Economic Update

Published 16 Jul 2019

The Central Bank of Sri Lanka (CBSL) has sought to stimulate a rebound in the economy by cutting domestic interest rates, following a slowdown linked to the Easter terrorist attacks.

At its meeting on May 30, the CBSL’s Monetary Board cut its benchmark rate by 50 basis points, to 7.5%. It also cut the standard lending facility rate offered to commercial lenders by 50 basis points, to 8.5%.

The first since early 2015, this reduction of the benchmark rate is part of a proactive effort to stimulate economic activity by increasing credit to the private sector, which contracted during the first four months of this year.

The intervention is also intended to improve business sentiment following the April 21 bombings in the executive and judicial capital, Colombo, which claimed the lives of 258 people.

“The Easter Sunday attacks have affected the confidence and sentiment of economic agents, particularly disrupting tourism and related activities,” the CBSL wrote in a press release accompanying the rate cuts. “[A]lthough normalcy is gradually returning to economic activity, lower than initially projected growth could be anticipated during 2019.”

This assessment echoes that of Eran Wickramaratne, the state minister of finance, who in late May told international media that he expected growth of 3% this year, less than the predictions of 3.6% and 3.5% made in April by the Asian Development Bank and the IMF, respectively.

Wickramaratne’s estimate is also short of the 3.2% GDP expansion seen last year, which represented a 17-year low.

See also: The Report – Sri Lanka 2019

Tourism bears the brunt of the downturn

The scaling down of growth projections is largely based on an anticipated slowdown in tourism growth, which has become a pivotal part of the domestic economy in recent years.

Last year the sector was worth roughly $4.4bn and accounted for 4.9% of GDP. It was the fastest-growing sector and third-largest source of foreign exchange (forex) for the year, trailing only remittances and exports of textiles and garments. The Ministry of Finance hoped it would reach $5bn in revenue for 2019.

However, in late April Mangala Samaraweera, the minister of finance and mass media, announced that tourism could suffer losses of up to $1.5bn in forex earnings as a result of cancelled bookings.

In terms of visitor numbers, officials had also hoped to extend a recent upward trend in total annual arrivals, which grew from 1.8m to 2.3m between 2015 and 2018. In June 2017 John Amaratunga, minister of tourism development and Christian religious affairs, told local media that he expected to welcome 4.5m foreign visitors in 2020.

Data suggests the April attacks had an immediate effect on arrival numbers.

An average of 247,000 tourists visited Sri Lanka per month during the first quarter of 2019, according to the Sri Lanka Tourism Development Authority (SLTDA). That number fell by 32.4% to 167,000 in April.

The SLTDA has revised downwards its estimate for 2019 arrivals, to 2.5m. In response, hotels and other industry stakeholders have sought to encourage a rebound by offering discounted prices and special deals.

Travel agents have also recently expanded their marketing campaigns in China, which was Sri Lanka’s second-largest source market last year. In late June tourism officials took part in a promotion at the Beijing International Travel Expo, the country’s largest international tourism fair.

IMF funds and sovereign bonds help with debt payments

The CBSL’s efforts to spur growth via rate reductions were furthered by the decision of the IMF, announced in May, to release a $164.1m disbursement of the country’s $1.5bn loan facility, which was suspended late last year amid domestic political instability.

The funding, along with a one-year extension of the lending arrangement, should help to shore up the government’s finances as Sri Lanka makes $5.9bn in debt repayments this year.

The government is further working to bolster its fiscal position by tapping international capital markets for the second time this year.

In late May the government announced its intention to raise $1.5bn through sovereign bonds, following the sale of $1bn in five-year bonds and $1.4bn in 10-year bonds in March.