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Prime Minister Mahinda Rajapaksa being presented with the Central Bank Annual Report 2020 by Governor Prof. W.D. Lakshman yesterday
As Sri Lanka grapples with a third COVID-19 wave, the Government has to cautiously manage external pressures, fiscal challenges and focus policy adjustments to address the disproportionate impact the pandemic has had on the underprivileged, the Central Bank said yesterday.
Releasing the Annual Report 2020, the Central Bank emphasised major fiscal challenges that need to be addressed by the Government include the persistently low revenue, rigid recurrent expenditure, rising gross financing needs and the resultant elevated debt level, as well as the need to improve the financial performance of State-Owned Business Enterprises (SOBEs).
“Policy adjustments in the period ahead must give due consideration to the fact that the COVID-19 pandemic has had a disproportionate impact on underprivileged segments of the population and has aggravated inequalities, not only related to income, but also in relation to other aspects that affect socioeconomic wellbeing in the short run and productivity in the long run,” the monetary institution said in its evaluation of the economy and future prognosis.
Improving the external current account balance and the fiscal balance is necessary to continue reversing the expansion in external debt, in order to ensure macroeconomic stability and prevent disruptions to long term economic growth.
“While cautious management of external sector pressures in the near term is crucial in maintaining macroeconomic stability, the implementation of policies to strengthen non-debt-creating foreign exchange inflows is expected to improve the resilience of the sector in the medium term. Earnings from exports are expected to strengthen in the period ahead with the envisaged recovery in global demand and the policy drive to improve the tradable sector.”
To manage the near-term pressures in the external sector, close management of expenditure on imports is expected in 2021, although higher petroleum prices and the recovery of domestic economic activity are likely to increase expenditure on imports somewhat during the year.
Expenditure on imports is expected to increase over the medium term with the envisaged expansion of domestic demand and exports, although the expected improvements in the domestic supply of consumer and intermediate goods may dampen the demand for such imports, the report added.
The envisaged improvement in earnings from exports is expected to result in a contraction of the trade deficit in the medium term. The surplus in the services account is expected to improve, underpinned by the recovery of the tourism industry with the reopening of the borders to international tourists and the expected relaxation of travel restrictions globally. Further, the rebound of activities in transport services and the expected high growth in the IT/BPO services subsector is expected to support trade in services over the medium term.
The growth momentum of workers’ remittances is expected to continue, supported by the prospective rebound of global activity, and the measures implemented by the Government to encourage foreign employment of skilled workers, alongside the incentive framework for migrant workers that is being put in place.
With the expected improvements in the merchandise and services exports and workers’ remittances, the external current account is expected to improve in 2021 to record a marginal deficit, strictly conditional on the continuation of close management of expenditure on non-essential imports and the recovery of global tourism flows in the second half of the year.
The external current account is expected to improve to record surpluses over the medium term, backed by the measures that are being introduced by the Government to promote merchandise and services exports, alongside strengthened institutional support.
The improvement in the current account balance and enhanced non-debt financial flows are expected to strengthen the gross official reserves over the medium term, while easing pressure on the domestic foreign exchange market. The near-term need to meet large foreign currency debt service payments of the Government is expected to be fulfilled with the support of bilateral and multilateral sources of financing, while ongoing improvements in the external debt profile and efforts to enhance non-debt creating foreign exchange inflows are expected to ensure the sustainability of Sri Lanka’s external debt in the period ahead, the report added.
Improvements in the Sri Lankan economy over the medium term are expected to be driven by the implementation of the Government’s novel economic policy framework based on Vistas of Prosperity and Splendour, which aims at addressing longstanding macroeconomic imbalances and ensuring equitable, shared and sustained economic growth.
“Sluggish improvement in productivity remains a major challenge for sustained economic growth of Sri Lanka. The country demands more planned and determined efforts to remove bottlenecks in increasing productivity in order to achieve sustained high growth. Productivity improvements in the traditional agriculture sector remain a priority in ensuring equitable growth and development. Substantially low levels of productivity have adverse effects on incomes of farmers and other workers in the agriculture sector.”
Increasing economies of scale, promoting modern technology-based agriculture, adopting smart farming technologies for efficient usage of resources, such as Good Agricultural Practices (GAP) and Geographic Information Systems (GIS), and efficiently connecting farmers with supply chains are among the major aspects that could enhance the productivity of the agriculture sector.
The report also highlighted prioritised export promotion is essential, alongside taking measures to implement long overdue structural reforms to address legacy issues and revive the export sector.
Although Sri Lanka recorded its historically highest export earnings in 2019 prior to the pandemic hit performance in 2020, such earnings are meagre when compared to those recorded by similar-sized economies in the region. Steering the export sector through the impact of the pandemic and fostering competitiveness in the new global environment are essential, while catching up with peers. In this regard, in the short term, prioritising export promotion in selected sectors, i.e., potential winning industries of the country, will drive the overall export performance, while enhancing domestic production.
Enhancing services exports through exploiting their untapped potential in a productive manner remains a key strategy for improving Sri Lanka’s external current account outcome.
Vulnerability of earnings from tourism to unexpected domestic and global disruptions has highlighted the need to diversify services exports to other services with high potential, while continuing to harness the full potential of the tourism sector. IT/BPO, transport services, financial services and other professional services are key services export sectors that Sri Lanka can and must focus on beyond tourism, in order to enhance foreign exchange earnings on a sustainable basis.
“The country’s continued failure to attract sizeable FDIs highlights the structural, institutional and policy impediments that need to be addressed urgently, while maintaining a consistent policy framework with a long term view. Unlike other capital flows, FDIs embody many desirable features, such as the transfer of technology, providing a boost to foreign exchange earnings and the development of human capital through technical and managerial know-how.”
Further, FDIs facilitate integrating with regional and global value chains, infrastructure development and technology innovation, while creating employment opportunities and enabling access to new markets.
