COLOMBO: The World Bank in its Fall 2016 South Asia Economic Focus Report projected Sri Lanka’s economy to grow at 5.0 percent in 2017, up from 4.8 percent 2016.
The global lender lowered the growth in 2017, driven by increased consumption and postponed investment in 2015, to 5.0 percent from the 5.3 percent projected in its April 2016 report.
According to the latest twice a year World Bank report on South Asia Economic Focus released Monday, Sri Lanka is faced with a challenging macroeconomic environment characterized by high fiscal deficit, elevated public debt, and relatively weak external buffers.
While recent policy measures along with the IMF supported program are expected to restore macroeconomic stability in the short-run, it is imperative for Sri Lanka to expedite high priority structural reforms to increase competitiveness, improve governance and consolidate its fiscal balance in order to ensure sustained growth and development, the World Bank said.
The report noted that Sri Lanka’s macroeconomic performance deteriorated in 2015. And the authorities took policy measures to arrest the deterioration in 2016 by bringing proposals to increase revenues to reduce the budget deficit and tightening the monetary policies to tame the stubbornly high credit growth and rising inflation.
The policy measures were followed by a new International Monetary Fund program. The 36-month Extended Fund Facility (EFF) for about US$ 1.5 billion is aiming to offer a policy anchor for macroeconomic stability and structural reforms.
Complementing the EFF, the World Bank approved a US$ 100 million Development Policy Financing (DPF) operation, supporting the government to carry out reforms in competitiveness, transparency and public sector and fiscal management. Monetary tightening and enhanced currency flexibility have contributed to improving short-term stability, the World Bank says.
The IMF program is expected to add to the confidence while supporting fiscal sustainability. Structural reforms supported by the DPF will yield benefits in the medium term. Growth is expected to remain unchanged in 2016 and grow marginally over 5.0 percent beyond, driven by private consumption and postponed FDI in 2015.
The reduced drag from imports on low commodity prices along with recent policy measures will contribute to the increase in growth. The impact of past currency depreciation and the increase of the VAT rate will increase inflation in 2016 and 2017 despite downward pressure from low international commodity prices. The external current account is projected to improve in 2016 with reduced imports and increased tourism. The fiscal deficit is projected at 5.7 percent of GDP for 2016 after considering delays in implementation of revenue measures. The immediate challenge for the government is to increase 2016 revenue amid legal obstacles on VAT, the report says.
“It is important that fiscal consolidation is designed to minimize the impact on the poor. Removing VAT exemptions, which tend to disproportionately benefit wealthier households, would constitute a positive first step. However, personal income tax and transfer spending are much more progressive than VAT,” the report says.
A recent assessment of the distributional impact found that the fiscal policy has become more progressive since 2009, largely because of an increase in direct transfers, but personal income tax revenue remains small.
“Ongoing reforms to implement criteria to select beneficiaries of Samurdhi, the main cash transfer program for the poor, will be crucial to assist the poor and maintain political support for reforms.”