Sri Lanka faces unsustainable debt and balance of payments problems


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 adverse effects on the poor and vulnerable, says World Bank in its update semi-annual regional update.

Published today, the latest Economic Focus on South Asia Reshaping the standards: a new way forward forecasts that the region will grow by 6.6% in 2022 and 6.3% in 2023. The forecast for 2022 has been revised down by 1.0 percentage point from the January projection, mainly due to because of the effects 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 the impact on the population,” mentioned Faris Hadad-Zervos, World Bank Country Director for the Maldives, Nepal and Sri Lanka. “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. The necessary adjustments may initially have a negative effect on growth and poverty, but will correct the major imbalances, subsequently laying the foundations for stronger and sustainable growth and access to international financial markets. Mitigation of impacts 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 tend to 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 the pandemic has had 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.

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