By:Isuru ParakramaColombo (LNW): With borrowing costs easing, inflation cooling and foreign exchange inflows coming again into play, the Central Bank expects the economy to recover faster than expected in the second half of the year, potentially revising the mild recessionary projections made earlier.
While the Central Bank forecasts the economy to contract by 2.0 percent in 2023 as the second half growth is offsetting much of the contraction seen in the first half, multilateral lenders including the International Monetary Fund (IMF), project contractions by between 3.0 to 4.0 percent for the year.
Sri Lankan economy contracted by a sharp 11.5 percent in the first quarter and the expectation was it to have contracted modestly in the second quarter, wrapping up what was the worst and deepest recession the country was ever to have gone through since its independence.
But now all eyes are on recovery prospects although much more needs to be done to restore and uplift the economic wellbeing of the people which hit rock bottom levels last year.
“Based on the information we have, we think we can have a higher than anticipated growth in the second half. But it is still premature to estimate what that would be. We think we would be able to revisit our growth projection after the second quarter output is out,” Central Bank Governor Dr. Nandalal Weerasinghe said.
Sri Lanka’s economy is getting a breather as the foreign currency inflows which fizzled out are now starting to flow back despite some temporary weakness in the export proceeds due to the softening global demand.
Also, the global commodities prices have moderated due to both supply and demand conditions coming into parity after a sharp imbalance seen during the pandemic and at the beginning of the Russia-Ukraine war. As a result the inflation is softening globally.
The foreign debt standstill and the weaker domestic consumption are also helping the authorities to regain some policy space. This helped authorities to change tack and ease policies to cut borrowing cost and take more imports into the country which will directly help to stimulate production and consumption starting from the second half.
To this end, the Central Bank has already cut policy rates by as much as 450 basis points within five weeks to ensure credit flows into the real economy and is dialing back much of the policy tightening that was done since the second quarter last year.