World Bank spells challenges for Sri Lanka

Ceylon Finance Today: Managing currency pressure and raising revenue to reduce the 2015 fiscal deficit were Sri Lanka's major economic challenges, the World Bank said in its latest report.

"Structural challenges include increasing fiscal revenue and narrowing a persistent current account deficit linked to structural competitiveness issues in the export sector", the twice-a-year South Asia Economic Focus report stated.

The report also stated that, with the country approaching upper middle income status, borrowing terms are becoming more commercial, which could affect affordability.

"Finally, with limited national savings compared to national investment, Sri Lanka needs to attract FDI. Going forward, to sustain its high growth path it needs to increase growth in the manufacturing and export sectors."

Growth is expected to reach 5.3 percent year-on-year in 2015 with significant contributions from the service sectors and accelerated private consumption, thanks to increased public sector wages partially compensated by reduced public investment.

Currency depreciation will exert upward pressure on prices in the second half of 2015, but relatively low international commodity prices and lowered taxes on key commodities are expected to keep annual average inflation around 1 percent in 2015.

Despite savings in the oil bill, private credit driven import expenditure is expected to widen the current account .deficit to 3.2 per cent of GDP in 2015, financed mainly by borrowing. Increased wages, social welfare and interest payments will expand the fiscal deficit to 5.8 per cent 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 widening primary deficit and slowdown in growth led to a slight increase in public debt to 71.8 per cent of GDP, while contingent liabilities were estimated at 5.4 per cent of GDP by end 2014.

The low tax revenue placed at 10.2 per cent of GDP in 2014 remains a key macro-economic concern.

The external current account deficit narrowed to 2.6 per cent of GDP in 2014 thanks to strong tourism and remittance flows, financed mainly by FDI and other private sector loan flows along with inflows to the government.

For the first half of 2015, the trade deficit widened by 15.6 per cent on a year-on-year basis due to rising imports of vehicles and consumer goods, reversing the favourable impact of a reduced petroleum bill. Rapid growth in private credit in a historically low interest environment was a key driver of the surge in imports.

Gross official reserves declined to USD 6.5 billion by end August 2015 from USD 7.5 billion at end 2014 due to capital outflows, debt repayments, the widening trade deficit and central bank intervention in the forex market.

The Central Bank allowed more flexibility in the exchange rate in early September, leading to strong depreciation.

The year-to-date targeting poor areas and disadvantaged groups, and promote sustainable sources of growth.

Key risks are a growth slowdown, which would lead to a fast rising public debt burden. 

While the direct impact of 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.
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