Get policies right before elections: World Bank

Economic experts at the World Bank have warned that Sri Lanka needs to have its right policies for reform in place ahead of crucial elections later this year that they fear are likely to change the course of the country's political outlook. Given Sri Lanka's "remarkable" resilience, economic stabilisation as it comes out of a crisis and despite elevated poverty levels the growth trajectory must not be hindered.

There are concerns that policy reforms could be reversed during the forthcoming elections, World Bank Senior Economist for Sri Lanka and Maldives Richard Walker said at a media briefing in Colombo this week where the bank announced their annual review of the country's economic progress and that of South Asia in the Sri Lanka Development Update and the South Asia Development Update.

"We want systems and policies to be in place so the elections will not impact on future growth and progress," he said.

It was also noted that elections bring about uncertainty and so it was difficult to give a timeline for a complete recovery from the crisis.

The growth in the economy was mainly driven by services it was noted and the construction sector has not yet shown signs of recovery. With external balances improving there is a significant rebound in tourism that has contributed to the country's economic performance and the increased remittances that have led to foreign exchange reserves building up and an appreciation of the rupee.

Though state reforms have helped stabilise the economy it has also increased the cost of living for households.

However, the World Bank noted that the path to recovery remains narrow and expect some growth this year at around 2.2 per cent.

Poverty and inequality have increased for the four consecutive years from 11.3 per cent to 25.9 per cent of the population living in poverty in 2023, it was stated.

With a slow growth in the economy expected the modest recovery will be insufficient to reverse impacts of the crisis and so poverty is likely to remain high for several years at above 22 per cent until 2026.

Worsening levels of labour force participation is evident mostly in the urban areas, it was pointed out.

Labour force participation fell from 52.3 per cent in 2019 to 49.8 per cent in 2022, with sharper drops in urban areas (47.2 per cent) and for women (32.1 per cent), reflecting the impact of MSME closures on the labour market.

This has contributed to households obtaining debt to meet food requirements and in this respect support for the poor and commitments to reforms is important to recovery.

Households are grappling with food insecurity and malnutrition, prompting cutbacks in education and healthcare spending. Statistics indicate that 3/4 households have reduced food spending; 22.3 per cent of households have taken on additional debt; 17.5 per cent of households decreased their educational spending; and 24 per cent of the population are facing food insecurity.

The three key reform areas that Mr. Walker highlighted needs to be carried out are in economic governance that needs improvement; enhancing competitiveness with SOE reforms, private sector participation and engaging untapped export potential; and protecting the poor and vulnerable.

Inflation decreased to 5.9 per cent in February this year, revenue increased to 11 per cent of GDP in 2023 and foreign exchange reserves improved significantly.

Risks include insufficient debt restructuring, reform reversal, financial sector instability, and the crisis's lasting effects.

In releasing the South Asia update the World Bank highlighted that at above 6 per cent the region is expected to remain the fastest-growing region in 2024-25 with a strong growth in India while the rest of the region is expected to remain below pre-pandemic averages.

South Asia's growth has mostly been driven by the public sector; while the private sector investment growth has slowed sharply clearly highlighting a need for openness to trade and finance and stronger institutional quality. The region is also not creating enough jobs to keep pace with its rapidly increasing workingage population.