Home / Front Page/ SL facing challenging macroeconomic situation, political environment a key source of risk: WB report

SL facing challenging macroeconomic situation, political environment a key source of risk: WB report

Comments / {{hitsCtrl.values.hits}} Views / Thursday, 11 April 2019 00:14


The latest edition of the World Bank’s report ‘South Asia Economic Focus, Exports Wanted’ says Sri Lanka is facing a challenging macroeconomic situation and the challenging political environment remains a key source of risk.

According to the World Bank’s twice-a-year regional economic update, Sri Lanka’s growth declined to 3.2% in 2018, and the fiscal deficit was 5.2% of GDP while external sector performance remained weak with a widened current account deficit and low reserves.

The growth dampened significantly in 2018, partly due to political tensions which impacted international business confidence. Leading rating agencies revised their assessments and Fitch, S&P, and Moody’s downgraded Sri Lanka’s sovereign ratings.

The, political uncertainty last year led to foreign selling and stock prices declined from March until October of last year.

The export growth decreased from 7.5% in 2017 to 2.1% in the fourth quarter of last year. At the same time, however, import growth came down from nearly 20% in 2017 to -5.8% in the last quarter of last year.

While export shares in South Asia are below the world average Sri Lanka exports more services as percent of GDP than the world average.

In South Asia Bangladesh, Sri Lanka and India are nearly at potential regarding their exports to the United States and the EU but have considerable gaps with China and the rest of the world.

The World Bank update points out that while the world average off goods exports is 22%, it is only around 13% in Sri Lanka. The export gaps are smaller but with around 20% of GDP still substantial in Sri Lanka.

However, going forward, the economy is expected to rebound, and growth to converge gradually toward 4% in the medium term, driven by domestic demand and inflation is projected to stabilize around 5%.

Continued fiscal consolidation, albeit slow, should bring the overall fiscal deficit and public debt on a downward path.

The current account deficit is projected to remain at around 2.4% of GDP between 2019 and 2021, as tourism receipts help counterbalance the effect of sluggish remittance flows and high external interest payments.

Foreign capital inflows to government securities and FDI should help meet external financing requirements.

Poverty has remained on a downward trajectory, with the headcount ratio estimated at 8.7% in 2018. The recovery of domestic demand and improvements in the labour market, aided by low inflation, should boost real incomes and lead to a further reduction in poverty.

As Sri Lanka is a fast-growing tourist destination, the tourism sector could help accelerate poverty reduction as it is labour-intensive, requires relatively low investment, and thus holds great potential to create jobs for youth and women, according to the report.

“More generally, the recovery of domestic demand and improvements in the labour market, aided by low inflation, should boost real incomes and lead to a further reduction in poverty,” it says.

However, the challenging political environment remains a key source of risk according to the World Bank since given recent developments, and the impending election cycle, the window for reforms is narrowing. Large refinancing requirements make the country vulnerable to global financing conditions. 

On fiscal and debt management fronts, risks include a delay or reversals in efforts to strengthen revenue collection, improve tax administration, and implement liability management operations.

On the external front, tighter than expected global financial conditions would increase the cost of debt and complicate endeavours to roll-over maturing Eurobonds.

The report says rising in oil prices increase current account deficits in South Asia, at least in the short run and the effect is strongest for Sri Lanka.

The increasing occurrence and impact of natural disasters could also have an adverse impact on growth and poverty reduction.

Priority reforms to sustain economic growth, create more and better jobs, and reduce poverty include: (a) fiscal consolidation to make space for investments in health, education, social protection and public infrastructure; (b) improving competitiveness and promoting trade and FDI to facilitate a shift in the growth model driven more by private investment and exports; (c) mainstreaming governance reforms, particularly with respect to public finance management (PFM) and state owned enterprise (SOE) reforms; and (d) reducing vulnerability stemming from refinancing risks and natural disasters risks.

Share This Article

Facebook Twitter


1. All comments will be moderated by the Daily FT Web Editor.

2. Comments that are abusive, obscene, incendiary, defamatory or irrelevant will not be published.

3. We may remove hyperlinks within comments.

4. Kindly use a genuine email ID and provide your name.

5. Spamming the comments section under different user names may result in being blacklisted.


Today's Columnists

2 June 1941: Operation Barbarossa

Friday, 21 June 2019

The 22nd of June marks the 78th anniversary of the bloodiest conflict in human history, the titanic World War 2 struggle between Germany and Russia. In this clash of irreconcilable racial and ideological foes, no quarter was asked for, no quarter giv

The contemporary Nikaya system, the most unBuddhist legacy of Buddhism

Friday, 21 June 2019

The recent comments made by the Mahanayake of the Asgiriya Chapter of the Siam Nikaya hopefully will generate an objective discussion on the Buddhist institution and its role in Sri Lanka. The Venerable Mahanayake’s comments belied what Buddha beli

Laundering the Parliament

Friday, 21 June 2019

There are strict laws and rules in force to ensure the honesty and integrity of people’s representatives in all countries where there is a democratic system of governance. People’s representatives elected by public vote are prohibited to pursue b

SOFA/VFA: A worrying scenario

Friday, 21 June 2019

An unrestrained communal animosity towards ethnic and religious minorities, anchored in mythology and historical half-truths, and popularised by sections of the Buddhist clergy and a sectarian media have combined to drive Sri Lanka to a point where t

Columnists More