Economic Update

22 Feb, 2017

Greater consumer confidence could bring about higher returns from Sri Lanka’s retail sector, though the possibility of a further tightening of monetary policy by the country’s central bank might offset any near-term gains.

Sri Lankans have an improved view of market conditions, according to the latest MasterCard consumer confidence index released in mid-January, with a 2.1-point increase in sentiment levels from the previous year, taking the country’s score on the index to 40.1.

This moves Sri Lanka from having a pessimistic outlook to a neutral one, and, while still well short of a positive score of 60, suggests a greater willingness to spend.

The result of the latest survey marks a modest turnaround from the previous MasterCard report issued in August, which recorded a 4.2-point fall in sentiment.

This was on the back of a 25.2-point drop in the February 2016 report, in which MasterCard suggested that consumer confidence had fallen in part due to uncertainty about the local currency and its impact on buying power.

Across 2016 the rupee fell 3.9%, after a far sharper decline of 10% the previous year. With the currency deprecating by another 1.6% since the start of this year, further retreats could feed into inflationary costs and potentially weaken demand for imported goods.

Growing retail activity

The incremental improvement in consumer sentiment was also reflected in the steady if unspectacular increase in retail and wholesale activity in the third quarter of 2016, the latest period for which data has been released by the Department of Census and Statistics.

Retail and wholesale trade posted a 4.6% increase year-on-year (y-o-y) in the third quarter. While this was in line with the 4.7% expansion of the wider services sector, it was above the 4.1% y-o-y rise recorded by the broader economy.

Expanding reach

Another factor supporting growth in the industry is the expansion of retail outlets into areas away from main population centres, with opportunities for further development as disposable incomes rise, according to Ashok Pathirage, chairman and managing director of retailer and mixed operations company Softlogic.

“The rest of the country also holds substantial growth potential, as the private sector is now focused on geographical expansion,” he told OBG. “Indeed, the rise of mixed-use developments – an integration of commercial, residential, recreational and institutional space – is on an upward trend in regional markets.”

This could see more investments in quality retail spaces across secondary urban centres in Sri Lanka over the next few years, which in turn should open up new markets to retailers.

Downside risks, upside gains

While retail activity is gaining some traction, a possible further tightening of fiscal policy could rein in growth in consumer spending. Though the central bank kept its benchmark interest rates steady at its February monetary policy committee meeting, the bank may come under pressure to raise rates late in the first quarter or early in the second due to upward movements in inflation.

Core inflation climbed to 5.5% in January from 4.5% the month before and in the upper range of the central bank’s targeted bracket of 4-6% for 2017.

Offsetting the risks of unwanted inflation and higher interest rates are the forecasts of solid growth this year, with both the IMF and the central bank maintaining a positive outlook.

Though the IMF marginally cut its projection for growth in December, the 4.8% expansion it forecasts is well above the global average, while the reserve bank’s 5-5.6% growth outlook is even more bullish. Even at the lower end of the scale, such growth, if achieved, would feed into disposable incomes and subsequently the retail chain.