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Sri Lanka’s economic performance broadly satisfactory in 1H-2017 – WB

z_pi-SriDespite significant challenges, Sri Lanka’s economic performance remained broadly satisfactory in the first half of 2017.

The corrective policy measures taken in the monetary and fiscal fronts have led to gradual stabilization according to Sri Lanka Development update released in November 2017 reviewing the last six months economic performance of Sri Lanka.The update states that the construction sector’s rapid recovery supported by a strong rebound in investment was partially able to mitigate the impact of inclement weather conditions on the real sector.

External buffers strengthened thanks to foreign exchange purchases and improved capital flows. Inflation has risen since the second half of 2016 on account of drought and changes to the VAT Act.

Authorities pursued the economic reform agenda presented in the government policy statements, albeit at a slower pace, owing to the difficulties faced in a complex political environment and institutional constraints on policy implementation.

However, some other vital reforms were lagging; these included, implementing the One-Stop Shop for FDI, reforms to the investment climate2 and trade, SOE reforms such as for Sri Lankan Airlines, meaningfully progressing on the debt management agenda and passing of the Audit Act.

Fiscal consolidation continued in the first four months of the year following the reduction of the fiscal deficit to 5.4 percent of GDP in 2016 from 7.6 percent in 2015.

The VAT changes that came into effect in November 2016 will lead to a structural increase in tax revenues although the budget targets for 2017 are likely to be missed due to delay in implementation of the new Inland Revenue Act and higher than anticipated interest expenditure. Fiscal risks emanating from relatively high public debt to GDP ratio (79.3 percent, 2016) and treasury guarantees issued mainly for SOEs and state agencies (7.1 percent of GDP, 2016) remained high in the first five months of 2017 as well.

Floods and drought took a toll on real and external sectors. Despite important contributions from construction, financial services and trade sectors, growth decelerated to 3.9 percent, year-on-year, in the first half of 2017 due mainly to the contraction of the agriculture sector. Gross official reserves reached a 32-month high from relatively low levels thanks to proceeds from syndicated loans, fresh Eurobonds and central bank’s purchases in the market although an expanded trade deficit and low FDIs presented a challenging landscape for reserve management.

Courtesy – Daily News

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