Economic recovery in Sri Lanka hinges on political stability and reforms: World Bank

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ECONOMYNEXT – Sri Lanka’s economic growth is expected to slow to 2.7% in 2019 and pick up next year, but depends on how it secures political stability and continues reforms to bolster incomes, the Bank said world.

“The medium-term outlook depends on the country’s ability to ensure political stability and a return to normalcy,” he said in a new report on South Asia.

“Growth for 2019 is expected at 2.7%, as many important economic sectors show relatively weak performance.”

However, the bank said that over the medium term, the economy is expected to recover from the turmoil of 2019 and growth to pick up towards 4.0%, gradually narrowing the output gap.

The drivers of the recovery should be investment and exports, as the performance of the tourism sector improves and uncertainty dissipates after the election, according to the report.

“Risks are on the downside. On the domestic front, a challenging political environment, delays or reversals in efforts to bolster incomes, and a slower-than-expected recovery in some key economic sectors pose significant risks.

Sri Lanka faces a presidential poll in November, followed by parliamentary polls in 2020.

Priority reforms include pursuing fiscal consolidation by broadening the tax base and aligning spending with priorities, the World Bank said.

There is also a need to shift to a growth model driven by private investment and the tradable sector by improving trade, investment, innovation and the business environment, as well as better governance and the performance of state enterprises.

The April terrorist attacks added to macroeconomic challenges, with lower tourism receipts putting pressure on external accounts, despite lower import demand.

“Fiscal balances will deteriorate as incomes contract,” the report said.

“Large refinancing needs, low fiscal reserves and high debt make the country vulnerable to refinancing risks. A slowdown in economic activity will limit job creation and income growth, as well as the pace of reduction of poverty.

Meanwhile, other analysts have suggested that Sri Lanka should pass laws to reduce central bank discretionary powers to generate monetary instability, which tends to generate currency meltdowns, structurally high interest rates and negative shocks on production. (COLOMBO, October 14, 2019)

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