Shot in the arm for Lanka’s economy

Sri Lanka’s economy will receive a shot in the arm following its programme with IMF and will perform well this year with good results, IMF Economic Counsellor and Director of the Research Department Maurice Obstfeld told journalists at the launch of the Global Economic Outlook on April 18 in Washington.

The Global Economic Outlook is the flagship presentation of the Fund on the global economic forecast released twice a year at the Spring and annual meetings in the world. Sri Lanka entered into an agreement through an Extended Fund Facility to support its ambitious economic growth plan to boost balance of payment and maintain financial stability.

 The Central Bank of Sri Lanka early this year predicted economic growth to reach around 5.5 percent by the end of this year given the optimism of economic growth in the US and China and with the drought in the country having an early end.

However, economists at the launch of the outlook noted that geo-political tensions in the Asian region could have spillovers resulting in downside effects on the regional economies.

‘Asia will do well this year and a large share of the growth in the region would come from China, Japan and India which launched its demonitisation program last year,” Obstfeld said expressing optimism that turbulence in the region will abate and not intensify.

Obstfeld was confident that the region will do well this year with China to record a satisfactory growth.

The IMF also raised the global economic growth forecast this year to 3.5 percent this year up from 3.1 percent last year and 3.6 percent in 2008.

“Momentum in the global economy has been building since the middle of last year, allowing us to reaffirm our earlier forecasts of higher global growth this year and next. We project the world economy to grow at a pace of 3.5 percent in 2017, up from 3.1 percent last year, and 3.6 percent in 2018,” IMF’s chief economist said.

The IMF said acceleration will be broad based across advanced, emerging, and low-income economies, building on gains we have seen in both manufacturing and trade.

Obstfeld said the Fund’s new projection for 2017 is marginally higher than what it expected in its last update. This improvement comes primarily from good economic news for Europe and Asia, and within Asia, notably for China and Japan.

However, the IMF noted that protectionist policies from advanced countries could slower the pace of growth.

“Avoiding the damage from potential protectionist measures will require a renewed multilateral commitment to support trade, paired with national initiatives that can help workers adversely effected by a range of structural economic transformations including those due to trade,” Obstfeld said.

The Fund noted that despite these signs of strength, many other countries will continue to struggle this year with growth rates significantly below past readings. Commodity prices have firmed since early 2016, but at low levels, and many commodity exporters remain challenged – notably in the Middle East, Africa, and Latin America.

At the same time, a combination of adverse weather conditions and civil unrest threaten several low-income countries with mass starvation. In Sub-Saharan Africa, income growth could fall slightly short of population growth, but not by nearly as much as last year.

“Whether the current momentum will be sustained remains a question mark. There are clearly upside possibilities. Consumer and business confidence in advanced economies could rise further – though confidence indicators are already at relatively elevated levels. On the other hand, the world economy still faces headwinds,” economist at the panel noted.

“ For one thing, trend productivity growth remains subdued across the world economy, for complex reasons that we have explored in a recent paper, and that seem likely to persist for some time. In addition, several prominent downside risks threaten our baseline forecast, Obstfeld said.

The Fund also noted that one set of uncertainties stems from macroeconomic policies in the two largest economies. The U.S. Federal Reserve has embarked on monetary normalization and may soon begin to scale back the size of its balance sheet. Given the faster U.S. recovery, the Fed is ahead of the European Central Bank and Bank of Japan, for which interest-rate hikes are not yet imminent. At the same time, however, U.S. fiscal policy still seems likely to turn more expansionary over the next couple of years.

Obstfeld said the Fund Will be monitoring the policies of the US administration under President Trump and will come up with a review of the global economy by arounf July this year.

However he said if the degree of remaining slack in the U.S. economy is small, the result could be inflation and a faster than expected pace of interest-rate rises, sparking sharp dollar appreciation and possible difficulties for emerging and some developing economies especially those with dollar pegs or extensive dollar-denominated liabilities. China’s desirable rebalancing process continues, as seen in a declining current account surplus and an increased GDP share of services, yet growth has remained reliant on domestic credit growth so rapid that it may cause financial stability problems down the road. These problems could, in turn, spill over to other countries.

The IMF said though the world economy may be gaining momentum there is no certainty that the world wild be ou of the woods.

“How can countries safeguard and nurture the global recovery? There is no universal policy prescription for diverse economies at different conjunctural stages. Deflationary pressures have generally receded, but monetary accommodation should continue where inflation remains stubbornly below target levels. Growth-friendly fiscal measures, especially where there is fiscal space, can support demand where that is still needed and contribute to expanding supply and reducing external imbalances,” Obstfeld said.

He said all countries have opportunities for structural reforms that can raise potential output as well as resilience to shocks, although specific reform priorities differ across economies.

Trade has been an engine of growth, promoting impressive per capita income gains and declines in poverty throughout the world, especially in poorer countries. But its benefits have not always been equally shared within countries, and political support for trade will continue to erode unless governments step up to invest in their workforces and aid the adjustment to dislocations. 

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