First Capital Research Mid-Year Outlook 2021 says that they believe the accelerated vaccination in Sri Lanka supported by 24-hour vaccination centres which are very impressive may support the gradual opening up of the economy and recovery in tourism towards 4Q2021 similar to the Western Nations despite the recent surge in cases due to the COVID Delta variant.
Sri Lanka has also made C-19 vaccine certificates mandatory from September 15 to visit public spaces and travel between provinces while health regulations were relaxed for tourists. By making Quarantine for fully-vaccinated international arrivals limited to just one day. Due to this fully vaccinated travelers from India will now be able to travel to Sri Lanka.
“Due to these factors the tourism sector is likely to witness an important recovery from 4Q2021 onwards,” the report says.
“We expected Sri Lanka to go through a W-shaped recovery (September-20) amid the continuous waves and possible shocks while a bumpy road to recovery (January-21) was explained subsequently,” the report adds.
“Trade Deficit is expected to climb above USD 7 billion amidst gradual relaxations of trade restrictions.’The rupee experienced a steep depreciation in the 1Q, however, following that supported by moral suasion CBSL has managed to maintain the exchange rate around the Rs 200.0
Inflation that is likely to arise is mostly cost-push inflation primarily led by currency devaluation. Thereby, adjustment of monetary policy may not impact inflation, however, it may support the stabilization of the currency.
The First capital report identifies the following Economic Indicators for the next 12 months to be on the positive side. They are GDP on a recovery path: Tourism may recover: Low lending rates and Inflation rising but under control.
Negative factors identified are: High budget deficit may increase Govt borrowing requirement: Rising Credit Growth: Negative liquidity: Surge in CBSL Holdings: Steep LKR depreciation & potential to decline further: High rupee and USD debt maturities and difficulty in raising foreign long-term debt.
“Inflows to Sri Lanka have been weak amidst the struggling macroeconomic environment. Rating downgrades are further dampening interest as illustrated by the selling pressure on ISBs.
“Rate hikes around the world and possible tapering in the US are expected to shift the fund flow towards the developed markets while raising capital or debt is going to be challenging for countries like Sri Lanka,” the report says.
“In the line with the forecast of our Fixed Income Health score in Jan 2021, First Capital Research expected that Sri Lanka may negotiate an IMF program within 3Q2021. Though there are rumours of negotiations, so far such a program has not materialized, but the Govt. has obtained the Rapid Funding Facility of USD 787Mn from the IMF.”
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