“Secondly, the tricky external conditions will be the other factor, with policy changes in the US, tensions around trade policy and protectionism, and elections in key European states. Thirdly, changes in the policy and regulatory environment in Sri Lanka, with revisions to laws (Customs, Inland Revenue, Securities and Exchange, Exchange Control), which bring both opportunities and challenges. Businesses need to closely watch these changes and adapt accordingly,” the CCC Economic Intelligence Unit said.
On a positive note on the macro front, the commitment to fiscal consolidation, focus on macroeconomic stability, and predictability and credibility of Central Bank operations, will be a boost to the overall business environment. These benefits may not be felt in 2017 itself but are a solid foundation which is much needed, the unit added.
“While there are many nagging policy issues that we would like to see resolved, the main concern is of policy consistency. Predictable policy stances will help boost domestic and foreign investor confidence. On specifics, it would be good to see the early completion of the modernisation to Customs law as well as Exchange Control.”
One economic dimension policymakers should keep an eye on will be oil prices. Sri Lanka enjoyed a windfall gain in 2015 and 2016 due to low global oil prices. This came at a time of declining export earnings.
“With the OPEC agreeing to a production cut, we could see a steady upward movement of prices, which would impact an oil importer like Sri Lanka. However, we have to watch whether the OPEC production cut is balanced out by Iran’s continued high supply and also strong US shale oil supply.”
Big economic opportunities will revolve around new projects coming on stream, which is likely to include the Hambantota zone and the Megapolis project. The opportunities from these ventures range from construction to logistics services, IT services and manufacturing. The Economic Intelligence Unit urged the private sector to work closely with Government to understand what specific business opportunities are emerging, how they can plug in early on and push for a transparent framework for these investments.
“There’s also continued opportunities in logistics services, niche export manufacturing, agri-business, and of course mixed property development. On agri-business, there are several new government and donor-funded initiatives to support modernisation of agriculture, upgrading of technology in the sector, and export agriculture for SMEs. These will have many opportunities for businesses to latch on to.”
On the consumption outlook, the unit was reserved in its forecast pointing out it would be tepid due to the VAT increase, no major fiscal stimulus in Budget 2017 and the impact on rural household consumption due to the drought.
“The impacts of the drought will be felt mainly in Q1 and possibly Q2, as agricultural incomes are affected, and this in turn affecting spending on FMCG, consumer durables, loan and pawning repayments, and non-essential spending by rural households.”
On regulatory and policy changes, the report lists around 10 new areas that businesses need to watch closely to both identify opportunities emerging from those, adjusting their business processes accordingly and also managing any possible challenges.
“On the exports front, we see a positive outlook for some sectors. For instance, rubber in Q1 2017 will get a boost from Thailand’s supply constraints due to floods there. Apparel exports to the US will improve with the strengthening of the US economy and consumer confidence improving, and also a boost to EU exports with the regaining of GSP Plus. Already by September 2016 exports had reversed an 18-month losing streak. We also see a strong performance in the construction sector, driven by private sector construction projects.”