IMF forecasts lower contraction in SL economy than WB

The International Monetary Fund (IMF) this week forecasted a lower contraction of the Sri Lankan economy than the World Bank.

In its World Economic Outlook (WEO) released this week IMF estimated Lankan economy to contract by 8.7% this year and by 3% next year. However, the World Bank in its forecast released last week estimated a contraction of 9.2% this year and 4.2% in 2023.

 See: https://www.ft.lk/front-page/Debt-restructuring-deep-reforms-critical-for-Sri-Lanka-WB/44-740747

The WEO noted that for Sri Lanka, certain projections for 2023–27 are excluded from publication owing to ongoing discussions on sovereign debt restructuring, following the recently reached Staff-Level Agreement on an IMF-supported program after 3.3 growth in 2021.

IMF in its WEO said global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook. 

Global growth is forecast to slow from 6.0% in 2021 to 3.2% in 2022 and 2.7% in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic.

Global inflation is forecast to rise from 4.7% in 2021 to 8.8% in 2022 but to decline to 6.5% in 2023 and to 4.1% by 2024. The IMF WEO said the monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy. 

“Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation,” it added.

The World Bank last week noted Sri Lanka’s economic crisis is deepening with unsustainable debt and a severe balance of payment crisis on top of the lingering scars of the COVID-19 pandemic.

Debt restructuring and the implementation of a deep reform program are critical for Sri Lanka’s economic stabilisation, the World Bank said in its twice-a-year update, underscoring the need for Sri Lanka to build resilience.

World Bank also released as a companion piece the latest Sri Lanka Development Update, which highlights the poverty and welfare impacts of the crisis and the role of social protection in protecting vulnerable populations.

“Protecting the vulnerable is critical as Sri Lanka fast tracks deep reforms to navigate the deepening economic crisis. The crisis calls for immediate action to protect the poorest and most in need while also focusing on strengthening the social protection system,” said World Bank Country Director for Maldives, Nepal and Sri Lanka Faris H. Hadad-Zervos.

“In the face of the economic crisis, poverty estimates doubled to 25.6% between 2021 and 2022, increasing the number of people living in poverty by 2.7 million. Sri Lanka will need to expand employment in industry and services and recover real value of incomes to mitigate the impacts of the crisis and build long-term resilience of its people,” added Hadad-Zervos, underscoring the need for a coordinated approach to supporting the poor and vulnerable.