Growth hopes for 2021

The World Bank it its latest forecasts this week has projected Sri Lanka to grow by 3.3%, which is in line with the overall South Asian average. But it has also warned that risks remain tilted to the downside, particularly on virus impact and fiscal concerns, putting the Government on notice about challenges that lie ahead for the next 12-months. 

Sri Lanka’s forecast of 3.3% growth is lower than the Government estimate of 5.5% growth outlined in Budget 2021. The Central Bank in its Road Map released this week put the contraction at 3.9%, much lower than the World Bank estimated 6.7%. While Sri Lanka’s performance this year is expected to be better, concerns over growth sustainability remains with the World Bank forecasting 2022 growth to be only 2%. 

Other countries in the region have had mixed fortunes with India forecast to grow 5.4%, Bangladesh 3.4%, Afghanistan 2.5%, Nepal 2.5% and Pakistan 2%. Maldives, which depends on tourism for a large chunk of its growth is expected to rebound by an impressive 9.5% in 2021 after suffering a 21.5% contraction last year – the largest in the region.

Overall the region is projected to grow by 3.3% in 2021. Weak growth prospects reflect a protracted recovery in incomes and employment, especially in the services sector, limited credit provisioning constrained by financial sector vulnerabilities, and muted fiscal policy support. The forecast assumes that a vaccine will be distributed on a large scale in the region starting the second half of 2021 and that there is no widespread resurgence in infections – aspects respective Governments will have to pay attention to as well.  

The report went on to say risks to the outlook are tilted to the downside. They include more severe and longer-lasting infection rates from the pandemic, financial and debt distress caused by an abrupt tightening of financing conditions or possible widespread corporate bankruptcies, adverse effects of extreme weather and climate change, weaker-than-expected recoveries in key partner economies, and a worsening of policy- and security-related uncertainty.

Additional stress on domestic banks in the region could be triggered by the economic consequences of a more protracted recovery from the pandemic, which in turn could lead to a rise in bankruptcies and weaken the balance sheets of the banking and non-banking sectors among several economies of the region (Bangladesh, Bhutan, India, Sri Lanka). Extreme weather events also remain an important regional risk. Sri Lanka, which is among the most vulnerable countries in the world, will have to be extra vigilant.

Sri Lanka has also been encouraged by numerous entities and experts, including the World Bank, to continue reforms that would see key structural changes to its economy including continuing fiscal consolidation by broadening the tax base and aligning spending priorities; shifting to a private investment-tradable sector-led growth model by improving trade, investment, innovation and the business environment; improving governance and SOE performance; addressing the impact of an aging workforce by increasing labour force participation, encouraging longer working lives and investing in skills to improve productivity; and mitigating the impact of reforms on the poor and vulnerable with well-targeted social protection spending. 

In this backdrop the Government focus on pushing forward growth by reducing imports and encouraging domestic consumption will certainly see an increase in growth numbers but putting the economy on a sustainable path will be a longer term battle.