WB expects SL economy to contract by 7.8% in 2022

By Nishel Fernando

• Grim outlook as country battles with electricity, food and fuel shortages
• Movement towards positive growth trajectory expected only in 2024
• Says growth contraction can be worse if relevant authorities delay actions
• Points out that additional increases in global commodity prices may put further upward pressure on food inflation
• Region wise, growth in South Asia is projected to moderate to 6.8% and 5.8% in 2022 and 2023

The World Bank (WB) expects Sri Lanka’s economy to contract by 7.8 percent in the year 2022, a grim outlook, due to the country battling with severe shortages in electricity, food and fuel.

As the economic crisis, due to poor management of the economy, resulting in foreign reserves to dip to historic low levels, the WB said the island nation would only be able to move towards a positive growth trajectory in 2024, where the economy is forecasted to expand by one percent. In 2023, the economy is expected to contract by 3.7 percent. 

“A balance of payments crisis and the cessation of external debt repayments in Sri Lanka have significantly deteriorated growth prospects, which are highly uncertain and subject to significant downside risks,” said the WB in its Global Economic Prospects report released this month.“The country faces severe economic difficulties and rising policy uncertainty—with the ongoing electricity blackouts and an inability to import sufficient essentials, including food and energy,” it added. 

The WB cautioned that the economic growth contraction can be worse, if the relevant authorities delay the actions required in debt restructuring efforts and restoring macroeconomic stability. The former is critical to commence the process of fiscal rehabilitation, the agency said. 

The WB also expressed concerns on the sky-rocketing food prices and its impact on the poor, who spend a substantial proportion of their income on food. The food prices, as measured by the Colombo Consumer Price Index (CCPI), rose by 57.4 percent year-on-year in May. 

According to the United Nations, nearly five million people or 22 percent of the Sri Lankan population are estimated to have become food insecure, due to the ongoing economic crisis in the country.
It noted that the additional increases in global commodity prices may put further upward pressure on food inflation, which is already high, eroding real incomes and reducing consumption. 

Region wise, growth in South Asia is projected to moderate to 6.8 and 5.8 percent in 2022 and 2023, as the momentum of the recovery wanes and the war in Ukraine undermines external demand and erodes real incomes through higher food and energy prices.

“The region is particularly vulnerable to the impact of higher food prices, with food accounting for 43 percent of the consumption basket on average, compared to 33 percent across EMDEs,” the WB said.

The weakening net exports and eroded consumer demand amid higher prices are expected to remain a significant drag on activity, the former reducing growth in 2022 by two percentage points. 

As the recovery from the pandemic recession matures, growth will be supported by private consumption, which is projected to contribute about four percentage points a year to GDP growth over 2022-24. The contribution to growth from government consumption will peak in 2022 and wane thereafter as fiscal support is withdrawn, the WB said.