Sri Lanka needs more FDI for high growth rate: World Bank
Saturday, 18 April 2015 00:00
-
- {{hitsCtrl.values.hits}}
Sri Lanka’s economic growth is expected to decline to 6.9% in 2015 due to slowing construction activity, while South Asia is projected to steadily increase from 7% in 2015 to 7.6% by 2017 through maintaining strong consumption and increasing investment.
According to the twice-a-year South Asia Economic Focus report released recently, Sri Lanka’s growth is expected to decline due to deceleration of construction activities with the new government reassessing the investment-led growth model, partially set off by increased consumption thanks to increased public sector wages.
Inflation is expected to remain around 3.0%, as global commodity prices remain subdued and the taxes on key commodities are lowered.
The fiscal deficit expected to narrow to 5.0% of GDP in 2015 thanks to proposed one-time revenue measures.
Going forward, measures are needed to increase revenues to avoid widening of the deficit in the wake of some populist proposals increasing costs on a permanent basis for 2015 and beyond.
A slowdown in GDP growth might reverse the decline in the public debt-to-GDP ratio, which was largely dependent on fast GDP growth, the report cautioned.
The current account deficit is expected to narrow to 1.8% of GDP in 2015, reflecting savings on petroleum bill. A persistent current account deficit is linked to structural issues in the export sector, which is in need of improved competitiveness and diversification, the report points out.
Recent growth has been driven mainly by non-tradable sectors. Going forward, it will be difficult to sustain its high growth path without increasing growth in manufacturing and export sectors, the report warns.
According to World Bank, fiscal revenue has been declining for the last decade, placing Sri Lanka among the lowest levels in South Asia, and below average for its income level. This restricts the space for public investment and countercyclical policy.
With limited public and private national savings compared to national investment, Sri Lanka needs to attract Foreign Direct Investments (FDI) in order to maintain its high growth rate, the World Bank points out.
Despite its geographic, education and infrastructure advantages, Sri Lanka attracts less FDI than expected compared to other countries in the region.
With the country on course to join upper middle income countries, concessional borrowing sources are drying up and are being replaced by borrowings on commercial terms, which could affect affordability.
The global lender expects the exchange rate that came under depreciation pressure due to forex outflows in the first quarter of 2015 likely to be managed using reserves in the next few months.
A planned sovereign bond and other capital flows to the Government would help mitigating pressures on the currency in the second half of the year.
The Bank cautions that any upward pressure on oil prices could adversely affect the external balance. Tightening global financial conditions could lead to capital flight and debt roll-over could become expensive. Recent depreciation of Euro could affect competitiveness of exports given that Euro Zone is purchasing over 30% of Sri Lanka’s exports.
IMF sees moderate, uneven global growth
Reuters: The International Monetary Fund highlighted an increasing divergence in the growth paths of the world’s major economies this year, as a pick-up in the Euro Zone and India is expected to be offset by diminished prospects in other key emerging markets.
The IMF on Tuesday kept its global growth forecasts unchanged, but warned that the economic recovery remains “moderate and uneven,” beset by greater uncertainty and a host of risks, including geopolitical tensions and financial volatility.
In its flagship World Economic Outlook, the Washington-based institution kept its forecast for global growth this year at 3.5%. For 2016, the IMF now expects global gross domestic product to expand 3.8%, up from the 3.7% it forecast in January.
But the headline figures mask a growing split among major economies, in part due to the varying impacts of currency fluctuations and lower oil prices.
They also reflect the IMF’s growing concern about key developing countries, including Russia, Brazil and South Africa, and fears of a greater slowdown in growth in China, as the world’s second-largest economy rebalances away from investment toward consumption-led growth.
India will overtake China as the fastest growing emerging economy in 2015-16 by clocking a growth rate of 7.5% on the back of recent policy initiatives, pick-up in investments and lower oil prices, the IMF said.
The IMF’s Managing Director, Christine Lagarde, last week called the current level of growth “just not good enough” to help millions of people stuck without jobs, and again urged policymakers to pursue deeper reforms to boost economies’ growth potential.
The subdued forecasts will form the backdrop to the meeting of the world’s top economic policymakers in Washington later this week. Compared with the last gathering six months ago, the United States’ economic prospects seem tarnished while troubled Europe finally shows signs of turning the corner.
The IMF raised growth expectations for all the major economies in the euro zone – especially Spain – and for Japan, as both oil-importing regions benefited from the lower price for crude oil and depreciation of their currencies.
But the IMF cut its outlook for the US, as a 10% appreciation in the dollar over the last six months dragged down net exports.
The IMF also warned that many of the risks it highlighted in October, including geopolitical tensions and disruptive shifts in financial markets, could still derail the sluggish recovery.
It warned, in particular, of surprises around the first US interest rate hike in nearly nine years, expected later this year, which could prompt capital outflows from emerging markets.
The IMF said oil prices should add more than 0.5 percentage point to global economic growth by next year, but warned prices could rise more quickly than expected and hurt global demand.
