World Bank forecasts 3.9% economic growth for Sri Lanka this year

The World Bank expects Sri Lanka economy to grow 3.9 percent this year and 4 percent in next two years, recovering from the weather disruptions, which negatively affected agriculture, last year.

Sri Lanka recorded growth of 3.3 percent in 2017, the slowest in growth rate in 16 years. 

According to Sri Lanka’s Census and Statistics Department, the economy grew 3.6 percent in the first half. Central Bank Governor Indrajit Coomaraswamy recently said he was hopeful of achieving 4 percent economic growth for this year, although it meant the economy has to grow 4.4 percent in the second half. Both the International Monetary Fund and Asian Development Bank revised down their growth forecasts on Sri Lanka for this year and 2019. Despite Sri Lanka’s moderate growth expectations, the World Bank said the growth in the South Asian region is set to top 6.9 percent this year and to accelerate to 7.1 percent next year.

“South Asia is firming up its position as the world’s fastest-growing region, further extending its lead over East Asia and the Pacific,” the World Bank said yesterday in its twice-a-year regional economic update. The latest edition of the South Asia Economic Focus, Budget Crunch, however noted that the region’s growth performance is uneven across countries—with Afghanistan notably bucking the upward trend—and mainly driven by domestic demand.

Further, the report warned that a more turbulent external environment, manifested by trade wars and capital outflows from emerging markets and called for prudent economic policy and fiscal discipline.

Most South Asian countries generate low tax revenue and run large budget deficits, often made worse by economic shocks and 
election cycles.

At 4.4 percent of its gross domestic product, South Asia’s fiscal deficit is projected to be the second largest in the world this year, after the Middle East and North Africa region.

The average fiscal deficit over the last three years has been around 5.5 percent in Pakistan and above 6 percent in the Maldives, India and Sri Lanka.

“Budget deficits in South Asia are among the highest in the world and this could be storing up trouble for the future,” World Bank Vice President for South Asia Region Hartwig Schafer said.

“South Asia’s fiscal weaknesses reduce its ability to address external shocks or economic slowdowns. It would be wise to use these good economic times for countries to get their budgets in better shape.”

While fiscal challenges vary across the region, the report noted that tax revenue is consistently low across most South Asian countries and at rates below that of other developing countries with a similar income per capita, sometimes by a vast margin.

“South Asian countries have also favoured procyclical approaches to spending—with expenditures going up fast as their economies expand—that amplifies boom-and-bust cycles.

Together with public debt, hidden liabilities, arising from non-viable borrowing by state-owned enterprises, the failure of infrastructure projects involving the private sector and non-performing loans in commercial banks should be closely monitored,” the World Bank said. 

“Substantial government spending is understandable, even beneficial if well-invested, given South Asia’s enormous development needs,” World Bank Chief Economist for South Asia Region Martin Rama said. 

“But South Asian economies need to address their fiscal challenges to give themselves room to manoeuvre and sustain their journey toward greater prosperity.”