COLOMBO (EconomyNext) – Sri Lanka’s growth is expected to decline to 6.9 percent in 2015 from last year owing to deceleration of construction activities with the new government reassessing the investment-led growth model, the World Bank said.
But this will be partially set off by increased consumption thanks to increased public sector wages, according to the bank’s twice-a-year South Asia Economic Focus report.
"Any upward pressure on oil prices could adversely affect the external balance," the report warned.
"Tightening global financial conditions could lead to capital flight and debt roll-over could become expensive."
Recent depreciation of Euro could affect competitiveness of exports given that Euro Zone is purchasing over 30 percent of Sri Lanka’s exports.
Inflation is expected to remain around 3.0 percent, as global commodity prices remain subdued and the taxes on key commodities are lowered.
The fiscal deficit expected to narrow to 5.0 percent of GDP in 2015 thanks to proposed one-time revenue measures.
But the bank said that in future, measures are needed to increase revenues to avoid widening of the deficit in the wake of populist budget proposals increasing costs on a permanent basis for 2015 and beyond.
"A slowdown in GDP growth might reverse the decline in the public debt-to-GDP ratio, which was largely dependent on fast GDP growth," the report said.
Sri Lanka’s current account deficit is expected to narrow to 1.8 percent of GDP in 2015, reflecting savings on petroleum bill.
The exchange rate that came under depreciation pressure due to forex outflows in the first quarter of 2015 would likely to be managed using reserves in the next few months.
A planned sovereign bond and other capital flows to the government would help mitigating
pressures on the currency in the second half of the year.