Amidst different predictions by the International Monetary Fund, World Bank and the Central Bank, rating agency ICRA Lanka stated that based on its productive models, the Sri Lankan economy would contract by 8.2% – 10.9% in 2020.

Issuing its quarterly economic update, ICRA Lanka, which is a subsidiary of Moody’s Investor Services, stated that it earlier projected a contraction of 1.9% as the base case and -3.3% as the protracted case for 2020 GDP.

“With the latest analysis, we are revising the annual real GDP growth expectation to 8.2 to 10.9%,” it said.

ICRA Lanka further noted that based on the current situation of the country the rating agency is projecting a GDP contraction in the range of 7.9 to 17.8% for 4Q.

“This bleaker outlook could derail the current credit expansion further and weaken aggregate demand. Therefore, we do not rule out the possibility of another policy rate cut before the end of the year. Headline inflation is likely to remain around 4% - 4.5% but the food inflation may remain at upper single digit level,” it said.

In addition, ICRA Lanka expects the exchange rate to remain broadly stable as markets have already factored in most of the shocks. Businesses may scale down operations leading to rise in unemployment and stagnant wages. ICRA Lanka does not expect the exchange rate to experience significant pressure assuming import controls to remain in effect for the rest of 4Q.

The rating agency further stated that factory shutdowns could affect the export volumes moving forward which in turn negatively affect the trade balance. Looking ahead, in this context, the government expenditure may remain elevated leading to expansion in the fiscal deficit.

3Q 2020 was shaping up to be the turning point from the depths of economic contraction, but the fast escalation of the second wave of COVID-19 infections throughout the island towards the tail end of the quarter, quickly dimmed the hopes for continued recovery.

ICRA Lanka’s recalibrated nowcasting models show GDP growth estimates for 2Q to be -17.5% (margin of error = +/- 16%) and for 3Q to be -6.1% (margin of error = +/- 6%). Based on our predictive models, we expect the Sri Lankan economy to contract by 8.2 – 10.9% in 2020.