The International Monetary Fund (IMF) yesterday predicted “broadly stable” growth for Sri Lanka in the next two years with improvement in GDP pinned at a 6% range.
Releasing the Asia Pacific Region’s Economic Outlook, the IMF projects Lankan economy to grow by 6.3% this year and 6.7% in 2014. The growth forecast for this year is 0.5 lower than that was predicted in IMF’s October 2012 World Economic Outlook. For 2014, it is 0.3 higher than the October 2012 assessment. The estimate of 6.3% for 2013 is far below Central Bank’s forecast of 7.5%.
“In Sri Lanka, growth is expected to remain broadly stable, as continued macroeconomic stabilisation should restrain domestic demand, while export growth is projected to remain tepid,” the IMF said. Latest forecast also puts Sri Lanka’s growth above the average of South Asia, the GDP of which is estimated to grow by 5.7% in 2013 and 6.3% next year.
Noting that 2012’s growth was 6.4%, the IMF said in Sri Lanka, tighter policies in early 2012 to rein in credit and import growth contributed to slowing activity last year.
Commenting on South Asia, IMF’s Asia Pacific Economic Outlook said notwithstanding a modest growth recovery in India on a more favourable external demand environment, deep-rooted structural challenges are expected to exert a substantial drag on potential growth while keeping inflation at elevated levels by regional standards.
In its report titled ‘Shifting risks, new foundations for growth’, the IMF also said growth in ASEAN economies is expected to remain robust, mainly on account of resilient domestic demand.
The IMF said Asian countries have resorted to a broad range of macro-prudential measures, but in recent years most of them have focused on stability risks arising from overheating property markets.
In particular, LTV caps for mortgage loans and debt-to-income limits have been used (China, Hong SAR, Singapore), often together with other real estate lending restrictions and real estate taxes.
To address broader-based banking system risks, several economies have also imposed capital measures (Australia), tightened provisioning rules (India) and varied reserve requirements (China, India, Sri Lanka).
A number of Asian economies have also resorted to capital flow management when they were faced with macroeconomic and financial stability risks in the face of surging capital inflows. Such measures, which have often overlapped with macro-prudential measures, have focused on limiting external borrowing by the corporate and banking sectors through restrictions on derivative positions (Korea) or interest rate caps (India).
Other capital flow management policies have sought to reduce volatility by shifting the composition away from short-term flows, including by setting minimum holding periods for securities (e.g. central bank bills in the case of Indonesia since mid-2010) or discouraging inflows through withholding taxes on foreign holdings of government securities (Thailand and Korea, where they apply equally to residents). In some instances, measures were also taken to ease certain existing restrictions on outflows (China, Malaysia).
The IMF also said building on the progress achieved over the past decade, fiscal policy can play a key role in laying the foundations for sustainable and inclusive growth in Asia.
In many economies, public investment could help more to fill the considerable infrastructure gaps, especially in Indonesia, Nepal, the Philippines and Sri Lanka. At the same time, fiscal risks stem from investment spending conducted outside of the general government budget and from public-private partnerships in some economies; countering those risks requires that public spending management and fiscal transparency be enhanced, in particular, by fully reporting all forms of investment expenditure in the general government accounts.
In most of Asia, public spending on education and health – typically about four percentage points of GDP lower than in peers in other regions and not offset by higher private spending – could be scaled up to enhance human capital and living conditions.
Expenditures could also be better targeted to the poor, emphasised the IMF. Distortive food and energy subsidies, which impose a direct fiscal cost of more than 2% of GDP per year in China, Indonesia, Korea, Malaysia and South Asia, could be gradually phased out and replaced by targeted programs such as direct cash transfers.
Further space for social spending and continued countercyclical fiscal policies could also be created by reducing complex and poorly targeted tax incentives. In a number of Asian economies, revenue administration could be enhanced by boosting the capacity of revenue agencies and strengthening their powers in accessing information and conducting audits.
Some economies could also consider making their current revenue structure more growth-friendly by expanding the use of general consumption taxes and property taxes and reducing their reliance on corporate income taxation.
The IMF report also noted that by contrast, government investment has been relatively low in 2011–12 in Indonesia, the Philippines and Sri Lanka despite significant infrastructure shortages.
Commenting on the impact of higher oil prices, the IMF said according to some estimates, a $ 0.25 per litre rise in fuel prices could reduce household real income by about 4% in Bangladesh and 3% in Sri Lanka quoting an assessment by Arze del Granado, Coady, and Grillingham, 2012.
source - www.ft.lk
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