Facing low growth

The word recession is dreaded by many and the World Bank has forecast that it will be Sri Lanka’s reality this year. The country, which began the year with hopes of an economic turnaround, has to now deal with a much grimmer prospect, made all the more darker by rising poverty levels and high debt. Whether a recession becomes reality remains to be seen, but there can be little doubt that Sri Lanka is going to experience very low growth this year.

Sri Lanka’s economy could contract by as much as 3% this year with debt growing to 91.6% of GDP and the budget deficit growing to 9.8% this year. The impact of COVID-19 would also mean that people who earn about Rs. 1,000 a day will make up as much as 47% of the overall population.

The report, titled ‘South Asia Economic Focus: The Cursed Blessing of Public Banks,’ in its country reports section forecasts that the COVID-19 outbreak will lead to a contraction in the economy, and periods of economic inactivity and disruptions will trigger jobs and earnings losses in 2020. Poverty is expected to increase, especially if the outbreak is protracted.

The report also forecast recessions for Afghanistan, Pakistan, and Maldives, but said Bangladesh, Bhutan, India and Nepal will continue to grow, albeit at a slower rate. However, all economies in the South Asian region are expected to recover and grow in 2021, with Sri Lanka to record a modest 0.2% to 1.2% growth.

The Government will have no choice but to roll out more spending and relief measures for an economy that has possibly never been this badly hit. The 2019 growth stimulus package and possible additional spending in the wake of the COVID-19 outbreak will exert pressure on fiscal sustainability, in a context of pre-existing constrained fiscal space. Macroeconomic vulnerabilities will remain high, with limited fiscal buffers, high indebtedness and large refinancing needs, the report warned.

The immediate challenge is to limit the domestic spread of COVID-19. A prolonged outbreak could lead to further movement restrictions and deeper disruptions in economic and labour market activities. Small and Medium Enterprises will struggle to survive. In this scenario the economy could contract by 3% and poverty could increase to 43.9% in 2020. Fiscal sustainability would be further strained.

The Government is, at least on paper, aware of this but the pull of elections may prove stronger. But what cannot be doubted is that stronger governance, transparency and accountability will be needed for Sri Lanka to move out of the economic doldrums.

Measures taken to counter COVID-19 have so far been largely successful and the Government has received a great deal of good will from the public as a result. While this good will would be useful at an election it could also be used to push forward reforms needed to deal with the economic fallout caused by the virus. For one thing it is always important to front load reforms at the beginning of a Government’s term and give itself enough time to offset any adverse repercussions before the next election cycle.

The other reason is that no matter how much of an inward-looking or closed economy the Government will create, it will only foster growth in the short term. Eventually, for growth to continue, Sri Lanka will have to attract more investment and increase exports. If nothing else, the country’s debt dynamics insist on this, which means that using this opportunity to reform State enterprises, increase public revenue, reengineer better budgeting and reduce corruption will only ease the country’s future path.