Corporate sentiment remains frozen as the nation grapples with economic challenges

Sri Lanka’s manufacturing Purchasing Managers’ Index (PMI) increased by 8.3 index points to 50.4 in June, indicating a slight recovery from the adverse impacts of the third wave of the pandemic.

The Central Bank of Sri Lanka notes that this was largely driven by recovery in the new orders sub-index while the ‘travel restrictions’ imposed during the period negatively impacted the suppliers’ delivery time sub-index.

“Expectations for manufacturing activities for the next three months significantly increased with the anticipation that economic activities would normalise in the coming months, supported by the rapid roll out of the COVID-19 vaccination campaign across the country… and the easing of mobility restrictions,” the Central Bank notes.

As for the latest LMD-NielsenIQ Business Confidence Index (BCI) survey, the slow but steady decline in new COVID-19 cases and pace of the country’s immunisation campaign may point to signs of stability in corporate corridors – albeit that the index has remained below 90 basis points for three successive months.

THE INDEX The BCI remained unchanged in July, registering 87 for the second consecutive month. This represents a deterioration compared to the corresponding month of last year when the index stood at 97 and places it more than 20 points below its 12 month average.

NielsenIQ’s Director – Consumer Insights Therica Miyanadeniya sheds light on this: “With the country opening up again, immunisation drive accelerating with more than 30 percent of the population being vaccinated and number of COVID-19 cases on the decline, the situation is gradually becoming more manageable.”

“People and businesses have more or less overcome the fear that gripped the nation at the onset of the pandemic, and are settling down to embrace the ‘new normal’,” she elaborates.

SENSITIVITIES “As the country forces itself to settle down despite the ongoing pandemic, for the economy to recover following the heavy battering it experienced, we are yet to see what the future will hold,” Miyanadeniya says in her assessment of the future of the BCI.

Furthermore, she notes that “with an unpredictable future where countries are shutting down due to new waves of the virus, there has to be a lasting solution if Sri Lanka is to recover.”

PROJECTIONS With the islandwide immunisation campaign gathering momentum, together with the receipt of several consignments of vaccines in recent weeks and ‘travel restrictions’ easing, we may see economic activity picking up in the coming months.

This could have a positive impact on the BCI in the near term.

However, as we outlined in the July edition of LMD, the general direction of the index will depend on how the country tackles macroeconomic challenges such as bolstering its dwindling reserves, meeting its debt obligations, bridging the ballooning trade deficit and mitigating the foreign exchange crisis.

– LMD