World Bank warns of reform slowdown amid challenging political environment

Apr 17, 2018 (LBO) - Sri Lanka's growth is projected to rebound in 2018 and continue to be around 4.5 percent in the medium term, driven by private consumption and investment, the Wold Bank says in its latest report. "Inflation will stabilize at the mid-single digit level as the impact of natural disasters wears off, although the upward trend in oil prices may exert some upward pressure," it said. "The outlook remains favorable, provided the government is committed to the reform agenda of improving competitiveness, governance and public financial management." Together with the IMF program, these reforms will add to confidence and support fiscal consolidation efforts. The external sector will continue to benefit from the GSP+ preferential access to the European Union and tourism receipts, despite the deceleration of remittances. External buffers are expected to improve, with emphasis on purchasing foreign exchange, maintaining a more market-determined exchange rate, and increased FDI. The overall fiscal deficit is projected to fall in the medium term, supported by the ongoing implementation of revenue measures. Growth should continue to translate into poverty reduction and improvement in living standards. Risks and challenges A further slowdown in reform implementation, in a challenging political environment, remains the key risk to the baseline. The impending election cycle elevates this risk. External risks include disappointing growth in key countries that generate foreign exchange inflows to Sri Lanka: exports, tourism, remittances, FDI, and other financing flows. Steeper than expected global financial conditions would increase the cost of debt and make rolling over the maturing Eurobonds from 2019 more difficult; however, the enactment of the Liability Management Act will help mitigate this refinancing risk. Faster than expected rises in commodity prices would increase pressure on the balance of payments and make domestic fuel and electricity price reforms more difficult. On the fiscal and debt management front, risks include the delay in implementing revenue measures, and slower than expected improvement in tax administration. The increasing occurrence and impact of natural disasters could have an adverse impact on growth, the fiscal budget, the external sector and poverty reduction. Sri Lanka faces several challenges that increasingly put its future economic growth and stability at risk, which must be addressed through macro and structural reforms: (1) stay on the fiscal consolidation path by broadening and simplifying the tax base and aligning spending with priorities. This is important given high public debt, SOE debt and guarantees and large gross financing requirements; (2) shift towards a private investment-tradable sector-led growth model by improving trade, investment, innovation and the business environment; (3) improve governance and accountability by implementing the Right to Information Act for citizens engagement and improve SOE performance and service delivery; and (4) reduce vulnerability and risks in the economy by enhancing disaster preparedness and mitigating the impact of reforms on the poor and vulnerable with well-targeted spending.