Lanka faces unsustainable debt and balance of payments problems – BM

Sri Lanka’s economic outlook is highly uncertain due to fiscal and external imbalances. Urgent policy measures are needed to address high levels of debt and debt service, reduce the fiscal deficit, restore external stability and mitigate the negative impact on the poor and vulnerable, the World Bank said ( BM) in its semi-annual regional report. update.

Recently released, the latest report titled South Asia Economic Focus Reshaping Norms: A New Way Forward predicts growth of 6.6% this year and 6.3% next year. This year’s forecast has been revised down 1.0 percentage point from the January projection, mainly due to the impact of the war in Ukraine.

South Asian countries are already grappling with rising commodity prices, supply bottlenecks and financial sector vulnerabilities. The war in Ukraine will amplify these challenges, further contributing to inflation and deteriorating current account balances.

“The World Bank is deeply concerned about the uncertain economic outlook in Sri Lanka and its impact on the people,” said World Bank Country Director for the Maldives, Nepal and Sri Lanka, Faris Hadad-Zervos.

“We are working to provide emergency assistance to poor and vulnerable households to help them overcome the economic crisis and we remain committed to the well-being of the people of Sri Lanka and a narrative of sustainable and inclusive growth which will require concerted action. and collective.

Sri Lanka needs to address the structural sources of its vulnerabilities. This would require reducing fiscal deficits, including by strengthening domestic revenue mobilization. Sri Lanka also needs to find workable options to restore debt sustainability.

The financial sector should be carefully monitored given the high exposure to the public sector and the impact of the recent currency depreciation on banks’ balance sheets. Adjustments may negatively affect growth and have an impact on poverty initially, but will correct significant imbalances, subsequently laying the foundations for strong and sustainable growth and access to international financial markets. Mitigating the impact on the poor and vulnerable would remain essential.

In South Asia, although GDP growth remains solid during the recovery, all countries in the region will face challenges ahead. On a positive note, the region’s service exports are on the rise as the pandemic subsides.

The war and its impact on fuel prices can give the region the much-needed boost to reduce its dependence on fuel imports and shift to a green, resilient and inclusive growth trajectory. The report recommends countries move away from inefficient fuel subsidies that benefit wealthier households and drain public resources. South Asian countries are planning to move towards a greener economy by phasing in taxation that imposes tariffs on products that cause environmental damage.

Another challenge facing the region is the disproportionate economic impact of the pandemic on women. The report includes an in-depth analysis of gender disparities in the region and their connection to deeply rooted social norms, and recommends policies that will support women’s access to economic opportunities, tackle discriminatory norms and improve outcomes. gender for inclusive growth.

Tana T. Thorsen