The Sri Lankan economy has showed early signs of stabilisation in 2016 in response to corrective actions adopted by the government and the Central Bank.
The Central Bank Economic Review released on Wednesday said unfavourable weather conditions and sluggish global economic recovery caused the economy to grow at a slower rate of 4.4 per cent in 2016 in real terms, in comparison to 4.8 per cent in the previous year, although a steady acceleration in quarterly growth was observed from the second quarter of the year amidst tightened fiscal and monetary policies.
Increased investment expenditure, especially in the construction sector, drove economic growth during the year, while consumption expenditure slowed in response to the policy environment in place.
The financial sector, in the meantime, continued to expand during the year whilst exhibiting resilience amidst challenging market conditions both globally and domestically.
Meanwhile, fiscal operations registered a notable improvement in both revenue and expenditure fronts, resulting in the containment of the overall budget deficit at the envisaged level of 5.4% of Gross Domestic Product (GDP).
In spite of these achievements, central government debt as a percentage of GDP increased, illustrating the narrowing fiscal manoeuvrability within the overall macroeconomic policy framework and highlighting the necessity of continued efforts to sustain the fiscal consolidation process.
In 2016, the Sri Lankan economy grew by 4.4 per cent in real terms, amidst numerous global and domestic challenges.1 Unfavourable weather conditions that prevailed during the year adversely impacted economic activity, primarily in the Agriculture sector.
Services related activities, which constitute 56.5 per cent of real GDP, grew by 4.2 per cent in 2016, on a year-on-year basis, supported by the expansion in financial services, insurance, telecommunications, as well as transportation, and wholesale and retail trade.
Industry related activities, which account for 26.8 per cent of real GDP, recorded a notable growth of 6.7 per cent, year-on-year, driven by the subsectors of construction, and mining and quarrying.
National savings also improved in 2016 as a result of the expansion in net current transfers from the rest of the world while net primary income from the rest of the world declined. Consequently, national savings as a percentage of nominal GDP improved to 28.9 per cent in 2016 compared to 26.0 per cent in 2015.
Sri Lanka’s external sector performance remained subdued in 2016, with foreign exchange outflows exceeding the moderate inflows during the year.
Meanwhile, Sri Lanka’s gross reserve asset position declined to US dollars 6.0 billion, as at end 2016, equivalent to 3.7 months of imports of goods and 3.1 months of imports of goods and services.
The decline in gross official reserves was primarily due to foreign currency debt service
payments, settlement of international foreign currency swap arrangements, repayments under the IMF Standby Arrangement (SBA) facility and the supply of liquidity to the domestic foreign exchange market, particularly in the first half of the year.
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