By: Staff Writer
August 19, Colombo (LNW): Sri Lanka’s retail sales are showing signs of improvement, and private credit is anticipated to follow suit in the latter half of the year 2024 if businesses begin to invest in expansion, according to the Central Bank.
Although private credit is growing, it remains sluggish, with most borrowing currently focused on working capital. Businesses are in a phase of de-leveraging after a currency crisis, seeking to improve their financial positions by renegotiating old loans at lower interest rates, particularly in the SME sector.
De-leveraging is a natural part of the credit cycle that strengthens business balance sheets, positioning them for future growth. For expansion to occur, retail sales must increase, which would prompt capital investments as existing capacity becomes fully utilized, and confidence in future prospects grows.
By 2023, many of the earlier restrictions were lifted, but Sri Lanka continued to face significant challenges due to strict fiscal policies from the Central Bank and external factors like Russia’s war with Ukraine, which disrupted global supply chains.
Peppercube, a Sri Lankan market research firm, reported that in 2021, there were around 270,000 retail stores across the island. Informal retailing, especially for fresh produce, cooked food, and clothing, remains robust.
Local markets, known as “Pola,” are prevalent in both urban and rural areas, often serving as the primary source for essentials like vegetables, fruit, meat, and fish.
In 2022, the Sri Lanka Retailers’ Association (SLRA) expressed concerns about the retail sector’s health, warning that a collapse would have far-reaching consequences for the economy, including unprecedented financial and social repercussions and significant job losses.
The retail sector accounts for over 30% of the national GDP and provides 14% of direct employment. Over 10% of Sri Lankan households depend on retail sector jobs, which are crucial for maintaining the country’s economy and ensuring widespread income distribution.
Sri Lanka’s economy began to recover in the third quarter of 2023, with economists forecasting 3.5% growth in 2024. Inflation, which returned to single digits in 2023, is expected to stabilize further, easing economic pressures and boosting the retail sector.
The economic recovery is likely to be driven by increased consumer spending, a revival in tourism, and investment spending. Although household incomes were severely impacted by the sharp devaluation of the Sri Lankan rupee, inflation has eased, allowing households to rebuild purchasing power and stimulate consumption.
Inflation is projected to average 6.6% in 2024 and decrease to 5.0% in 2025. However, the retail sector remains cautious ahead of the Presidential election in the second half of the year, with potential changes in economic policy depending on the election outcome. Despite this, the business community views the macroeconomic stability of 2023 positively.
