Shadows loom large as the pendulum swings yet again amid multiple sensitivities

Business confidence remains clouded by ongoing developments – and heavily dependent on their outcomes. The IMF’s review of the four-year Extended Fund Facility (EFF), ongoing debt discussions with creditors, rapid disinflation, fluctuating fuel prices and the added complexity of the Israel-Palestine conflict – not to mention the ongoing war in Ukraine – are influencing and shaping business sentiment these days.

Regarding the International Monetary Fund, Sri Lanka’s advancement towards fulfilling economic targets and reforms within the framework of the US$ 3 billion bailout package is currently under evaluation. And should a staff-level agreement be reached in the near future, Sri Lanka stands to receive the second tranche of US$ 334 million under terms of the EFF.

In the meantime, Sri Lanka has reportedly reached an agreement with the Exim Bank of China regarding the essential terms and principles for restructuring its debt. This is expected to play a pivotal role in facilitating the release of the second IMF instalment. The authorities are also optimistic that it will serve as a cornerstone for ongoing engagements.

Furthermore, the Central Bank of Sri Lanka says that headline inflation is expected to stabilise at the target rate of five percent over the medium term as reflected in the latest projections. This news is indeed welcome, especially after months of experiencing double-digit inflation.

THE INDEX Amid these ongoing and conflicting developments, the LMD-NielsenIQ Business Confidence Index (BCI) shed six basis points in October to register 75.

The barometer has displayed a somewhat volatile trajectory since July, falling from 103 in June to 73 in August and rebounding to 81 in September, only to dip again in October.

Notably, the index is 14 basis points shy of where it stood a year ago and 12 notches less than its median since then.

SENSITIVITIES Prime among the short-term sensitivities, in addition to the aforementioned, is the upcoming 2024 budget, which is scheduled to be presented in parliament during the second week of November.

Although import restrictions have been eased on all items except motor vehicles, questions abound as to whether new terms and conditions will be announced in the budget along with a swathe of taxes aimed at the wealthy, which could dampen business sentiment.

On the contrary, many commentators expect more relief for the poor and even concessions for middle income earners in Budget 2024.

The prospect of surging global oil prices – which could exacerbate the onset of a global recession and lead to more inflation worries – amid the conflict between Israel and Hamas also hangs in the air.

PROJECTIONS In the light of mixed signals and sensitivities, LMD maintains its assertion of recent months that the one of a kind index will continue to remain in negative territory.

Looking further and into the new year, the prospect of election related disruptions and a re-emergence of political instability doesn’t bode well – even if we have come a long way since the debilitating economic crisis of 2022.

– LMD