The world Bank in its Sri Lanka Development Update (SLDU) says that amid the COVID-19 pandemic, Sri Lanka’s economy contracted by 3.6 percent in 2020, the worst growth performance on record, as is the case in many countries fighting the pandemic. Swift measures enacted by the government in the second quarter helped contain the first wave of COVID-19 success-fully, but these measures hit sectors like tourism, construction, and transport especially hard, while collapsing global demand impacted the textile industry. Job and earning losses disrupted private con-sumption and uncertainty impeded investment. As a result, the economy contracted by 16.4 percent (y-o-y) in the second quarter. The economy began to recover in the third quarter as the first wave was brought under control and containment measures were relaxed. The momentum continued in the fourth quarter as the economy was broadly kept open despite a second wave of COVID-19 infections.

Growth is expected to recover to 3.4 percent in 2021, mainly reflecting a base effect and FDI inflows. Gradually normalizing tourism and other economic activities as well as already signed investments will support growth. However, the subdued global recovery may dampen export demand. The forecast is subject to both upside and downside risks. If the global economy recovers faster than expected and the global tourism industry rebounds more quickly with the progress on vaccination pro-grams, the growth outlook could become more favorable. On the other hand, downward risks persist, pertaining to debt and external sustainability given high debt and low external buffers, especially because the repayment profile requires accessing financial markets frequently. Given large refinancing requirements, constrained market access amid rating downgrades is a challenge. Thus, striking a balance between supporting the economy amid COVID-19 and ensuring fiscal sustainability is key

Unequal opportunities to work from home have introduced new economic and spatial divides as working remotely is nearly exclusively an option for high-income earners, and small and me-dium-sized enterprises were unlikely to adopt digital technologies. In the medium to long-term, digital technologies could become an important engine for job growth. However, despite widescale ownership of cellphones in Sri Lanka, the digital revolution will fall short of expectations without expansion of high-speed networks and accessible data on the whole island.

The sharp economic slowdown is estimated to have increased the $3.20 poverty rate from 9.2 percent in 2019 to 11.7 percent in 2020, leading to more than 500,000 additional poor people. The economic impact of the pandemic is expected to be felt broadly.

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