Sri Lanka’s public debt-to-GDP is expected to rise in the next two years while increased wages, social welfare and interest payments will expand the fiscal deficit to 5.8 percent of GDP, the World Bank cautioned in a recent report released last week. According to the biannual economic update South Asia Economic Focus Fall 2015, Sri Lanka’s fiscal consolidation will be challenging in 2016 and beyond unless permanent revenue measures are implemented.

“The pace of growth and poverty reduction depends on the success of reforms that increase fiscal revenue, promote export-led growth, rebalance the role of the public sector, enhance economic inclusion by targeting poor areas and disadvantaged groups, and promote sustainable sources of growth,” the report titled ‘Getting Prices Right – The recent disinflation and its implications’ released on October 02 stated.

Sri Lanka’s fiscal deficit for 2014 was 5.7 percent of GDP, up from 5.4 percent for 2013. This marked a slight reversal of the consolidation in the post-conflict period. The widening primary deficit and slowdown in growth led to a slight increase in public debt to 71.8 percent of GDP, while contingent liabilities were estimated at 5.4 percent of GDP by end 2014.

The report added that key risks are a growth slowdown, which would lead to a fast rising public debt burden while Sri Lanka’s immediate challenges include managing currency pressure and raising revenue to reduce the 2015 fiscal deficit. According to the World Bank, structural challenges include increasing fiscal revenue and narrowing a persistent current account deficit linked to structural competitiveness issues in the export sector. The low tax revenue placed at 10.2 percent of GDP in 2014 remains a key macro-economic concern.

“While the direct impact of a slowdown in China is limited, continued economic woes in the Middle East, the EU and Russia could adversely affect exports and remittance inflows. Tightening global financial conditions could increase capital outflows and currency pressure, and make borrowing more expensive,” the report stated.

The report further warned that with the country approaching upper middle income status, borrowing terms are becoming more commercial, which could affect affordability.

“Finally, with limited national savings compared to national investment, Sri Lanka needs to attract FDI. Going forward, to sustain its high growth path it needs to increase growth in the manufacturing and export sectors,” it said.

The update projected that Sri Lanka’s growth is expected to reach 5.3 percent year-on-year in 2015 with significant contributions from the service sectors and accelerated private consumption, thanks to increased public sector wages partially compensated by reduced public investment.

“Currency depreciation will exert upward pressure on prices in the second half of 2015, but relatively low international commodity prices and lowered taxes on key commodities are expected to keep annual average inflation around 1 percent in 2015. Despite savings in the oil bill, private credit driven import expenditure is expected to widen the current account deficit to 3.2 percent of GDP in 2015, financed mainly by borrowing,” the report said. (AR)