Presenting an economic overview for May 2023 from a macroeconomic and global perspective.

Macroeconomic Overview 

• Tourism earnings in the first four months of 2023 recorded USD 696.3 Mn, reflecting a 17.8% increase compared to the corresponding period in 2022.
  
  
• Efforts to boost the tourism industry are currently underway with Sri Lanka Tourism holding three road shows in China recently

Economic prospects

According to the Central Bank of Sri Lanka (CBSL) “ill-timed tax reductions, an ill-equipped attempt to swiftly adopt organic agriculture, the depletion of the country’s official reserves amidst futile attempts to maintain an untarnished debt servicing record, the delay in the exchange rate adjustment, and the failure to pay heed to several early warning signals caused tremendous shockwaves across the economy”.  Thus, a battered economy had to be repaired. Accordingly, interest rates were increased to tame inflation. Import controls were introduced to arrest the decline of the rupee. Taxes have been raised to increase government revenue, as part of a revenue driven fiscal consolidation program. 

In the first quarter of 2023 exports had recorded a decline of 8% compared to the corresponding quarter of 2022. However, imports recorded a faster decline of 31.7% (YoY) in 1Q, 2023.  These developments led to a 64.1% (YoY) reduction in the deficit of the trade balance in 1Q, 2023.

During the first quarter of 2023 apparel exports to the US fell by 22 % YoY to record USD 470 Mn while apparel exports to the EU declined by 13% YoY to record USD 344 Mn. Apparel exports to the UK fell by 10% YoY to record USD 167.7 Mn. Overall, apparel exports recorded a 13.8% decline in 1Q, 2023 compared to 1Q, 2022.

Sri Lanka’s worker remittances recorded a high growth rate of 81% (YoY) in the first four months of 2023. Worker remittances for the first four months of 2023 amounted to USD 1,867.2 Mn.

Worker remittances

Apart from remittances, tourism is another bright spot in the Sri Lankan economy. However, due to the pandemic Sri Lanka’s loss of tourism earnings amounted to over USD 10 Bn during the past two years. Tourism generated earnings of USD 4.38 Bn in 2018.

Tourism earnings in the first four months of 2023 recorded USD 696.3 Mn, reflecting a 17.8% increase compared to the corresponding period in 2022. Despite being hit by multiple crises beginning with the Easter Sunday attacks in 2019, the tourism industry has displayed remarkable resilience to come up with a commendable performance in the first four months of 2023. 

The rise in Chinese travellers will benefit the tourism industry in terms of both arrival numbers and tourism earnings. The latest IMF Economic Outlook on Asia and the Pacific has also noted that countries dependent on Chinese tourists will prosper, as the country will lead the economic expansion in the region with a 5.2% growth rate forecasted for 2023.

Efforts to boost the tourism industry are currently underway with Sri Lanka Tourism holding three road shows in China recently in order to encourage more Chinese tourists to visit the country.

The three road shows were held in Beijing (17th April), Guangzhou (19th April) and Shanghai (21st April) respectively.  

S&P expects the Sri Lankan economy to contract by about 1.8% in 2023, compared with a 7.8% contraction in 2022, as activity gradually stabilizes. It also forecasted GDP to return to expansion in 2024, at a growth rate of 1.5%. 

The Central Bank of Sri Lanka forecasts that the economy will shrink by 2% in 2023, but expand by 3.3% in 2024. This prediction is more optimistic than IMF’s forecast of a contraction in 2023 of around 3% and growth of 1.5% in 2024. 

The government’s EFF arrangement with the IMF entails major policy reforms over the next three to four years. If implemented, these reforms would help to boost Sri Lanka’s growth potential.

Interest rates and exchange rate

Sri Lanka’s treasury bill yields rose across all three maturities during the latest auction held on 24 May 2023. Yield of 91 day t-bill increased to 25.66% from 25.47% a week ago (+19 bps). The 182 day t-bill yield increased to 25.30% from 25.22% a week ago (+8 bps).  The 364 t-bill yield increased to 22.97% from 22.79% a week ago (+18 bps).

The total amount offered at the auction was Rs 160bn and the same was accepted.

CBSL purchased USD 147.75 on a net basis from commercial banks during April 2023.

The Central Bank middle rate recorded Rs.304.6 per US dollar on 24 May 2023.

Battling poverty

According to the World Bank, the percentage of the population living in extreme poverty (International poverty rate), in Sri Lanka, is estimated to have risen to 5.8% in 2022 from 1.5% in 2021 and is expected to further rise to 6.6% in 2023. Further, around 37% of households were facing acute food insecurity as of November, 2022.

An effective safety net is a priority initiative in the IMF program, which can protect the most vulnerable groups in the society amid the unprecedented economic crisis.

Accordingly, the Cabinet has granted approval to borrow USD 200 Mn from the World Bank (WB) under the proposed social security project, which aims to establish a sustainable social protection system with a mechanism in place to provide direct cash transfers to most vulnerable and poor communities.

Global Outlook

• The International Monetary Fund raised its growth forecast for Asia-Pacific (4.6%), saying the region’s growth will be primarily driven by China’s recovery and “resilient” growth in India. This comes as the rest of the world braces for slower growth from tightened monetary policy and Russia’s invasion of Ukraine.
  
  
• The Federal Reserve raised interest rates by a quarter point (0.25%) on 03May, the tenth rate hike since the central bank started its battle against inflation last March. The Federal Reserve’s interest-rate increases have helped consumer-price growth to slow since its peak in June (Annual inflation dropped to 4.9% in April 2023). Markets are betting that the Fed will soon pause the run of rate rises, though the labour market is still running hot. Employers created 253,000 jobs in April 2023, well above estimates.
  
  
• The Bank of England raised its benchmark interest rate for the twelfth consecutive time on 11 May, lifting it by 0.25% to 4.5%, its highest level since 2008. Annual inflation in Britain has remained stubbornly high, well above inflation in America and the euro area. The bank said that further rate rises were on the cards, if inflationary pressures persist.
  
  
• European Central Bank too increased its policy rates by a further 0.25% on 04 May to 3.75%.
  
  
• The Reserve Bank of Australia surprised markets when it raised its rate by 0.25%, to 3.85%. The bank had left the rate on hold in April, suggesting that a rapid run of increases was over.
  
  
• The price of natural gas in Europe fell to its lowest level since July 2021. Alternatives to Russian energy and a mild winter that has left gas stocks in good shape were factors in the benchmark Dutch ttf contract (Dutch ttf is a virtual trading hub for gas in the Netherlands and is the primary gas pricing hub for the European gas market) falling to just over Euro 35 (USD 38) a megawatt hour (mwh). Last August the price peaked at more than Euro 300 a mwh as Russia squeezed its supplies.

Dr. Shanthikumar Fernando | Research & Development Unit | shanthikumar_fernando@combank.net

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