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OTG: Sri Lanka – Subdued Outlook for 2016

By Standard Chartered Bank

Summary

We believe Sri Lanka’s economy will need to re-balance in 2016, as macro vulnerabilities have increased on a widening twin deficit, high public debt and low FX reserves. The government will therefore need to increase its monetary defences by raising interest rates gradually in 2016, bolstering FX reserves and lowering the current account deficit. It will also need to sharply cut expenditure (mostly public investment) to rein in the fiscal deficit and rising public debt given that a sharp increase in revenue collection is unlikely. We expect this to have a negative impact on growth.

We therefore lower our GDP growth forecast for 2016 to 5.5% (from 6%) on an expected slowdown in private consumption due to monetary tightening, higher inflation and a slowdown in remittances. We forecast a fiscal deficit of 6% of GDP for 2016. We expect the Central Bank of Sri Lanka (CBSL) to raise policy rates by 50bps in 2016 (two hikes of 25bps each) as it gradually tightens monetary policy.

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