SL projected to grow by 3.3% in 2021 amidst pandemic

Sri Lanka’s economy is projected to grow by 3.3 percent in 2021, but the medium-term outlook is clouded by pre-existing macroeconomic weaknesses and the economic scarring from the COVID-19 pandemic, the World Bank said this week. Sri Lanka’s Central Bank estimates growth to be higher than the bank forecast.

The World Bank in its twice-yearly regional update said the gradual recovery will likely lead to corresponding improvements in labour market conditions. Most countries in South Asia are far from pre-pandemic trend levels.

The bank’s latest South Asia Economic Focus titled Shifting Gears: Digitisation and Services-Led Development projects the region to grow by 7.1 percent in 2021 and 2022. While the year-on-year growth remains strong in the region, albeit from a very low base in 2020, the recovery has been uneven across countries and sectors. South Asia’s average annual growth is forecast to be 3.4 percent over 2020-23, which is 3 percentage points less than it was in the four years preceding the pandemic.

COVID-19 has left long-term scars on the region’s economy, the impacts of which can last well into the recovery. Many countries experienced lower investment flows, disruptions in supply chains, and setbacks to human capital accumulation, as well as substantial increases in debt levels. The pandemic is estimated to have caused 48 to 59 million people to become or remain poor in 2021 in South Asia. Sri Lanka’s poverty at $3.20 per day poverty line is projected to fall to 10.9 percent in 2021, which is still significantly above the 2019 level of 9.2 percent, the report added.

“Sri Lanka has done well to vaccinate more than 50 percent of the total population so far and the Government is now focusing on targeted measures to prevent further COVID-19 waves, which could dampen the economic recovery,” said Faris Hadad-Zervos, Country Director of the World Bank for Maldives, Nepal, and Sri Lanka. “The pandemic has brought unprecedented disruptions to education and the learning losses will be a drag on the country’s human capital gains. Targeted policies to reverse trends of long-term inequality and reduce gaps in equity are priority to realise growth prospects.”

In Sri Lanka, continued macroeconomic challenges, particularly the high debt burden, large refinancing needs, and weak external buffers will adversely affect growth and poverty reduction over the medium term. Despite increased policy rates and price controls imposed by the government, inflationary pressure is expected to remain strong amid partial monetisation of the fiscal deficit, currency depreciation, and rising global commodity prices. Food insecurity could worsen and poverty reduction slow if food prices remain elevated and shortages continue.

As countries build back, they have a chance to rethink their long-term development models. With the emergence of new digital technologies, South Asia has an opportunity to shift gears from a traditional manufacturing-led growth model and capitalise on the potential of its services sector, the report said.