Sri Lanka’s gross domestic product (GDP) is projected to grow by 5.3 percent until end-2018, compared to a 4.8 percent growth in 2015 despite the multiple risks and challenges, a World Bank report said.
“Growth is expected to increase to 5.3 percent in 2016 and beyond, driven by increased public investment and postponed foreign direct investments (FDI) in 2015,” it said.
The World Bank said that the complex political environment curtailed FDIs last year, but noted that Sri Lanka would probably not be able to afford public investment through borrowings any longer.
“Reduced drag from imports thanks to continued low commodity prices and the recent policy measures to curb import growth would also contribute to the increase in growth.
The trade balance is projected to improve with reduced imports on policy tightening and continued low oil prices,” it added.
It noted that inflation is likely to be in the range of 4.2-4.3 percent, following the unusually low inflation experienced in 2015 through pressure from the global environment and the fiscal expansion.
While praising the belated steps taken to tighten the monetary policy with increased policy rates and greater exchange rate movements, as well as to increase value-added tax to stem the budget deficit, the World Bank said that these steps would lead to higher inflation.
It added that the biggest contributor to the current account would be tourism, reducing the deficit to 0.7 percent to GDP, compared to a 2.2 percent deficit in 2015.
“Remittances are projected to grow below nominal GDP growth because of continued low oil prices affecting the Middle East,” it said.
Remittance inflows fell marginally last year due to the oil crisis.
According to the World Bank, the budget deficit is likely to narrow to 5.4 percent of GDP from an estimated 6.3 percent in 2015, mainly due to the amendments to the tax regime brought on earlier this year.
However, these proposals were scrapped recently due to public pressure and a revised budget is in the offing.
The report said that increasing taxation and managing the external front prudently would be the main challenges to overcome in 2016.
It added that with low national savings and the likelihood of receiving commercial borrowing rates due to being in the cusp of reaching the higher middle income status, the country would have to attract more FDIs to develop the structurally challenged manufacturing and export sectors, in order to sustain high growth.