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Pre-budget World Bank wake-up call for Sri Lanka

6 October 2015 03:04 am - 0     - {{hitsCtrl.values.hits}}

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  • Stress need for radical fiscal measures 
  • Says borrowing terms becoming more commercial
  • Urges permanent revenue measures way to fiscal consolidation
 


By Shabiya Ali Ahlam 

The World Bank (WB) this week commended the new government for its commitment to carry out much-needed political and economic reforms, but having acknowledged what has been done, the global lender stressed there is much more to do in the macroeconomic sphere if Sri Lanka is to fulfil its aspirations.

“Public debt is rising, fiscal revenue is low and the external current account is in deficit. Much needs to be done in order to attract FDI, improve external sector competitiveness and arrest declining fiscal revenues to adopt an export-led growth path and create the space to pursue counter-cyclical policy,” advised the WB in its South Asia Economic Focus Fall 2015 report released on Sunday (4).

The report, which is published twice a year, professed that going forward, increasing growth in manufacturing and export sectors is essential for the nation to sustain its high growth trajectory.

However, the immediate challenges faced by the economy include managing currency pressure and raising revenue to reduce the 2015 fiscal deficit, whereas structural challenges include increasing fiscal revenue and narrowing a persistent current account deficit linked to structural competitiveness issues in the export sector.

“With the country approaching upper middle income status, borrowing terms are becoming more commercial, which could affect affordability. With limited national savings compared to national investment, Sri Lanka needs to attract FDI,” the WB said.

Currency depreciation is expected to exert upward pressure on prices in the second half of 2015, but relatively low international commodity prices and lowered taxes on key commodities are likely to keep the annual average inflation around 1 percent in 2015. The report highlighted that private credit-driven import expenditure is expected to widen the current account deficit to 3.2 percent of gross domestic product (GDP) in 2015, financed mainly by borrowings, despite savings in the oil bill.

Furthermore, increased wages, social welfare and interest payments will inflate the fiscal deficit to 5.8 percent of GDP, while public debt-to-GDP is expected to rise in the next two years.

“Unless permanent revenue measures are implemented, fiscal consolidation will be challenging in 2016 and beyond. 
“The pace of growth and poverty reduction depends on the success of reforms that increase fiscal revenue, promote export-led growth, rebalance the role of the public sector, enhance economic inclusion by targeting poor areas and disadvantaged groups and promote sustainable sources of growth,” the report noted. 

Identified as the key risk was ‘growth slowdown’, which is likely to lead to a fast rising public debt burden.  Furthermore, while the impact on Sri Lanka due to a slowdown in China is limited, continued economic woes in the Middle East, the EU and Russia could adversely affect exports and remittance inflows. 
“Tightening global financial conditions could increase capital outflows and currency pressure and make borrowing more expensive,” cautioned the WB.

 Speaking on South Asia as a whole, the global lender expressed confidence in the region’s ability in using the available monetary policy space to cushion future external shocks if needed.  However, as fiscal space remains highly constrained, slowing down the development of much-needed infrastructure, it warned that financial sector vulnerabilities remain one of the main challenges faced by several South Asian countries.
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