior to now six quarters. This enchancment was as a result of manufacture of meals and beverages, whereas attire and development remained in detrimental territory.
Relative to the double digit contraction in construction over the previous couple of quarters, progress declined by 5.5 p.c, highlighting the truth that a discount in exercise could possibly be bottoming out. To help this, the Buying Managers’ Index (PMI) for the development business reached its impartial threshold of fifty in October – after 20 months of contraction.
It’s anticipated that the resumption of some government funded initiatives on a restricted scale will increase exercise in early 2024. Nonetheless, the slowdown in attire exports is anticipated to proceed with weak progress in key markets.
Expectations by most forecasters for Sri Lanka’s GDP progress in 2024 are below two p.c. This degree of progress will not be excellent and coverage makers want to focus on an acceleration of three p.c or extra, led by unlocking reforms that can stimulate the benefit of doing enterprise, nontraditional exports and investments.
A stronger yr for tourism – much like 2018 – can increase companies. A rise in development on the nationwide degree may have an natural elevate nevertheless it gained’t be again to the extent it was previous to 2020 given the shortage of fiscal area for presidency spending.
DEFICIT MANAGEMENT The nation managed its commerce deficit in 2022 as a result of wholesome progress of exports and by curbing imports. Final yr, the export momentum reversed with a 12 p.c contraction within the first 10 months, led by a fall in exports of apparels, rubber and so forth though agricultural exports remained impartial.
Because of this, a commerce deficit ensued – significantly in October, which widened to US$ 682 million. The present account in 2023 was supported by sturdy performances in tourism and remittances, which grew by 71 and 66 p.c respectively, albeit from a weak base.
If the value of oil stays under the 90-100 {dollars} a barrel vary this yr, Sri Lanka will be capable to mitigate the potential enhance in imports. Nonetheless, there may be uncertainty on account of a number of ongoing world conflicts.
A resumption of development actions may probably enhance funding in imports, which has eased in recent times owing to a slowdown in consumption. Managing the present account deficit would be the key to making sure foreign money stability as effectively.
REFORM MEASURES The current enhance in worth added tax (VAT) and removing of VAT associated exemptions will have an effect on consumption and inflation, and this enhance will probably be handed onto shoppers.
As such, reform measures associated to vitality and state-owned enterprises (SOE) are wanted to ship materials advantages to shoppers. For instance, vitality reforms associated to enhancements in forecasting and the addition of renewable vitality to the grid can probably result in decrease tariffs in 2024.
A formulaic method to gasoline and fuel can cross on advantages from world costs if the downward pattern for oil – particularly, within the latter a part of 2023 – continues.
Past this, bettering productiveness in SOEs and income administration, and some divestments within the first half of 2024, may assist help the income measures. It might additionally assist ease sure tax measures if larger income streams are garnered.
Implementing a few of the suggestions by the IMF on governance and corruption may even assist increase confidence that the reform momentum is underway… and right here to remain.
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