Sri Lanka to embrace coronavirus-induced recession this year: WB

• Country’s 2020 GDP contraction to be in 0.5-3% range   
• Prolonged outbreak to increase poverty to 44% 
• A 2-4-month lockdown to decline employment 2.4-9%  
• Govt. debt to reach 91.6% of GDP at end-2020

The World Bank (WB) Group projects Sri Lanka’s GDP to contract in the range of 0.5-3 percent this year as the country embraces a coronavirus-induced recession, which would result in losses in employment and earrings leaving many in poverty while posing significant concerns on the country’s fiscal and external sustainability.

“For Sri Lanka, a recession is anticipated, with annual growth estimated between -3.0 and 
-0.5 percent. 

The COVID-19 outbreak will lead to a contraction in the economy. Periods of economic inactivity and disruptions will trigger jobs and earnings losses in 2020. Poverty is expected to increase, especially if the outbreak is protracted,” the WB stated in its latest ‘South Asia Economic Focus Spring edition: The Cursed Blessing of Public Banks’.

The WB cautioned that a prolonged outbreak in the country could potentially lead to a 3 percent contraction of the GDP with almost 44 percent increase in poverty. Hence, it emphasised that the immediate challenge for the government is to contain the domestic spread of COVID-19.

“A prolonged outbreak could lead to further movement restrictions and deeper disruptions in economic and labour market activities. Small and medium enterprises will struggle to survive. In this scenario, the economy would contract by 3.0 percent and poverty would increase to 43.9 percent in 2020,” the WB said. 

The WB expects that fiscal stimulus package introduced end last year and possible additional spending in the wake of the COVID-19 outbreak would exert pressure on fiscal sustainability, in a context of pre-existing constrained fiscal space. 

“Macroeconomic vulnerabilities will remain high, with limited fiscal buffers, high indebtedness and large refinancing needs,” it stated. 

Sri Lanka’s fiscal deficit is forecasted to shoot up to 9.8 percent of GDP this year, from the estimated 6.4 percent last year and the fiscal deficit is expected to remain above 8 percent of GDP for next two years. 

“With the worsening fiscal deficit, debt will become an issue once countries emerge from the crisis and normal activity resumes. Several countries may want to consider public debt service restructuring programmes to avoid bunching up of maturities further down the line that could increase financing costs,” the WB said.

Further, Sri Lanka’s Central Government’s debt is forecasted to reach 91.6 percent of GDP at the end of this year from estimated 84.1 percent in 2019 and it is expected to rise to 99 percent of GDP in 2022.

“Sri Lanka is vulnerable to uncertain global financial conditions as the repayment profile requires the country to access financial markets frequently. A high deficit and rising debt levels could further deteriorate debt dynamics and negatively impact market sentiments,” the WB noted. 

Accordingly, the country’s refinancing requirements is expected to be remaining high in near future, with annual gross foreign exchange requirements estimated at 6-7 percent of GDP during 2020-2022.

Meanwhile, the slowdown in economic activity is expected to trigger sharp jobs and earnings losses, in particularly service sector.

“Informal workers comprise about 70 percent of the workforce and are particularly vulnerable as they lack employment protection or paid leave. Social-distancing measures will directly impact services sector activities and extended travel restrictions will hurt tourism,” the WB noted.

It highlighted that two to four-month lockdown in Sri Lanka could lead to a decline in employment between 2.4 percent and 9 percent of total employment. Although, cash support to beneficiaries of various social protection programmes have been announced in response to the fallout from the COVID-19 outbreak, the WB pointed out that these measures are inadequate to effectively support to mitigate the adverse impacts as many poor and vulnerable people are excluded from such programmes. 

Further, the country is likely to struggle executing any possible additional spending in the wake of the COVID-19 outbreak, given its pre-existing constrained fiscal space.

“Macroeconomic vulnerabilities will remain high, with limited fiscal buffers, high indebtedness and large refinancing needs,” the report stated. 

The WB urged the South Asian nations to choose at diversification instead of autarky to address changed long-term challenges and opportunities.

“The pandemic might reinforce the backlash against globalisation that was already visible in recent years. When global value chains are disrupted, it is understandable that countries look for production methods that are less dependent on foreign producers. However, economic security is better served by diversification than by autarky,” it pointed out. 

Given increasing importance of India as a driver of per-capita growth in other South Asian economies, the WB suggested that any policies that India conducts to revive demand after COVID-19 will also have an important positive effect for the region as a whole.

Hardest hit is the Maldives, where GDP is expected to decline by between 8.5 and 13 percent this year, as tourism has dried up. Also, for Afghanistan, Pakistan and Sri Lanka, the full range of their forecast GDP growth for this fiscal year is in negative territory.