ICRA Lanka expects the economic growth of Sri Lanka to be around 3.6% in 2021 and hover around 4% for the next four years thereafter.
“In addition, our estimates indicate industry, services, and agricultural sectors to have contracted by 7.3%, 1.7% and 1.3% respectively.” According to ICRA Lanka Economy Highlights – February -2020.
Economies of most of Sri Lanka’s key trading partners will not return to the pre-crisis level in 2021. Therefore, ICRA Lanka does not expect the export sector to normalize in 2021.
As per ICRA Lanka’s estimates, the total revenue and grants of the government have plummeted by nearly 28% in 2020, while total expenditure records a marginal increase. As a result, the fiscal deficit may have widened by over 63%. In this context, ICRA Lanka expects the total public debt to have reached 97.4% in 2020.
“Unlike exports, imports are clipped by the import restrictions. Therefore, imports are expected to be more or less flat throughout 2021. But we believe it is likely that the government may ultimately be compelled to relax the restrictions, at least partially, in 4Q.
Nevertheless, ICRA Lanka says the import restrictions would increase the trade deficit to about 6.1% of the GDP while generating a current account surplus of about 0.5% of the GDP.
Foreign currency obligations for 2021 is just over USD 6 Bn. This includes the settlement of USD 1 Bn ISB maturing in July. We expect the GoSL to rollover about USD 2 Bn existing obligations, borrow about USD 2.3 Bn of which USD 2 Bn may come from a bilateral arrangement with China. In addition, FDIs may remain low around USD 200 Mn. As per ICRA Lanka’s projections, with the positive current account balance and additional forex borrowings, the total reserves would fall to USD 3.7 Bn by the end of 2021.”
On the fiscal front, ICRA Lanka expects the government revenue to gradually return to normalcy by the 2H. The expenditure side of the government may expand at a steady pace throughout 2021.“According to our projections, the budget deficit would reach 10.8% of the GDP in 2021. The government’s fiscal policy is also now closely aligned with Modern Monetary Theory (MMT).
