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Sri Lanka GDP to shrink 6.7-pct in 2020, Maldives 19.5-pct: World Bank

ECONOMYNEXT – Sri Lanka’s gross domestic product is forecasted to shrink 6.7 percent in 2020, Maldives by 19.5 percent and India 9.6 percent in 2020, the World Bank said in a report.

“The COVID-19 crisis has substantially clouded the outlook and exacerbated an already challenging
macroeconomic situation,” the World Bank in a report on South Asia.

“The economy is expected to contract by 6.7 percent in 2020, with all key drivers of demand affected: exports, private consumption and investment.”

“The COVID-19 pandemic has paralyzed the Maldivian economy through its impact on tourism,” the report said.

“Construction, the other main driver of growth, also slumped due to logistical difficulties and repatriations of foreign workers following COVID-19 outbreaks.”

Sri Lanka has also imposed import controls amid foreign exchange shortages after money printing in March and April 2020. Private credit later contracted reducing pressure on the rupee.

Sri Lanka and Bhutan had however contained the Coronavirus outbreak. Sri Lanka’s economy is expected to rebound to 3.3 percent in 2021.

“While some countries were successful in controlling the pandemic, others were not, the report noted. “Bhutan and Sri Lanka avoided large-scale domestic transmission and experienced only very small numbers of infections per capita.”

The Asian Development Bank has projected Sri Lanka’s economy to shrink by 5.5 percent. Sri Lanka’s central bank has said the economy may show zero growth.

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The World Bank said three-quarters of all workers in South Asia depend on informal employment, especially in hospitality, retail trade, and transport which were most affected by containment measures.

“The collapse of South Asian economies during COVID-19 has been more brutal than anticipated, worst of all for small businesses and informal workers who suffer sudden job losses and vanishing wages,” Hartwig Schafer, World Bank Vice President for the South Asia Region said in a statement.

“Immediate relief has dulled the impacts of the pandemic, but governments need to address the deep-seated vulnerabilities of their informal sectors through smart policies, and allocate their scarce resources wisely.”

Rising debt and adverse market conditions were also hurting Pakistan, Sri Lanka and the Maldives, the report said.

“Debt vulnerability is increasing in many countries and especially in Sri Lanka and Maldives,” the report said.

“In Sri Lanka, the central government debt-to-GDP ratio rose to over 90 percent as of end-April 2020 (from 86.8 percent at the end of last year), with more than half of the debt denominated in foreign currency.”

In Sri Lanka budgets have deteriorated in partly due to a ‘fiscal stimulus’ dating back from November 2019.

“Tax revenues fell short due to the fiscal stimulus package implemented in November 2019, which included a reduction of the VAT rate and an increase of the registration threshold, and severe disruptions in economic activity,” the report said.

“As a result, despite a moderation in public investment, the overall budget deficit increased.

“Approximately 40 percent of the deficit was financed by central bank credit.

“In Maldives, fiscal imbalances have widened significantly as well, as revenues and grants collected between January and July halved compared to the corresponding period in 2019…”

“Sri Lanka is also highly exposed to global financial conditions, as the repayment profile of its debt requires the country to access financial markets frequently.

A high deficit and rising debt levels could further deteriorate debt dynamics and negatively
impact market sentiment.

“Thus, Sri Lanka will need to strike a balance between supporting the economy amid COVID-19 and ensuring fiscal
sustainability.”

If there is reasonable access to finance South Asian countries could improve finances, the report said. (Colombo/Oct08/2020)