Colombo (The Island/ANN) - The World Bank, painting a bleak picture of the global economy, says Sri Lanka's post-conflict economic rebound is waning and the country is vulnerable to risks associated with falling exports, declining remittances and increased rick averseness of the international investment community. Growth is expected to slow down to 6.8 percent this year, a much slower rate compared to the Central Bank's forecast of near-8 percent.
The World Bank's annual publication 'Global Economic Prospects 2012: Uncertainties and Vulnerabilities' released yesterday said: "The world economy has entered a very difficult phase characterized by significant downside risks and fragility. The financial turmoil generated by the intensification of the fiscal crisis in Europe has spread to both developing and high-income countries, and is generating significant headwinds. Capital flows to developing countries have declined by almost half as compared with last year, Europe appears to have entered recession, and growth in several major developing countries (Brazil, India, and to a lesser extent Russia, South Africa and Turkey) has slowed partly in reaction to domestic policy tightening. As a result, and despite relatively strong activity in the United States and Japan, global growth and world trade have slowed sharply."
The prospects for South Asia was mostly bleak, it was no different for Sri Lanka.
"Sri Lanka is particularly exposed to a downturn in European demand for merchandise. With respect to services, the tourism sector could be especially hard hit in Sri Lanka although greater diversification with booming arrivals from Asia should provide a buffer," the World Bank said.
"Worker remittances could slow markedly through second round effects of weakened domestic demand in migrant host-countries, largely located in the Arabian Gulf.
"Sri Lanka, with external financing needs projected at 7 percent of GDP, is highly exposed to a rise in global risk aversion as well."
"While South Asia is relatively insulated from international financial market turbulence compared to other more integrated regions, the weak global economic trajectory will nonetheless likely have an adverse impact on the region. Given the lack of fiscal space in South Asia, inflationary pressures and consequent limited room for monetary policy easing, fiscal consolidation through greater revenue mobilization (particularly in Pakistan, Sri Lanka, Bangladesh, and Nepal) and expenditure rationalization (especially in India) could play a key role in helping to protect critical social programs. Governments should also look at further improving the targeting of its safety nets and capacity to respond to a crisis to improve efficiency of social safety net programs."
The World Bank said industrial production in Sri Lanka was expanding rapidly, growing at a robust pace. Inflation was high, although softened in the 'post-conflict' environment.
"Following a vibrant 9.1 percent growth rate in 2010 (calendar year), South Asia's real GDP growth decelerated to an estimated 6.6 percent in 2011. A slowdown in activity became strongly apparent late in the year with a pronounced fall-off in industrial production, well below most other developing regions. The slowdown reflects numerous headwinds, both internal and external. Nevertheless, growth is estimated to have exceeded the long-term average of 6 percent (1998-2007), led by above trend activity in Bangladesh, India and Sri Lanka."
The World Bank's economic growth rate estimates for Sri Lanka are well below Central Bank projections. According to World Bank estimates, GDP growth in 2010 was 8 percent, 7.7 percent for 2011, 6.8 percent this year and would reach 7.7 percent in 2013.
"Despite a waning of the post-conflict rebound effects, GDP in Sri Lanka is estimated to have grown 7.7 percent in the 2011 calendar year, slightly below the 2010 pace of 8 percent. Domestic demand growth has been vibrant, supported by strong credit expansion. Strong export growth, led by a surge in textile exports, was more than offset by the rise in imports, and the trade deficit rose. Remittances, tourism and port services grew strongly, which helped to contain the deterioration of the current account balance. While growth was strong at the start of 2011, a deceleration became apparent in the second half of the year, on heightened uncertainty and weakening external demand, as reflected in a modest slowdown in industrial production growth," the multilateral development agency said.
"Terms of trade losses across South Asia are estimated at about 1.9 percent of GDP for the region in aggregate, led by a 4.3 percent of GDP decline for Nepal, while Bangladesh and Sri Lanka saw a smaller negative impact of close to 1.5 percent of GDP, and India and Pakistan saw negative impacts of close to 1.8 percent of GDP (estimated January through September 2011 terms of trade impacts relative to 2010).
"Regional inflationary pressures are projected to come down over the forecast horizon, assuming continued expansion of crop production in India, Pakistan and Sri Lanka and a decline in international fuel prices, reflecting weaker global activity in 2012.
"Larger investments and reconstruction projects should contribute to stronger growth outturns in 2013, boosting productivity and potential output. External demand is expected to revive in 2013, which also with improved international investor sentiment is expected to support stronger regional growth.
"Real interest rates indicate some scope for easing, and much improved positions in Pakistan and Sri Lanka since 2008."
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