In 2014, the Sri Lankan economy showed its resilience in the face of domestic as well as external challenges. Real GDP grew by 7.4 per cent in 2014, in comparison to the growth of 7.2 per cent in 2013. Accordingly, GDP per capita increased to US dollars 3,625 in 2014 from US dollars 3,280 in the previous year. The economy was driven by domestic consumption expenditure that constitutes the largest share of aggregate demand, while investments, particularly on construction, also provided an impetus to the economic expansion during the year. On the production side, the Industry and Services sectors continued to perform well, while adverse weather conditions dampened the performance of the Agriculture sector during the year. Inflation remained at single digit levels for the sixth consecutive year, with year-on-year and annual average inflation declining to 2.1 per cent and 3.3 per cent, respectively, by end 2014, from 4.7 per cent and 6.9 per cent, respectively, at end 2013. Prudent monetary policy as well as the considerable decline in global commodity prices in the second half of the year enabled the deceleration of inflation to low single digit levels during the year. In spite of the relatively relaxed monetary policy stance, the effect of declining pawning advances as a result of lower international gold prices shrouded the pickup of credit obtained by the private sector, particularly in the first seven months of the year. In the absence of demand pressures on inflation, the Central Bank took measures to facilitate further credit disbursements by banks. However, these measures, along with volatile global conditions, caused some portfolio investment outflows and encouraged imports, increasing the pressure on the external sector and the exchange rate towards the latter part of the year. Overall, the trade deficit widened in nominal terms during the year, although inflows from trade in services and workers’ remittances supported the reduction of the deficit in the current account. This, together with other financial inflows, helped strengthen the balance of payments (BOP), and hence gross official reserves. The continued inflow of funds from the expatriate workforce in the form of remittances and investments aided an increase in national savings, which helped reduce the savings-investment gap. Meanwhile, in the fiscal sector, despite the government’s announced commitment towards fiscal consolidation, the overall fiscal deficit increased to 6.0 per cent of GDP in 2014 from 5.9 per cent of GDP in the previous year, mainly as a result of the continued shortfall in revenue collection. Nevertheless, central government debt as a percentage of GDP declined to 75.5 per cent by end 2014 from 78.3 per cent by end 2013. In the financial sector, the strengthened regulatory and supervisory framework, improved risk management capabilities and adequate buffers to mitigate risks, enabled financial institutions to remain resilient during the year.
Going forward, the Sri Lankan economy is projected to reach upper middle income levels and sustain the favourable high growth and low inflation nexus in the medium term, supported by appropriate economic policies. The new government is expected to uphold policies of good governance and transparency, which would support a high growth path through an improved investor friendly environment. The government faces the enormous task of articulating a coherent medium term policy framework, which enhances positive effects while addressing possible shortcomings of previously announced policies as well as the challenges ahead. Some of these challenges are, the urgent need to address the continued decline in government revenue as a percentage of GDP in order to achieve a better fiscal balance; increasing productivity of all sectors of the economy, including the public sector; raising resources required for sustained growth through non debt creating sources, in particular, foreign direct investments (FDI); developing appropriate pricing policies for public utilities; better identification of beneficiaries in implementing social safety nets and subsidy programmes; improving the equity and quality of health and education service provision; addressing the issue of public transportation; continuing physical infrastructure development on a sustainable basis; formulating policies to address the challenge of aging population including improving labour productivity and promoting the development of superannuation and insurance products; and, improving the doing business environment and policy predictability. Addressing such challenges would be essential to realise the projected growth path as envisaged, enabling the economy to achieve its full potential while maintaining macroeconomic stability in a more equitable environment.
Exports grew at a healthy rate in 2014 supported by improved external demand along with a stable domestic macroeconomic environment. Earnings from exports grew by 7.1 per cent in 2014 compared to the previous year and reached US dollars 11,130 million, reflecting increases in all major categories. The highest contribution to export earnings was from industrial exports, supported by the substantial increase in exports of textiles and garments. Earnings from textiles and garments exports, which accounted for about 44 per cent of total exports, recorded an increase of 9.4 per cent in 2014, reflecting increases in garment exports to both traditional and non-traditional markets. Meanwhile, earnings from agricultural exports registered an increase of 8.2 per cent in value terms due to higher exports of coconut products, tea and certain minor agricultural products. Export earnings from coconut products and tea increased by 74.2 per cent and 5.6 per cent, respectively, mainly due to higher export volumes. However, export earnings from spices, which showed a higher growth of 38.8 per cent during the previous year declined by 25.6 per cent in 2014 mainly due to low harvest of main export crops.