The World Bank (WB) has cut Sri Lanka’s economic growth forecast to 3.5 percent from earlier forecasted 4 percent due to anticipated rise in political uncertainty and impacts of Easter Sunday attacks on investor sentiment and perceptions.
“In Sri Lanka, a rise in political uncertainty in the months leading up to presidential and parliamentary elections, which will take place in 2019 and 2020 respectively, could weigh on business confidence. In addition, recent security-related incidents could dampen investor sentiment and perceptions,” the WB stated in its latest flagship report “Global Economic Prospects, June 2019: Heightened Tensions, Subdued Investment”.
The WB expects that economic growth this year will pick up marginally to 3.5 percent from 3.2 percent last year, driven by a pickup in services sector activity and solid infrastructure investment.
However, the WB warned that anticipated re-escalation of political turbulence amid elections could potentially lead to fiscal slippages with expanding public spending; and a resurgence of non-bank financial sector funding issues.
The Central Bank (CB) recently said that the economic growth may come down to 3 percent or below this year due to impacts stemming from Easter Sunday attacks on sectors such as tourism. According to WB, the economic activities remained soft in the first quarter of this year, constrained by tight monetary policy.
Given the country’s high external debt and low international reserves, the WB notes that Sri Lanka would remain vulnerable to external shocks stemming from weakening global growth and rising policy uncertainty.
“A sharper-than expected deceleration in major economies or a new escalation of trade-related tensions among major economies would likely result in adverse trade and financial market spillovers to the region.
“High external debt and low international reserves could limit the policy room to address external shocks in some countries,” the WB pointed out.
Further, WB warned that uncertainty on the Brexit process poses a risk to certain South Asian economies including Sri Lanka which have preferential trade agreements or generalized system of preferences with the European Union and significant exports to United Kingdom.
“A no-deal Brexit could have a significant impact on exports of those countries to the UK in the absence of new trade agreements,” WB stated.
However, the governments of Sri Lanka and UK already have commenced discussions informally for a potential trade pact in preparing for no-deal Brexit scenario.