June 29, Colombo: Sri Lankan Government led reforms to improve competitiveness, maintain macro-fiscal stability and strengthen institutions, with broad support in the country, are key to robust economic growth, job creation and poverty reduction, a World Bank report released today underscored.
The new Sri Lanka Development Update (SLDU) of the World Bank, a half-yearly report on the Sri Lankan economy and its future directions, noted that despite significant challenges posed by natural disasters, Sri Lanka's economic performance was satisfactory in 2016 and in early 2017.
The report highlighted the island nation's few recent landmark achievements, including the passing of the Right to Information Act and the regaining of General System of Preferences Plus (GSP+). The fiscal deficit narrowed from 7.6 percent in 2015 to 5.4 percent of GDP in 2016. The real GDP growth for 2016 slowed to 4.4 percent, as sustained drought took a toll on the agriculture sector.
"The Government of Sri Lanka's efforts have strengthened growth performance. However, extreme weather among other factors, has hindered the execution of the budget and impacted economic growth and exports performance" said Idah Z. Pswarayi-Riddihough, World Bank County Director for Sri Lanka and Maldives. "While robust contributions from construction and financial services sectors is a good sign, Sri Lanka needs to continue to take forward its reform agenda if it is to adequately boost revenues and provide its people with more and better jobs".
In addition to building resilience to meet natural disasters, among the report's recommendations, are the need to raise more revenue while controlling current expenditures to bring public debt to a sustainable path. Implementing the new Inland Revenue Act, soon to be submitted to the Parliament, will make for a good starting point.
For Sri Lanka to attain the status of an Upper-Middle-Income Country, it will have to bolster its economy's competitiveness and ability to pursue an export-led growth model, it says.
Among the risks identified by the report are delays in implementing structural revenue measures, slower than expected improvement in tax administration, less favorable growth in the global economy and faster than expected global commodity price rises.
The World Bank suggests faster implementation of several vital reforms, identified by the government, such as those affecting state-owned enterprises like Sri Lankan Airlines and measures to strengthen accountability and transparency are crucial. Additional urgent reforms such as improving the ease of doing business in Sri Lanka and trade facilitation are designed to address the issue of the economy's weak competitiveness.
The country also attracts a much lower volume of Foreign Direct Investment than peer economies, it points out.
"Sri Lanka has an opportunity to move to new sources of growth and jobs by opening up to trade and diversifying its economy," said Ralph Van Doorn, Senior Country Economist and one of the authors of the Sri Lanka Development Update. He emphasized that moving ahead with measures to increase exports and fiscal revenue should give Sri Lanka the means to improve the lives of the poor and help the economy adjust.
"The Government will need to be cognizant of the fact that policy reform will lead to gains, which are often dispersed over time and space, as well as losses, which can be immediate," the report says.
"There will be sectors, firms, and workers that will succumb to competition unleashed with the opening up of the economy and declining protection for domestic industries. However, it is important to focus on the fact that the costs will be far outweighed by the overall benefits to the Sri Lankan economy," it points out.
Cautioning against adopting piecemeal solutions, the report notes that these key challenges are inter-linked and require a comprehensive and coordinated reform approach. Although the island nation must cope with a turbulent external environment and domestic political considerations, a strong political will and the support of the bureaucracy could help advance the reform agenda, the report concludes.