Sri Lanka’s growth seen staying below potential in near term: UN

ECONOMYNEXT – Sri Lanka’s economic growth is projected to remain below potential in the near term owing to insufficient international competitiveness and vulnerability to external shocks, a new United Nations study said.

The island has a high debt burden and heavy government interest payments, which at almost 40 percent as a share of general government revenue was the third highest among South Asian economies, the U.N.’s report, the World Economic Situation and Prospects 2019, said.

“In several countries, high debt-service obligations already constitute a heavy burden on government finances. In 2017, interest payments alone exceeded 20 per cent of government revenue in several countries in Africa, Latin America and South Asia.”

Sri Lanka’s economy is recovering from the slowdown in 2017, but much more slowly than anticipated, amid weak business sentiment, feeble investment demand and political turbulences, the U.N. said.

“Growth is projected to remain below its potential in the near term.” Sri Lanka had the lowest total reserves over external debt in the 2015–2017 period in South Asia, the U.N report said.

“Policymakers in the developing economies are faced with the challenge of containing the build-up of financial risks while supporting short-term growth prospects,” the U. N. said.

“Deleveraging policies that are too aggressive could cause major disruptions to economic activity, while a focus on promoting growth, including through maintaining easy financial
conditions, would induce further debt accumulation.”

The U.N. advocated a stronger policy focus on improving the composition and quality of investment, given that raising investment in productivity-enhancing activities is key to improving the sustainability of growth prospects over the medium term.

The report noted that an abrupt tightening of global financial conditions, coupled with a further escalation of the ongoing trade disputes, is also a significant downside risk to the outlook.

“More challenging external conditions can further expose macroeconomic imbalances and financial vulnerabilities associated with rising fiscal and current account deficits and elevated levels of debt in some economies,” it said.





“Notably, most economies have insufficient foreign  exchange reserves to face severe external shocks. In addition, given that South Asia is a net oil importer, a significant rise in oil prices could raise inflationary pressures and constrain economic activity in several economies.”

South Asian countries need to tackle medium-term challenges and structural constraints to unleash their enormous growth potential.

“A crucial challenge is the strengthening of its productive and international competitiveness, as the region is lagging in several competitiveness indicators, like attracting foreign investments, penetrating new markets, and diversifying and upgrading its export products.”

Amid limited trade openness and regional integration, South Asia has an enormous potential to gain market share in foreign markets and to participate more decisively in global value chains.

The U.N. study noted positive examples, such as the garment sector in Bangladesh and Sri Lanka, but said the positive effects of increased global integration have remained limited in most economies in the region.
(Colombo/January 22/2019)

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