COLOMBO: The World Bank in a report said economic growth in Sri Lanka is expected to slow down with the new government revisiting the investment-led growth model, though it will be partially offset by increase in consumption and strong tourism and remittance inflows.
The World Bank forecasts a growth of 6.9 percent for this year, slightly down from the 7 percent growth forecast by the Sri Lanka’s Central Bank. But, International Monetary Fund (IMF) recently said the economy would grow at a much slower pace of 6.5 percent in 2015.
The new government has halted some of the ambitious Chinese-funded infrastructure projects planned and partially implemented by the previous regime, on allegations of corruption.
However, the administered cuts in prices of several essential goods and significant reduction in fuel prices have boosted domestic consumption. The inflation in May was only 0.2 percent and the policy interest rates remain low.
The report titled ‘Global Economy in Transition’ also stated that the quality of fiscal consolidation in the country has deteriorated, and the government could potentially overshoot its fiscal targets in the short term.
Sri Lanka missed its budget deficit target for the first time in the post-conflict period, as the country reported a fiscal deficit of 6 percent of Gross Domestic Product (GDP) for the year 2014, amid revenue collection shortfalls and higher expenditure.
The government aimed to reduce the deficit to 5.2 percent of GDP in 2014 from 5.9 percent of GDP in the previous year.
The World Bank report also noted that lower global oil prices have helped countries in the South Asian region such as Sri Lanka, Pakistan, Bhutan and Maldives in narrowing their trade deficits.
Between June 2014 and January 2015, international oil prices declined by nearly 50 percent, more than the prices of other commodities, and have remained low despite the recent up tick.
Sri Lanka is a net importer of oil and the country’s oil bill fell over 50 percent in the first quarter of 2115 to US $ 709 million compared to the same period of the previous year.
Another positive development pointed out by the World Bank report for some of the South Asian countries was the higher inflows of tourists and remittances.
“Remittances inflows have been particularly strong in Pakistan, amounting to US$13.3bn in the first three quarters of FY2014–15 (a 15 percent increase from a year earlier), helping shore up consumption in the face of energy bottlenecks that have hampered production and exports. Flows to Sri Lanka and Bangladesh have also remained strong.”
However, the report cautioned that retrospective one-off taxes on large corporates, cut in infrastructure spending and salary increase to public sector with no link to productivity improvement, have created investor uncertainty in Sri Lanka ahead of the upcoming parliamentary elections.