Sri Lanka’s outlook remains stable but is conditional on reforms: World Bank

June 28, 2018 (LBO) – World Bank says a challenging domestic political environment has already taken a toll, slowing down some reforms and complicating the stable medium-term outlook and an impending election cycle which will only elevate this risk.

World Bank, releasing its June 2018 edition of the Sri Lanka Development Update said the reforms are expected to bring in long-term benefits enhancing competitiveness, improving governance and streamlining public financial management.

“Delays in improving tax administration are among the risks Sri Lanka must confront on the fiscal front,” the report said.

“As successive instances of extreme weather have demonstrated, natural disasters could have an adverse impact on growth, the fiscal budget, the external sector and poverty reduction.”

Further, public spending is only expected to increase as the country’s demographic transition advances, putting pressure on pension and healthcare systems, the bank said.

“To stay on track, Sri Lanka will have to invest in continued fiscal consolidation – by further increasing revenue and creating fiscal space for growth-supporting public investment,” the report said.

“Even as the central government’s debt to GDP ratio declined to 77.6 percent, it remains high compared to other middle-income countries and is subject to risks.”

Implementing the new Active Liability Management Act is critical to deal with the risks of refinancing the Eurobonds maturing between 2019 and 2022.

Sri Lanka’s sizeable state-owned enterprise (SOE) sector is struggling, with SOE debt growing mainly due to the absence of cost reflective pricing of energy and weak operational performance.

The recent introduction of cost-reflective pricing for fuel has been identified by the World Bank as an important measure to reduce fiscal risks.

“An integrated risk management approach is needed to manage debt and contingent liabilities linked to SOEs and the impact of natural disasters,” the report said.

“Implementing without further delay the cost-reflective energy pricing formulas, and establishing a unified debt management office is critical.”

In a context of high domestic interest rates, the gradual tightening of global financial conditions and an expected gradual depreciation of the exchange rate, increased fiscal discipline will prove critical.

If seen through, continued fiscal consolidation will continue to reduce the debt burden in the medium term.