WB cuts Sri Lanka’s economic growth to 4.5% this year

„Cautions on further reform delays over troubling political landscape „SL’S economic growth hits 16-year low of 3.1% last year

The World Bank (WB) forecasts Sri Lanka’s economic growth to rebound to 4.5 percent this year, backed by consumption and investment but cautions against the increasingly challenging political environment, which would delay reforms further down the road.

Despite the positive outlook, the WB cut the earlier growth outlook for the year from 5 percent to 4.5 percent. Similarly, the Central Bank of Sri Lanka (CBSL) also projected the economic growth to rebound below 5 percent, while the Asian Development Bank (ADB) forecasts a 4.5 percent economic growth for the year.

Sri Lanka’s economic growth slowed down to a 16-year low of 3.1 percent last year, mainly due to adverse weather conditions, with floods in May in the South and West and prolonged drought across the country.

The WB warned that further slowdown in reform implementation, in a challenging political environment, remains the key risk as the challenging political environment has already slowed the pace of the reform agenda, while emphasizing that the impending election cycle elevates this risk.

“Political uncertainties slowed the implementation of reforms. The uneasy relationship of the ruling coalition surfaced after the victory of the party backed by the former president at the local government elections. Recent communal tensions that led to violence in some parts of the country also added to the challenging political environment,” the WB elaborated in its latest report titled ‘South Asia Economic Focus Spring 2018: Jobless Growth?’

The Sri Lankan economy is currently recovering from base after a difficult year with inclement weather where the prolonged drought adversely impacted the growth and external sector while contributing to pushing the inflation up.

However, the WB noted that the fiscal and monetary policy measures contributed to the stabilization of the economy last year and urged the government to expedite reforms to promote competitiveness, governance and continued fiscal consolidation.

The WB stressed that 2018 economic outlook will largely depend on the government’s commitment to the reform agenda of improving competitiveness, governance and public financial management.

The inflation is expected to stabilize at mid-single digit level this year as the impact of natural disasters wears off, although rising oil prices may pose some upward pressure.

Despite the low economic growth last year, Sri Lanka recorded the highest merchandise export growth in South Asia and also became the only South Asian country to have exports grown stronger than imports in 2017.

The external sector is expected to continue to benefit from the GSP Plus preferential access to the European Union and tourism receipts, despite the deceleration of remittances. External buffers are also expected to improve, with emphasis on purchasing foreign exchange, maintaining a more market-determined exchange rate, and increased foreign direct investment.

The overall fiscal deficit is expected to fall in the medium term, supported by the ongoing implementation of the revenue measures. However, the WB cautioned that delays in implementing tax reforms and improving the tax administration would strain fiscal and debt management.