The World Bank said that Sri Lanka’s Gross Domestic Product (GDP) growth will remain flat this year compared to 2015, and will marginally improve to just above 5 percent in 2017 as more investments flow in.
“Sri Lanka’s GDP growth to remain unchanged in 2016 and grow marginally over 5 percent in 2017 and beyond, driven by public and private investment (including the resumption of postponed FDI), tourism and reduced negative impact on growth from commodity imports,” it said in a report.
Sri Lanka’s GDP grew at 4.8 percent in 2015, amid uncertainty surrounding an election year and due to the change of the base year of calculations to 2010, slightly down from 4.9 percent growth experienced in 2014.
The World Bank said that past currency depreciations and the Value Added Tax (VAT) increase will impart upward pressure on inflation, despite lower global commodity prices.
“The current account deficit is projected to narrow in 2016 with reduced imports and increased tourism,” it added.
Finance Minister Ravi Karunanayake this month said that he was expecting the economy to grow at 5.5 percent this year, and had also refuted 2.6 percent GDP growth experienced due to adverse weather during the second quarter of the year.
According to the Census and Statistics Department, the country’s GDP had grown by just 3.9 percent during the first half of the year, though the Purchasing Managers Index shows signs of a pickup of the economy during the latter half.
The World Bank added that to sustain growth above 5 percent, Sri Lanka needs to increase revenue collection, remove tax exemptions which benefit the rich and set up pro-poor safety nets, improve export competitiveness, and work towards refinancing debt which will mature starting from 2019.
It added that tightening global financial conditions could lead to capital outflows and make borrowing more expensive.
“While the economy is unlikely to feel the direct impact of a slowdown in China and the Brexit, continued economic woes in the Middle East, the European Union and Russia could adversely affect Sri Lankan exports and remittances,” the World Bank said.
Taking into account the reduced spending of the Finance Ministry so far this year, the World Bank projected the budget deficit to improve to 5.7 percent of GDP, compared to government approved estimates of 5.9 percent of GDP.
The government had hoped to reduce the budget deficit to 5.4 percent with the introduction of the VAT increase, according to the World Bank. However, the legislation was halted in July due to legal troubles and was passed by parliament again this month.