GDP growth during the first 09 months of 2016 was at 4.0% yoy propelled by growth in the industrial and service sectors by 5.7% and 4.8% respectively. Financial Services and Construction along with Wholesale & Retail Trade were key growth drivers during the period while the contraction in Tea and Rubber prices contributed to a decline in the Agriculture sector
Slowdown in GDP growth compared to the previous year coupled with tighter monetary policy resulted in the demand for private credit being relatively lower. Nevertheless, HNB’s loan book grew by 17.3% during the year.
The IMF projects Sri Lanka’s GDP to grow by 4.8% in 2017 while the World Bank estimate is at 5.0%. The CBSL anticipates a 6.3% GDP growth in 2017 and a GDP growth of 7% in the medium term.
The low interest rate regime which
prevailed during 2014-2015 fuelled high
growth in private sector credit creating
inflationary pressure, thus prompting CBSL
to respond with monetary tightening.
However, despite the increase in lending
rates, private credit disbursements by
commercial banks continued to grow
throughout the year
before showing signs of slowing towards
the latter part of 2016.
The slower growth in GDP and the
tightening of the monetary policy led to a drop in credit growth compared to the previous year. Nevertheless the tighter monetary policy enabled to record a 30.5% growth in NII and a sound growth in the bottom line.
The CBSL expects the intended effects of
the tightened monetary policy stance to be
lagged and become apparent in 2017 with
credit growth slowing down. It seems likely
that interest rates would moderate over the
medium term but remain at current levels or
increase slightly during the year.
Underperforming exports and an increase in investment imports led to the cumulative deficit in the trade account widening by 7.9% yoy in November. However growth in tourism and remittances enabled a contraction in the current account deficit. An agreement was also entered into with the IMF to borrow USD 1.5 Bn to support the BOP and economic reform agenda
Despite the overall drop in international trade, HNB grew trade related fee income by 9% and improved exchange income by 25%. The Bank also outperformed the industry in Remittances Growth
The receipt of further tranches of funding from the agreement with the IMF is expected to boost the BOP in 2017. However sluggish global growth, continuation of weak global demand, low FDI’s and expected rate hikes by the US Fed present downside risks to the envisaged path of external developments