Sri Lanka economic recovery relies on political stability, reforms: World Bank

ECONOMYNEXT – Sri Lanka’s economic growth is expected to slow to 2.7 percent in 2019 and recover next year but depends on how it ensures political stability and continues reforms to strengthen revenue, the World Bank said.

“The medium-term outlook is subject to the country’s ability to ensure political stability and a return to normalcy,” it said in a new report on South Asia.

“Growth for 2019 is expected at 2.7 percent, as many important economic sectors show relatively weak performance.”

However, the bank said that in the medium-term, the economy is expected to recover from the disruptions in 2019, and growth to accelerate towards 4.0 percent, gradually closing the output gap.

The drivers of the recovery are anticipated to be investment and exports, as performance in the tourism sector improves and uncertainty is resolved after the elections are held, the report said.

“Risks are tilted to the downside. On the domestic front, a challenging political environment, delays or reversals in efforts to strengthen revenues, and a slower than expected recovery of some key economic sectors represent important risks.”

Sri Lanka faces a presidential poll in November, followed by parliamentary polls in 2020.

Priority reforms include continuing fiscal consolidation by broadening the tax base and aligning spending with priorities, the World Bank said.

Shifting to a private investment-tradable sector-led growth model by improving trade, investment, innovation and the business environment is also needed along with better governance and state enterprise performance.

The April terrorist attacks heightened macroeconomic challenges with reduced tourism earnings exerting pressure on external accounts, despite reduced import demand.

“Fiscal balances will deteriorate amid contracting revenues,” the report said.

“Large refinancing needs, weak fiscal buffers and high debt make the country vulnerable to rollover risks. A slowdown in economic activity will constrain job creation and income growth, and the pace of poverty reduction.”

Meanwhile other analysts have suggested that Sri Lanka should bring laws to reduce the discretionary powers of the central bank to generate monetary instability, which tends generate currency collapses, structurally high interest rates and negative output shocks. (COLOMBO, 14 October 2019)