Boston, MA -- (SBWIRE) -- 03/28/2014 -- Although the US is pressing for a UN inquiry into war crimes in Sri Lanka that allegedly occurred during the final stages of the country's civil war, the island state will continue to receive strong political and economic support from China, its strategic partner. Even if a UN resolution is passed, President Mahinda Rajapaksa's government will remain strong, and the current economic growth momentum will not be derailed.

We are forecasting a healthy real GDP growth rate of 6.8% year-onyear (y-o-y) in 2014, as we expect public investment in infrastructure development to continue supporting growth and the gradual recovery in the US and European markets to bode well for goods exports.

In addition to a potential bottoming out of private sector credit, the recent rise in public sector credit could have inflationary consequences over the coming months. Economic growth continues to be on a sound footing, and the Central Bank of Sri Lanka will remain cautious of further rate cuts and will likely keep rates steady for a prolonged period. We are forecasting the reverse repo rate to end the year at its current level of 8.00%.

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We expect the Sri Lankan rupee to remain fairly stable against the US dollar over the course of 2014, as the recent improvement seen in the external sector will lend support to the currency.

Even though the Sri Lankan government remains committed to consolidating its fiscal account, the pace of consolidation will be slow due to the marginal impact of ongoing tax reforms and the downward rigidity in government expenditures. As such, the fiscal deficit as a share of GDP will likely stay elevated over the course of the next few years, and we are forecasting it to come in at 5.8% in 2014 before falling marginally to 5.7% in 2015.

Major Forecast Changes

We have recently upgraded our 2014 current account forecast to -5.0% of GDP, from -5.4% previously.

Key Risks To Outlook

Upside Risks To Current Account Deficit: Risks include the potential for adverse global commodity price movements (especially that of oil prices) and a flare-up in sovereign risk in the European Union.

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