Sri Lanka’s economic growth could pick up to 4.7 percent in 2017 and further up to 5.0 percent in 2018 on the back of a reform programme supported by the International Monetary Fund (IMF), but the downside risks stem from extreme weather conditions and external shocks, the World Bank (WB) said in its latest report.
Sri Lanka, last week, experienced its worst floods in 13 years, which killed 224 people with another 78 missing and over 700,000 people being affected. Although the damage is still being assessed, some quarters unofficially place the figure north of Rs.30 billion.
In the absence of a proper disaster management fund, the ad hoc provision of relief could derail the island nation’s fiscal consolidation programme, which the Sri Lankan government has committed to, under its three-year extended fund facility with the IMF.
Besides, crop losses, disruption to business activities in the affected regions and infrastructure rebuilding activities could take a considerable toll on the country’s finances and growth in the short term.
“In Sri Lanka, a resumption of Chinese-funded investment and infrastructure projects have lifted private investment and foreign direct investment inflows and fiscal consolidation under an IMF programme has helped improve investor sentiment,” the WB said in its report titled ‘Global Economic Prospects’, released this week.
The multilateral lender grouped Sri Lanka among the other South Asian countries such as India, Bhutan and Pakistan, which will see accelerated growths this year and 2018 but said the growth in the Bangladesh and Nepal economies would ease during the two years.
The WB forecasts the growth in the South Asia region to advance to 6.8 percent in 2017 and accelerate to 7.1 percent in 2018, supported by solid expansion of domestic demand and exports.
In that respect, the region’s economies become more susceptible to negative external shocks such as possibility of weaker than expected demand or a rise in trade restrictions in advanced economies weighing on the exports.
The report also forecasts the global growth to rebound to 2.9 percent in 2018—fastest pace in seven years—up from 2.7 percent this year.
The global economy for the first time in many years is seeing a recovery with all three major economies—United States, Europe and Japan—recording higher growths. This is partly supported by the stabilized commodity prices.
However, the buildup in emerging market debt, particularly in China, the world’s second biggest economy, could weigh on the global growth.
Meanwhile, the WB said it is worried about the capital outflows from the South Asian region in response to “the possibility of an abrupt market reassessment of the US monetary policy tightening”.
Another vulnerability the South Asia economies face, according to the report, is “the uncertain outlook for remittances, which could slow in the aftermath of tighter immigration policies in advanced economies or continued fiscal consolidation among members of the Gulf Cooperation Council”.
Yesterday, Saudi Arabia, the UAE, Bahrain, Yemen, Libya and Egypt severed their diplomatic ties with Qatar accusing it of supporting terrorism and destabilizing the region.
This development yesterday sent the oil prices sharply up, a not-so-good sign for countries like oil-importing countries like Sri Lanka, which have massive trade balances.
Based on how long these severed relations would prevail, Sri Lanka and other South Asian neighbours will also have to reassess its impact on their economies in terms of remittances, oil prices and tourism.