Sri Lanka’s economic growth rate fell to 3.1 percent last year, from 4.4 percent in 2016, the worst result in 16 years. This slide points to serious economic problems facing the government, amid a worsening debt burden.
The Statistics Department said the services sector, which contributes close to 56 percent of output, grew last year only by 3.2 percent, a significant drop from the previous year’s 4.7 percent result.
The agricultural sector, which accounts for close to 8 percent of the economy, declined by 0.8 percent, mainly due to weather calamities. The industrial sector, which makes up around 27 percent of the economy, grew by only 3.9 percent, a marked fall from the previous year’s 5.8 percent.
The growth statistics appeared on the department’s web site on March 15 but were withdrawn the next day. The department’s head said it received the data “at the last minute” and wanted “full data calculations.”
The Sri Lankan stock exchange last week reported its lowest share prices in more than eight weeks. “The market is moving sideways as investors are on the sidelines due to concerns over lower growth,” First Capital Holdings PLC senior research analyst Atchuthan Srirangan said.
In January, Central Bank Governor Indrajit Coomaraswamy predicted a lower economic growth rate for 2017. Together with floods and droughts, he blamed “the tight monetary stance of the Central Bank as well as the relatively tight fiscal policy stance of the government,” which “partly affected public and private investment spending.”
These Central Bank and government policies are the direct result of the International Monetary Fund’s (IMF) austerity program. In return for bailout loans, the IMF insisted that the fiscal deficit be cut to 3.5 percent of the gross domestic product (GDP) by 2020, half the 2014 deficit.
The latest IMF staff report on Sri Lanka highlights its vulnerability “given the still sizable public debt and low external buffers.” For “sustained growth, the reform momentum needs to continue,” it insisted.
The debt service payment for this year is $US2.9 billion, rising to $4.2 billion in 2019 and continuing at $3.6 billion for each year from 2020 to 2022, according to the Central Bank.
There is much media debate about how the government will save money this year to pay next year’s massive $4.2 billion bill. A Sunday Times economics columnist declared on March 25: “It is vital for the country’s balance of payments to achieve a higher surplus than last year’s $2 billion to reduce foreign borrowing for debt repayment.”
The article noted that international tensions and the slowdown in the Middle East were reducing remittances from Sri Lankans working overseas, which covered around 70 percent of the trade deficit.
On 23 March, Parliament passed the government’s “active liability management bill” to allow it to take out more loans overseas to “improve public debt management.” However, this means the government could exceed the borrowing limit approved by the budget bill for specific purposes like debt servicing.
The declining conditions have intensified public anger. As a result, the ruling coalition of President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe suffered heavy defeats in the local government elections on February 10. In the ruling class there are ongoing concerns over the government’s fragility as Sirisena and Wickremesinghe blame each other for the election debacle.
It is possible that the government will pursue “populist measures” to pacify people but that will undercut the austerity programme.