ECONOMYNEXT – Sri Lanka is expected to grow 3.3 percent in 2021, recovering from Coronavirus pandemic but is clouded by pre-existing macroeconomic weaknesses, Washington-based World Bank said.
Macro-economic threats are generally created by a central bank and finance ministry policies though a monetary authority can do it on its own through stimulus.
“In Sri Lanka, high debt burden, large gross financing needs, and weak external buffers cast shadows on the outlook,” the World Bank said in its Global Economics Prospects report.
“Despite a fast vaccine rollout in the last two months, the country is in the middle of the second COVID wave of 2021.”
Sri Lanka has speeded up vaccination, especially in large cities and is ahead of many countries, helped by Chinese vaccine supplies.
“Real GDP is expected to grow by 3.3 percent in 2021, from a 3.6 percent contraction in 2020,” the report said.
“GDP is expected to grow around 2 percent each year over the next two years.
“The government’s ability to implement policies to support recovery are limited by sovereign rating downgrades.”
A relatively strong credit recovery has hit the country’s external sector with both the bond and foreign exchange markets crippled by liquidity injections that sent rates to historic lows amid budget deficits not seen since the early 1980s when the currency also collapsed, analysts say.
Sri Lanka has raised policy rates by 50 basis points and is removing the shackles on bond markets, but forex markets are still dysfuctional.
Sri Lanka has also seen a spike in traded commodities and domestic substitutes as the Federal Reserve fired its latest commodity bubble under Chairman Jerome Powell.
The Fed is the worst known bubble blower in history, having created the Great Depression with the Roaring 20s bubble, the 1970s oil shock with the Arthur Burns bubble which also broke the Bretton Woods shattered a three century-old gold standard.
The Fed also fired the Greenspan-Bernanke bubble which broke in 2008 triggering the what is now called the Great Recession.
Fed is under pressure to raise rates to contain the Powell Bubble. Fed rate hikes in the past have also hit Sri Lanka including in 2018.
Meanwhile Maldives which does not practice active monetary policy and has the highest per-capita incomes is expected to grow 22 percent helped by a tourism recovery.
India is projected to grow 5.0 percent (July to June) Bhutan 1.2 percent , Nepal 1.8 percent, Pakistan 3.5 percent and Bangladesh 5.0 percent. (Colombo/Oct07/2021)