Economy News: World Bank in its twice-a-year-regional update expects the South Asian economies including Sri Lanka to slump sharper than expected this year into its worst-ever recession as the devastating impacts of COVID-19 on the region’s economies.
As the pandemic linger on taking a disproportionate toll on informal workers and pushing millions of South Asians into extreme poverty, the latest South Asia Economic Focus “Beaten or Broken?” released Thursday (Oct 08) forecasts a sharper than expected economic slump across the region, with regional growth expected to contract by 7.7 percent in 2020, after topping 6 percent annually in the past five years.
In its outlook, Sri Lanka’s economy is expected to contract by 6.7 percent in 2020, with all key drivers of demand affected: exports, private consumption and investment.
The current account deficit is expected to remain low (at 2.2 percent of GDP in 2020) thanks to low oil prices and strict import restrictions, which should largely offset the reduction in receipts from garment exports, tourism and remittances.
However, refinancing requirements will be high, with annual foreign exchange debt service requirements estimated at 7-8 percent of GDP over 2020-2022. The fiscal deficit is projected to expand further to over 11 percent of GDP in 2020, driving an increase in debt levels.
Reflecting these challenges, the $3.20 poverty headcount is projected to increase from 8.9 percent in 2019 to 13 percent in 2020. During the lockdown, the government extended temporary cash support to Samurdhi households, including a large number of which were on the waitlist. But the program is not well targeted and benefit amounts are inadequate.
Construction and services sectors, including tourism, have been important sources of jobs growth in recent years and the outbreak will likely harm the prospects of many low-skilled workers, the World Bank predicts.
The government is employing 60,000 graduates and 100,000 individuals from low-income families to support livelihoods, but this will remain insufficient and add further strain on public finances, according to the Report. A fall in remittances could adversely impact some poor households that rely on them as an important source of income.
A longer than expected outbreak of COVID-19, that would extend the horizon and depth of related economic disruptions, is a key risk to the baseline outlook. In turn, a longer downturn could push many small and medium enterprises from illiquidity to insolvency, and the poverty rate could rise even higher as more people suffer income losses. Low growth would also put additional strain on public finances.
Sri Lanka is also highly exposed to global financial conditions, as the repayment profile of its debt requires the country to access financial markets frequently.
A high deficit and rising debt levels could further deteriorate debt dynamics and negatively impact market sentiment. Therefore, Sri Lanka will need to strike a balance between supporting the economy amid COVID-19 and ensuring fiscal sustainability, the World Bank says.
Courtesy to: ColomboPage