A Fragile Recovery

The World Bank says economic reforms, International Monetary Fund programs and resumption of European Union’s Generalized System of Preferences Plus (GSP+) will help Sri Lanka’s economy to accelerate to 5.1 percent by 2019.

The global lender says Sri Lanka’s growth is expected to pick up to about 4.7 percent in 2017 and accelerate to 5.1 percent by 2019, as The IMF-supported program helps improve macroeconomic resilience.

According to the World Bank’s June 2017 Global Economic Prospects, reforms initiated by the World Bank Development Policy Operation in 2016 are expected to reduce obstacles to private sector competitiveness in the medium-term and help attract Foreign Direct investment (FDI). Resumption of the GSP+ trading arrangement with the European Union will boost its export sector. 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.

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”.

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”.

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