With the twin drags of tight monetary and fiscal policy, Sri Lanka's growth is set to remain sluggish, Alex Holmes, an economist at Capital Economics, said.
The economy grew 3.3 percent in the third quarter, slower than the 4 percent expansion in the preceding period, the Department of Census and Statistics reported on December 15.
The slowdown in the third quarter was driven by the poor performance of industry, the economist observed.
The industrial sector expanded only 1.9 percent after a 5.2 percent growth in the second quarter.
The volatility of Sri Lanka's GDP series raises serious questions over their reliability.
"Looking past the problematic GDP data, the overall picture is one of a weak economy that has little chance of seeing a meaningful recovery anytime soon," Holmes pointed out.
Looking ahead, one point is that fiscal policy will remain a drag on growth as the government attempts to reduce its fiscal deficit to 3.5 percent of GDP by 2020, from 5.4 percent in 2016, under the terms of its $1.5 billion IMF loan agreement.
"Interest rates were last raised in March and although we don't expect any further hikes, cuts are unlikely," Capital Economics said.
Therefore, monetary policy is set to remain tight, too, the economist added.
Admittedly, inflation slowed to 7.8 percent in November from 7.8 percent in October and should fall further next year.
However, credit growth is still on the high side and Sri Lanka needs to sure up its currency in the face of its vulnerable external position, the economist said.
On a more positive note, the agricultural sector should rebound over the coming quarters.
Besides this, the strong external environment should also help to provide some support to the economy.
"On balance, while GDP growth should pick up a little next year, with the twin drags of tight monetary and fiscal policy, it is set to remain sluggish - we expect an underwhelming 4.5 percent y/y expansion in 2018," the economist said.
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