Sri Lanka’s future growth will depend on foreign investor confidence, which in turn will depend on fiscal consolidation and an end to the political deadlock between the unity government’s major parties, a World Bank report said this week.
“Fiscal consolidation amounting to 3.5 percent of GDP by 2020 will lift investor sentiment, but weigh on growth and, especially, infrastructure spending in the near-term. Political deadlock in the coalition government, on near-term spending priorities, could hinder the pace of reforms,” it said.
The current government managed to push the budget deficit up to 7.4 percent of GDP in 2015 by fulfilling election promises, before cutting the deficit down to 5.6 percent of GDP in 2016, slightly off its target of 5.4 percent of GDP.
Although fiscal consolidation will cut growth, an uptick in private consumption and increased foreign direct investments would push growth up to 5-5.1 percent over the next three years from 4.8 percent in 2016, according to the World Bank.
However, the development lender said that the local investment growth would continue a downward trend due to the tightening of the monetary policy, which has raised financing costs.
The report said that slippages on fiscal consolidation could cast doubts on reducing public debt to more sustainable levels.
“A transparent medium-term framework for the budget would help stabilize public debt. Improved public financial management and efficiency at national and sub national levels (e.g., through fiscal rules), would help to anchor expectations of fiscal sustainability,” it said.
However, the World Bank noted that in addition to discipline in spending, revenue raising has also improved under the International Monetary Fund’s extended fund facility, which is providing US $ 1.5 billion in balance of payments support.