WB revises Sri Lanka’s GDP growth projection to 3.5% this year

• Debt-to-GDP ratio projected to come down to 81.4% this year
• Impending election cycle could further slowdown reforms

The World Bank (WB) has revised Sri Lanka’s gross domestic product (GDP) growth to 3.5 percent this year, from an earlier forecast of 4 percent, well below the projected growth for South Asia.

The WB earlier this year forecasted that Sri Lanka’s GDP growth would accelerate marginally to 4 percent while estimating that the GDP growth for 2018 was 3.9 percent. However, Sri Lanka’s GDP performed projections by recording a GDP growth of 3.2 percent last year. 

In the latest edition of its biannual South Asian regional economic update titled ‘The South Asia Economic Focus, Exports Wanted’, the WB stated that Sri Lanka’s economic recovery will be supported by a pickup in the services sector and solid infrastructure investment this year. 

The WB estimates are below the Central Bank’s projection of 4 percent GDP growth for the year.

The WB expects Sri Lanka’s GDP growth will gradually converge towards 4 percent over the forecast horizon driven by domestic demand and the inflation is projected to stabilize around 5 percent.

As per the WB forecast, Sri Lanka’s GDP growth will accelerate by 0.1 percent until 2021 to reach 3.7 percent GDP growth by 2021. 

The WB also projected that the net foreign direct investment (FDI) as a percent of GDP to decline to 1.4 percent this year, from the estimated 2.2 percent last year.

The WB expects that the continued fiscal consolidation, albeit slow, would bring the overall fiscal deficit and public debt on a downward path.

It estimated that the debt-to-GDP ratio would come down to 81.4 percent this year after reaching 83 percent last year, while the fiscal deficit is estimated to come down to 4.8 percent of GDP, from the estimated 5.2 percent of GDP last year. However, Sri Lanka’s WB sees the largest risk for Sri Lanka’s economy arising from the impending election cycle combined with the recent developments in the political arena that could further slow down or reverse the government’s reform agenda.“On the fiscal and debt management fronts, risks include a delay or reversals in efforts to strengthen revenue collection, improve tax administration and implement liability management operations,” the WB stated. 

The WB advised the policymakers to mainstream the governance reforms, particularly with respect to public finance management (PFM) and state-owned enterprise (SOE) reforms to speed up the process. “While the implementation of cost-reflective pricing of fuel is an important step, further reforms are needed to reduce the fiscal risks of SOEs,” the WB stated. 
The authors of the report highlighted that the tourism sector could move labour out of agriculture and improve the earnings of the poor.“Sri Lanka is a fast-growing tourist destination and the tourism sector could help accelerate poverty reduction as it is labour-intensive, requires relatively low investment and thus holds great potential to create jobs for youth and women,” the WB stated.Sri Lanka’s poverty headcount ratio, which has remained on a downward trajectory, was estimated at 8.7 percent in 2018. The WB expects that recovery of domestic demand and improvements in the labour market, aided by low inflation, should boost real incomes and lead to a further reduction in poverty.Meanwhile, the GDP of the South Asian region is projected to grow by 7 percent this year, driven mostly by domestic demand. Hence, the WB urged the South Asian nations to increase their exports to sustain their high growth and reach their full economic potential as the current growth model led to widening the trade gaps and current account deficits and triggering currency depreciation in some countries.