WB forecasts SL economy to contract by 3.2% this year

• Says V-shaped recovery unlikely as predicted by country’s Central Bank 
• Forecasts possible U-shaped recovery given 0% growth projected for 2021
• Cautions on challenges to govt. debt refinancing in current environment 

By Nishel Fernando
The World Bank (WB) Group projects Sri Lanka’s GDP to contract by 3.2 percent this year and to remain flat at zero percent next year, underscoring that a V-shaped recovery is unlikely for the country from the coronavirus-induced recession.

“In Sri Lanka, the combination of falling tourism, manufacturing activity and services associated with the pandemic, is envisaged to cause the output to contract by 3.2 percent, despite the earlier recovery from the April 2019 terrorist attacks,” the WB stated in its June 2020 flagship report ‘Global Economic Prospects’.

In April, the WB cautioned that Sri Lanka’s GDP could contract in the range of 0.5-3.0 percent, with an almost 44 percent increase in poverty, in a case of a prolonged COVID-19 outbreak in the country.

However, Sri Lanka’s Central Bank (CB) insisted on a V-shape economic recovery, starting from the second half of this year.

Revising the GDP growth forecast for the year, the CB projected a 1.5 percent GDP growth for this year and a 4.5 percent growth for 2021.

In contrast, the WB expects Sri Lanka’s GDP to remain at the same level of this year in 2021, projecting zero percent growth for next year, indicating a possible U-shaped recovery for the economy. 

The WB in particular noted that the impact on the tourism industry would create a challenging path for certain South Asian economies such as Sri Lanka, for their recovery. 

“Tourism activity was on a path to recovery but became severely damaged by the pandemic. This includes sharp declines in tourist arrivals in economies like Bhutan, Nepal, Sri Lanka and especially the Maldives, where tourism directly and indirectly accounts for more than two-thirds of GDP. 

This includes a decline in arrivals from China, a key market, since early in the year. International travel bans and other restrictions adopted by regional economies (e.g., airport closure for arrivals in Sri Lanka) have further contributed to the weakness in tourism,” the WB elaborated. 

The development lender also cautioned the South Asian nations on challenges to government debt refinancing requirements, amid the current challenging environment.

“Government debt refinancing needs can be vulnerable to a deeper reversal of global capital flows and higher global financial market uncertainty. A further pullback in capital flows would likely reduce investment activity and private sector credit growth. 

Corporate balance sheet weakness in regional economies could also hinder capital investment. High debt and deficits, as well as inadequate fiscal management regimes across the region, also limit the scope and effectiveness of fiscal stimulus,” the WB said.

In some instances, the WB noted that extraordinary financial sector support, due to COVID-19, could raise financial sector risks by stressing the capacity of commercial banks to support private sector credit.

According to the WB projections, the global economy will shrink by 5.2 percent this year, representing the deepest recession since the Second World War, with the largest fraction of economies experiencing declines in the per capita output since 1870.

For South Asia, the regional economy is projected to contract by 2.7 percent this year, as the pandemic mitigation measures hinder consumption and services activity and as uncertainty about the course of the pandemic chills private investment.

The WB expects the South Asian region economies to return to growth path, projecting a 2.8 percent GDP growth for next year, although risks remain. 

“Growth in 2021 is projected to rebound to around 3 percent after the effects of the pandemic fade and global headwinds taper. Downside risks to the outlook predominate and could materialise as a stronger surge of COVID-19 within the region, an intensification of financial market stress, a deeper pullback in remittance inflows or a stronger-than-expected global economic contraction,” the WB said.