COLOMBO: Weak global demand and uncertainty over policy will continue to hold down Sri Lanka’s economic performance in 2016, the Asian Development Bank’s flagship annual economic publication, Asian Development Outlook 2016 (ADO), released today says.
The lender of Asia and Pacific region says weak demand and low prices for Sri Lanka’s major exports will constrain economic growth and exert pressure on the balance of payments, although lower oil prices projected for 2016 will somewhat alleviate the pressure while continued concern over fiscal consolidation will hinder foreign investment and other capital inflows.
“The Growth was marginally lower in 2015 while the current account deficit improved slightly and inflation moderated. Meanwhile, the budget deficit widened and foreign exchange reserves dropped sharply. The government will have to work to realign fiscal policy toward putting the country on a high and sustainable growth track,” the ADB report said.
The ADB report projects a growth rate of 5.3 percent in 2016 and 5.8 percent in 2017 while the inflation is expected to be be at 4.5 percent this year and 5.0 percent in 2017.
Fiscal reform to deal with a buildup of excessive debt is much-needed, the ADB said noting that total government debt is estimated to have increased to equal 73.5% of GDP in 2015.
The balance of payments was under pressure in 2015 from a decline in exports, weak remittances from workers overseas, and large capital outflows.
The government is to put fiscal consolidation back on track by a revision of the 2016 budget and the revised budget will be the basis for discussions with the International Monetary Fund (IMF) for possible support that interests the government.
A national development strategy will facilitate investment, both domestic and foreign, says ADB and adds that private investment can recover to drive economic growth in 2016, assuming that the government’s revised budget is approved in mid-2016, the national development strategy is finalized, and agreement is reached with the IMF on possible support.
“A persistently low revenue ratio has been a major challenge to Sri Lanka’s efforts to achieve fiscal consolidation while meeting growing needs for social expenditure and public investment,” the report further highlights.
Sri Lanka’s ratio of tax to GDP is, at 12%, uniquely low among countries at a similar stage of development, it says.
The lender recognizing that the government has taken “well-considered” steps to enhance revenue, says further improving the tax system requires stronger policy analysis and more capacity in decision-making agencies.
It suggests the Inland Revenue Department to set up a comprehensive tax policy analysis unit with the capacity to conduct statistical modelling and social surveys.
“Such analysis will inform policy makers on the impact of tax policy changes on revenue and the economy and facilitate tax administration policy analysis, intervention, and equitable revenue generation.”
The lender says the International Monetary Fund’s support, once agreed, will protect against expected pressures from external imbalances as it builds international confidence and facilitates fiscal consolidation and tax reform.
