Sri Lanka needs structural adjustments for sustained growth

 The World Bank said on Friday that Sri Lanka's short-term macroeconomic outlook remains positive, but warned the country's growth will depend on structural adjustments in the external and fiscal sectors and the implementation of sound macro-management policies.
In its latest economic report on South Asian countries, the World Bank says the outlook for Sri Lanka remains positive with an expected 7.8 percent GDP growth in 2014, subdued inflationary pressures, an improving external position and further fiscal consolidation and debt reduction.
The report titled "South Asia Economic Focus" forecasts 8.2 percent GDP growth for Sri Lanka in 2015 while on average the South Asian countries, which include India, Nepal, Pakistan, Afghanistan, Bhutan, Bangladesh, Sri Lanka, and Maldives, will see a growth of 6.0 percent.
The expected 7.8 percent GDP growth of Sri Lanka for 2014 is to be supported by major contributions from expansion of infrastructure facilities and growth in trade and services, especially in the areas of tourism, transport, telecommunication, ports and financial services.
However, the World Bank noted that the sustainable growth over the medium to long term will depend upon the structural adjustments in the external and fiscal sectors and the implementation of sound macro-management policies.
"Physical infrastructure investments need to be followed by investments in human capital and Foreign Direct Investments (FDI) promotion and efforts to enhance competitiveness are important measures to attain the government's sustained growth aspirations," it said.
Headline inflation ran to a 28-month low of 2.8 percent in June 2014 and inflationary pressures are expected to remain subdued for the rest of the year despite the fact that the prevailing drought in many parts of the country could trigger supply disturbances leading to temporary price fluctuations.
Relatively stable international commodity prices and contained demand pressures against a backdrop of sluggish private credit growth will help to keep the inflation under control.
The World Bank noted that the Sri Lankan authorities are committed to fiscal consolidation and debt reduction. A slight improvement in revenue collection and continued fiscal consolidation would help reduce the deficit to 5.3 percent of GDP, it said.
Looking further ahead, increased revenue will depend largely on the government's ability to support the growth through public investments, the report noted.
Although risks to the outlook from the international environment appear moderate, Sri Lanka has to watch out for a likely rise in global interest rates as the advanced economies taper down their extraordinary stimulus measures with economic recovery.