November 14, 2019
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    Lanka's economy is expected to recover in medium term Featured

    October 15, 2019

    Sri Lanka's economic growth expected at 2.7 percent in 2019 is expected to recover in medium term subjected to the country' ability to ensure political stability and a return to normalcy, the World Bank says in its twice-a-year regional economic update on South Asia.The latest edition of the South Asia Economic Focus, Making (De)centralization Work, the global lender says In the medium-term, the economy is expected to recover from the disruptions in 2019, and growth is expected to accelerate towards 4.0 percent, gradually closing the output gap.

     The report said the April terrorist attacks heightened macroeconomic challenges and growth for 2019 is expected at 2.7 percent, as many important economic sectors show relatively weak performance.Reduced tourism receipts will exert pressure on external accounts, despite reduced import demand. Fiscal balances will deteriorate amid contracting revenues. 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. The USD 5.50 poverty rate is projected at 36.1 percent in 2019.However, supported by recovering investment and exports, as the security challenges and political uncertainty dissipate, it is projected to reach 3.3 percent in 2020 and 3.7 percent in 2021.

    Key excerpts from the World Bank report:
    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 current account deficit is expected to narrow marginally in 2019 compared to 2018, thanks to weak import demand. Significantly large debt creating flows will be required to close the external financing gap when the impact of past one-off FDIs wane.

    Gross official reserves are expected to remain relatively low, as the country faces large debt repayments.Provided that the revenue-led fiscal consolidation continues, primary surpluses will return in 2020, which will help bring debt to a sustainable path. In the absence of currency depreciation, the debt-to-GDP ratio will stabilize in 2019.The successful completion of the IMF supported reform program and the continuation of the reform agenda beyond mid-2020 will be critical for macroeconomic stability and sustainability.The slowdown in economic activities, especially tourism, trade, transport, construction and other SME businesses, is expected to constrain jobs and wage growth in the near-term.The decrease in remittances will also lead to lower contributions to household income. As a result, the pace of poverty reduction is expected to slow down, with poverty measured using the USD 5.50 poverty line projected at 36.1 percent in 2019.

    A challenging political environment will delay or reversal in efforts to strengthen revenues, and a slower than expected recovery of some key economic sectors represent important risks. Mitigating these risks will be key to creating private sector jobs and accelerating poverty reduction.Externally, while Sri Lanka has raised enough foreign currency funds to manage immediate debt repayments, continued large refinancing requirements, weak fiscal buffers and high indebtedness make the economy vulnerable to uncertain global financial conditions.

    Priority reforms include: (a) continuing fiscal consolidation by broadening the tax base and aligning spending with priorities; (b) shifting to a private investment-tradable sector-led growth model by improving trade, investment, innovation and the business environment; (c) improving governance and SOE performance; (d) addressing the impact of an aging workforce by increasing labor force participation, encouraging longer working lives and investing in skills to improve productivity; and (e) mitigating the impact of reforms on the poor and vulnerable with well-targeted social protection spending.

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