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Sri Lanka: Macro Roundup May 2021 - Port City Bill finalised; travel restricted

  • Fresh travel restrictions; dampened momentum impacts growth forecasts
  • Colombo Port City Commission bill finalised; phase 1 to commence in June
  • Reserves down to USD 4.1bn, USD 500mn loan finalisation to help boost position

Fresh travel restrictions were imposed in the country as the new COVID-19 cases surpassed 2,500 cases/day. While the measures to curb travel is a key positive to control the spread of the virus, we expect this to have a material impact in 2Q 2021. In our view, the third wave looks to have a more profound impact than seen during the second wave in November, with the agri and Industrial sectors being impacted. Meanwhile, the country finalised a USD 200mn swap agreement with Bangladesh and a USD 500mn loan facility with South Korea during the month. This is a key positive going into the ISB maturity in June. The currency remained relatively flat in May, with the spot rate recording a 0.1% MoM appreciation, reaching USD/LKR 199.56 (as of 28th May), while the monthly average was USD/LKR 199.59. Looking ahead, we forecast the currency at USD/LKR 203.00 – 205.00 for 2021, depreciating by 8.9% YoY. We expect overall GDP growth to reach 4.6% - 4.8% YoY in 2021, with economic activity picking up following the roll-out of the vaccine.

Fresh travel restrictions; dampened momentum impacts growth forecasts

Following a strong start to April ahead of the Sinhalese and Tamil New Year, the ongoing travel restrictions continue to dampen economic momentum, with mobility data directing towards activity nearing the November localised lockdown levels. This is reflected in the PMI data, which declined in April since reaching a 9-month high in March. As such, the PMI was down 22.7 index points MoM to reach 46 points during the month. This was owing to a decline in production, new orders and a stock of purchases sub-indices. Amidst the current restrictions, we revise our GDP growth forecast to 4.6% - 4.8% YoY, from 5.2% YoY previously. While we acknowledge that the country is better geared to operate under lockdown measures, we anticipate a negative impact on the Industrial and Agricultural sectors in the near term. We also expect a prolonged recovery in the tourism sector.

Colombo Port City Commission bill finalised; phase 1 to commence in June

The laws to go ahead with Colombo’s Port City were finalised during the month. The Bill offers attractive tax breaks for investors, as the country paves the way for a potential International Business and Multi Services hub for South Asia. The special economic zone is expected to offer investors currency protection, a key barrier to FDIs in the past. According to the legislation, all registered entities are allowed 100% foreign ownership, with the opportunity to mitigate risk from relaxed exchange control regulations within the zone. Phase 1 of the Colombo International Financial Center is expected to commence in June 2021.

Reserves down to USD 4.1bn, USD 500mn loan finalisation to help boost position

Sri Lanka’s official reserves broke its three-month declining trend in April to end the month at USD 4.5bn, up 10.4% MoM (-37.9% YoY). Reserves were supported by the USD 500mn loan from China Development Bank in April. This comes amidst the Central Bank’s net Dollar purchases of USD 75.3mn in March. Looking ahead, we expect the USD 200mn swap agreement with Bangladesh and the USD 500mn loan facility with South Korea Exim bank to support reserves in May. This is a key positive ahead of the June International Sovereign Bond maturity.


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