Business Sentiment

Index Dips As Election Looms

Sri Lanka stands at a pivotal juncture with the 21 September presidential election on the horizon: the future direction of the country is undoubtedly at stake. And as the nation anticipates the potential impact of the election outcome, the path to recovery is laden with obstacles.

The next administration is likely to encounter both significant opportunities and formidable challenges.

According to the IMF, Sri Lanka’s economic reform programme is showing promising results. The International Monetary Fund notes that the recovery is ongoing with real GDP experiencing three consecutive quarters of growth – it accelerated at 5.3 percent year-on-year in the first quarter of this year.

The IMF emphasises that given Sri Lanka’s recovery path, it is crucial to maintain the momentum of reforms and ensure timely implementation of all commitments under its Extended Fund Facility (EFF). This is essential to solidify the gains achieved thus far and establish a stable economic foundation going forward.

Achieving and sustaining macroeconomic stability, as well as restoring debt sustainability, necessitates additional efforts to shore up fiscal revenues.

President Ranil Wickremesinghe maintains that the revenue and expenditure targets agreed with the IMF must remain unchanged whereas the other main contenders for the presidency say they hope to review the stringent terms of the EFF.

Incidentally, the third review of the IMF’s Extended Fund Facility (EFF) is to take place after the presidential election.

So the outcome of the election and advent of a new administration will play a crucial role in determining the path forward – including the sustainability of the EFF.

Meanwhile, the Monetary Board of the Central Bank of Sri Lanka lowered the Standing Deposit Facility Rate (SDFR) to 8.25 percent and the Standing Lending Facility Rate (SLFR) to 9.25 percent.

The Central Bank’s Governor Dr. Nandalal Weerasinghe notes that the economy grew for the third consecutive quarter in the first three months of 2024.

THE INDEX Having risen for four consecutive months between April and June, the LMD-PEPPERCUBE Business Confidence Index (BCI) re­gistered a second consecutive decline in August, falling to 94 after breaching the 100 mark in June.

This downtrend signals uncertainty over the outcome of the presidential election. Furthermore, the index remains well below its historical average of 122.

PepperCube Consultants observes that the August poll results, compared to the previous three months, reveal a ‘wait and see’ mindset in corporate circles regarding the economy and business volumes as the election season reaches a point of culmination.

SENSITIVITIES As the presidential poll approaches, the business community remains focussed on high taxes and the political culture with instability also a concern.

PROJECTIONS The outcome of the election will have a telling impact on Sri Lanka’s economic trajectory against a backdrop of uncertainly surrounding the crucial IMF programme and related reforms.

Given this context, we reaffirm our previous contention that the BCI will likely come under pressure in the near term.

– LMD