- IMF programme could help with debt repayment
As per a report published on Sri Lanka by HSBC Global Research, the expected GDP growth of Sri Lanka in 2021 will be 3.5% due to the effect of recurring waves of Covid-19.
According to the HSBC Sri Lanka report, initially, 2021 started on a strong note, with 1Q21 growing smartly, aided by a favourable base and pent-up demand following the second wave of the pandemic in 4Q20. However, the recovery momentum was dampened by the onset of the third wave of Covid-19 in April, and consequently the June quarter plunged back into the red due to said wave.
The Purchasing Managers Index (PMI) plummeted, the sequential growth in IP contracted, and electricity demand and port activity weakened.
As the wave peaked, activity began to look up as the PMIs came out of contraction in June and other indicators stabilised.
However, this brief improvement didn’t last for long, as Sri Lanka found itself battling against a more infectious fourth wave of the coronavirus. The nationwide quarantine curfew imposed on 20 August is likely to have had a growth cost, which is expected to show up in the September quarter results.
However, unlike the 2020 nationwide lockdown when only essential activities were permitted, the garment, construction, and export industries were permitted to function and therefore, economic cost is expected to be comparatively less.
HSBC Global Research predicts that for the rest of 2021, while the global recovery will likely keep exports strong, an incremental growth impulse from tourism is unlikely to materialise due to the risk of Covid-19.
While tourist arrivals had picked up by August, reaching 5,000 from around 1,500 in May, this still represents less than 5% of Sri Lanka’s average monthly tourist arrivals in normal times which stands at 180,000.
According to HSBC, the GDP contribution of the tourism industry, which fell to 0.8% in 2020 from 5.0% in 2018, is forecasted to fall further in 2021 to 0.1%.
Moreover, the outlook for Sri Lanka’s tourism industry now seems to be a function of three things: (a) How quickly Sri Lanka is able to inoculate a critical mass of its population – there has been some good news on this front; (b) How quickly Sri Lanka is able to control Covid-19 and the recurring pandemic waves?; and (c) The degree to which demand for overseas travel recovers internationally.
According to HSBC Global Research, Sri Lanka’s external profile is particularly concerning. Sri Lanka’s economy is valued at $ 80 billion but has $ 47 billion in external debt, of which 60% is owned by the Government.
Moreover, Sri Lanka has traditionally run a high fiscal deficit, which reached around 11% of the GDP in 2020, and considering the effect of the recurring waves of Covid-19, HSBC forecasts that the fiscal deficit will be equally high in 2021.
Public debt is a concern for Sri Lanka, reaching 108% of the GDP in 2020. However, in recent years, the Government has reduced its reliance on foreign sources of funding and consequently, foreign debt accounted for only 40% of the public debt in 2020.
Regardless of this development, Sri Lanka still owes over $ 4 billion in foreign debt per year over the next five years. The Government is making ad hoc arrangements such as bilateral swaps and small ticket loans to service the said foreign debt.
However, according to HSBC Global Research, there is an urgent need for a long-term solution to rollover debt at a reasonable cost. Unless that happens, the country’s external sector outlook will likely be clouded by debt repayment concerns and uncertainties every year. The lack of clarity on the debt sustainability front may keep both foreign and domestic investors at bay, delaying much needed FDI and domestic investment to kick start growth in the economy. Further, in terms of external debt payment, HSBC stated that an IMF programme could help Sri Lanka.