There are positive signs for the Sri Lankan economy as the fourth quarter of 2023 (4Q2023) witnessed a shift towards growth. A report by CT CLSA SECURITIES (PVT) LTD revealed a Gross Domestic Product (GDP) increase of 4.5% YoY (Year-over-Year) in 4Q2023, a significant improvement compared to the sharp contraction of -12.4% experienced in the same period of 2022. This growth, exceeding initial expectations, suggests the economy is transitioning from a period of decline to a phase of expansion.
This positive trend is attributed to a simultaneous expansion across all three major economic sectors: agriculture, industry, and services. The most notable growth occurred in the industrial sector, likely fueled by the easing of interest rates following a period of high inflation. This easing of interest rates, coupled with inflation dipping into single digits, helped mitigate the contraction witnessed throughout 2023. While the overall GDP for 2023 still reflects a contraction of -2.3%, this is a considerable improvement compared to the -7.8% contraction observed in 2022.
The report also highlights the challenges faced by the industrial sector, particularly in mining and quarrying, textile and apparel manufacturing, and construction activities, which all experienced contractions during the period. However, with the Central Bank of Sri Lanka (CBSL) implementing cautious policy rate cuts to stimulate growth, CT CLSA SECURITIES (PVT) LTD has revised their GDP forecast upwards to an expansion of 1.9% YoY for 2024, compared to their previous prediction of 1.7%.
This revised forecast is supported by several factors. Firstly, low single-digit inflation levels are expected to stabilize consumer disposable income in the near future. This will be further bolstered by a reduction in electricity tariffs and anticipated salary increases in both the public and private sectors leading up to the New Year season.
Furthermore, the Purchasing Managers’ Index (PMI) has shown promising growth in industrial and service activities in recent months, primarily driven by seasonal demand. This indicates that the Sri Lankan economy is likely to experience continued growth in the first quarter of 2024 (1Q2024E).
Looking ahead, the report suggests that an increase in private consumption due to lower interest rates might be offset by a VAT hike, potentially keeping disposable income levels in check. Nevertheless, a recovery in tourism and manufacturing activities, fueled by growth in both industries, is anticipated to contribute to an overall expansion of economic activities by the end of 2024.