Growth in Sri Lanka is expected to decelerate gradually to its potential growth rate, as the government reassesses the investment-led growth model, partially offset by increases in consumption, and strong tourism and remittance inflows, the World Bank Group’s latest Global Economic Prospects (GEP) report, released on Thursday said. The World Bank in April had predicted that economic growth is expected to decline to 6.9% in 2015 due to slowing construction activity.

“In Sri Lanka, policy actions by the newly-elected government include a one-off tax increase for large corporates, a cut in infrastructure spending, and a substantial increase in public sector salaries. These actions have added to investor uncertainty ahead of upcoming parliamentary elections in June,” the GEP report said.
The report further added that the quality of fiscal consolidation underway in Sri Lanka has deteriorated, and the government could potentially overshoot its fiscal targets in the short term.

In South Asia, the World Bank has forecast growth to firm to 7.1 percent in 2015 and 7.4 percent in 2016–17, buoyed by a reinvigorated reform agenda in India and supported by strengthening demand in high-income countries.

“The decline in global oil prices has benefited the region, improving fiscal and current account balances, enabling subsidy reforms to proceed in India, and facilitating an easing of monetary policy (India, Pakistan, Sri Lanka). In India, gradual implementation of reforms has supported business and investor confidence and encouraged capital inflows. However, credit growth remains modest, reflecting weak bank balance sheets (mainly in public sector banks). This is holding back credit-financed investment,” the GEP report said.

Meanwhile, the report also warned that developing countries face a series of tough challenges in 2015, including the looming prospect of higher borrowing costs as they adapt to a new era of low prices for oil and other key commodities, resulting in a fourth consecutive year of disappointing economic growth this year. As a result, developing countries are now projected to grow by 4.4 percent this year, with a likely rise to 5.2 percent in 2016, and 5.4 percent in 2017.