SL’s economic outlook uncertain: WB

The latest economic update by the World Bank (WB) revealed that there is much uncertainty over the outlook for the island nation.

The balance-of-payments crisis, leading to widespread shortages, makes any forecast for Sri Lanka highly uncertain, the WB said. 

The WB, in its South Asia Economic Focus, Spring 2022 update noted that if the country can muddle through by 2022 and assuming the external financing gap would be closed, the current account balance deficit in 2022 is expected to increase compared to 2021. 
“The abrupt switch to a floating exchange rate regime in March could help increase competitiveness,” the WB said.  

The WB noted that while the deepening foreign exchange crisis in Sri Lanka is putting a severe strain on its banking sector, the low interest rates and supportive credit and fiscal measures have led to the rapid growth of private sector credit in the region. 

However, they could also lead to rapid deterioration of bank asset quality if lender screening is not adequate, adding to the financial sector risks. 

The elevated financial risks in one sector can spill over and destabilise the economy as a whole and the financial sector balance sheets in South Asian economies featured significant risks even before the COVID-19 outbreaks. 
The report also added that the financial institutions are likely to come under significant stress as debt moratoria and other support policies for borrowers are scaled back from levels during the pandemic. 

Furthermore, as several countries, especially Sri Lanka and Afghanistan, have no borrowing capacity, while others, for example the Maldives and Pakistan, need to carefully watch their fiscal balance amid the rising external debt vulnerabilities, the WB said.