SL economy to grow by 3.3% in 2021: World Bank

  • High debt burden, large refinancing needs adversely affect growth

Despite the economy of Sri Lanka expecting a growth of 3.3% in 2021, World Bank in its biannual regional update predicted that the medium-term outlook of the country is likely to be affected due to macroeconomic weakness as well as the impact of the pandemic. 

It further said that a gradual recovery is likely to lead to corresponding improvements in labour market conditions. Most countries in South Asia are far from pre-pandemic trend levels.

The latest South Asia Economic Focus Report titled Shifting Gears: Digitisation and Services-Led Development projects the region to grow by 7.1% in 2021 and 2022. 

World Bank Country Director of the for the Maldives, Nepal, and Sri Lanka Faris Hadad-Zervos said: “Sri Lanka has done well to vaccinate more than 50% of the total population thus far and the Government currently targets to prevent further Covid-19 waves which could dampen the economic recovery.”

While the year-on-year growth remains strong in the region, albeit from a very low base in 2020, the recovery has been uneven across countries and sectors. South Asia’s average annual growth is forecast to be 3.4% over 2020-23 which is 3% points less than it was in the four years preceding the pandemic.

Hadad-Zervos noted: “The pandemic has brought unprecedented disruptions to education and the learning losses would be a drag on the country’s human capital gains. Targeted policies to reverse trends of long-term inequality and reduce gaps in equity are priorities to realise growth prospects.”

The pandemic has left long-term scars on the region’s economy, the impacts of which can last well into the recovery. Many countries experienced lower investment flows, disruptions in supply chains, and setbacks to human capital accumulation, as well as substantial increases in debt levels. The pandemic is estimated to have caused 48 to 59 million people to become or remain poor in 2021 in South Asia. Sri Lanka’s poverty at a $ 3.20 per day poverty line is projected to fall to 10.9% in 2021 which is still significantly above the 2019 level of 9.2%.

In Sri Lanka, continued macroeconomic challenges, particularly the high debt burden, large refinancing needs, and weak external buffers will adversely affect growth and poverty reduction over the medium term. Despite increased policy rates and price controls imposed by the Government, inflationary pressure is expected to remain strong amid partial monetisation of the fiscal deficit, currency depreciation, and rising global commodity prices. Food insecurity could worsen and poverty reduction would slow if food prices remain elevated and shortages continue.

As countries build back, they have a chance to rethink their long-term development models. With the emergence of new digital technologies, South Asia has an opportunity to shift gears from a traditional manufacturing-led growth model and capitalise on the potential of its services sector.

“Countries in South Asia have a strong comparative advantage in exporting services, particularly business processes and tourism, whereas they have struggled to break into manufacturing export markets,” said World Bank Chief Economist – South Asia Region Hans Timmer. “To realise the potential of the services-led development, the region needs to rethink regulations and establish new institutions to support innovation and competitiveness,” he emphasised.

In the medium to long term, digital technologies could become an important engine for job growth in Sri Lanka. However, despite wide-scale 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. Sri Lanka could provide new opportunities for economic mobility through policies that expand or universalise access to digital infrastructure, and investments in digital literacy are a prerequisite for widely shared benefits from these new opportunities.