World Bank says managing external balances a challenge for Sri Lanka

The World Bank projects Sri Lanka’s economic growth, driven by increased public investment and postponed FDI in 2015, to increase to 5.3% in 2016 and beyond, amid challenges managing external balances and implementing the proposed revenue measures to reduce the budget deficit.

However, the reduced drag from imports thanks to continued low commodity prices and the recent policy measures to curb import growth would also contribute to the increase in growth, the World Bank said in a report.

According to the twice-a-year World Bank report on South Asia Economic Focus, released Sunday, the challenging global environment took a toll on Sri Lanka’s economy with reduced exports and remittances and significant capital outflows.

“Expansionary monetary and fiscal policy supported growth, but were of little help in addressing these challenges, leaving the country with higher public debt, lower reserves and rising core inflation in 2015,” the report said.

Economic growth marginally decelerated to 4.8% in 2015 compared to 4.9% in 2014 on account of the decline in the construction sector as the new Government was reassessing the construction led growth model.

The global lender also expects the inflation to rise in 2016 due to the impact of past currency depreciation and the increase of VAT rate. However, relatively low international commodity prices are expected to maintain downward pressure on inflation.

The trade balance is projected to improve with reduced imports on policy tightening and continued low oil prices.

The current account deficit is also projected to narrow thanks to growing tourism inflows, while remittances are projected to grow below nominal GDP growth because of continued low oil prices affecting the Middle East.

The fiscal deficit is projected at 5.6% of GDP for 2016 after considering a few key policy measures, including the increase in VAT rate, announced as amendments to the Budget.

Immediate challenges include managing external balances with significantly large forex drains due in 2016 and implementing the proposed revenue measures to reduce the 2016 fiscal deficit.

Structural challenges include increasing fiscal revenue in the medium term to meet the requirements of a middle income country, and narrowing a persistent current account deficit linked to structural competitiveness issues in the export sector.

With the country approaching upper middle income status, borrowing terms are becoming more commercial, which could affect affordability.

“Finally, with limited national savings compared to national investment, Sri Lanka needs to attract more FDI to sustain a high growth path with emphasis on manufacturing and export sectors,” the World Bank report said.