SL Economy to Grow at 3.4% in 2021 – WB

By Mario Andree | Published: 2:00 AM Apr 5 2021

By Mario Andree

The Sri Lankan economy is expected to grow at 3.4 per cent this year followed by a two per cent growth in 2022, after crashing 3.6 per cent in 2020 due to the global COVID-19 pandemic, the World Bank said.

The South Asian Economy is expected to grow at 7.2 per cent this year and 4.4 per cent in 2022, after crashing 5.4 per cent in 2020.

The Maldives is expected to grow at 17.1 per cent this year after crashing 28 per cent in 2020, while India is expected to grow at 10.1 per cent this year after crashing 8.5 per cent in 2020.

“Prospects of an economic rebound in South Asia are firming up as growth is set to increase by 7.2 per cent in 2021 and 4.4 per cent in 2022,” the World Bank said.

“The COVID-19 pandemic resulted in a sharp economic contraction of 3.6 per cent in 2020 for Sri Lanka, the worst performance on record in the country’s history,” the bank said.

According to the World Bank it was caused by contractions in construction, tourism, textile, mining and transport, due to mobility restrictions in the second quarter amid strict lockdowns.

As a result of widespread earning losses, particularly in the industry sectors, poverty, using the US$ 3.20 per day poverty line, is projected to have increased significantly, from 9.2 per cent in 2019 to 11.7 per cent in 2020, the bank said.

Despite high food inflation, annual average inflation remained low at 4.6 per cent in 2020 due to the offsetting effects of weak aggregate demand and low oil prices, which allowed the Central Bank of Sri Lanka to reduce policy rates by 250 basis points and the reserve ratio by 300 basis points in 2020, the bank said.

The current account deficit is estimated to have narrowed to 0.9 per cent of GDP in 2020, as a reduction in imports due to low oil prices and severe import restrictions offset reduced receipts from exports, the bank said.

However, official reserves declined to an 11-year low of US$ 4.6 billion by February 2021, mainly because reserves were mobilised to service external debt, the bank said.

The US$ 1.5 billion currency swap approved by the People’s Bank of China in March 2021 is expected to provide a boost to the reserves, the bank said.

The combination of a stimulus package in 2019 due to the Easter Sunday attack and low revenues in the aftermath of the COVID-19 shock resulted in a steep deterioration in fiscal balances, the bank said.

The deficit is believed to have increased to 12.6 per cent of GDP in 2020, and public and publicly guaranteed debt to have increased to 109.7 per cent of GDP, the bank said.

While the economy is expected to grow by 3.4 per cent in 2021, output will remain 0.3 per cent below its pre-COVID level, the bank said.

With a gradual improvement in labour market conditions, poverty at US$ 3.20 per day is projected to fall to 10.9 per cent in 2021, the bank said.

Continued import restrictions and the high debt burden will adversely affect growth and poverty reduction over the medium-term, the bank said.

Inflation is projected to increase gradually, as domestic banking institutions, including the Central Bank, are contributing to finance the government deficit, the bank said.

The current account deficit is expected to remain low due to strict import restrictions, which should largely offset a deceleration of export growth, the bank said.

However, significant additional borrowings will be required to close the external financing gap in 2021 and beyond, as external public debt service requirements are estimated above US$ 4 billion each year between 2021 and 2023, the bank said.

External buffers are expected to weaken relative to external liabilities as reserves may need to be used to service the external debt, the bank said.

The fiscal deficit is expected to be high in the forecast period, despite tightly controlled expenditures, as revenue collection is expected to remain weak. In turn, public and publicly guaranteed debt is expected to reach 115.0 per cent of GDP in 2021 and to rise further between 2022 - 2023, the bank said.

By Mario Andree | Published: 2:00 AM Apr 5 2021

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