Sri Lanka at risk from global slowdown

Lanka Business Online
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Sri Lanka's post-war economic rebound is slowing and financial problems in key Western markets could reduce demand for the island's exports and hit earnings from worker remittances and tourism, the World Bank said.

It has also lowered its forecast for economic growth in the island, saying Sri Lanka is now expected to grow at 6.8 percent in 2012 and 7.7 percent in 2013.

Earlier this month, Sri Lanka's central bank said Sri Lanka's economy is projected to grow at 8.0 percent in 2012 after having grown at about 8.3 percent in 2011. The forecast was lowered from the earlier forecast of nine percent in 2012.

The World Bank said in a new report on global economic prospects that the global slowdown has been taking its toll on South Asia, with merchandise export volumes which had been growing very strongly in the first part of 2011, declining almost as quickly in the second half.

" . . . year-over-year exports in October are broadly unchanged from a year ago," it said.

"A deepening of the Euro Area crisis would lead to weaker exports, worker remittances and capital inflows to South Asia," the World Bank said.

"The EU-27 countries account for a significant share of South Asia merchandise export markets, although not as much as for some developing regions."

Moreover, the bank said, export financing from Europe, an important component of the region‟s trade credit, is particularly vulnerable to drying up, as was the experience during the 2008 financial crisis.

"At the country level, Bangladesh, the Maldives and Sri Lanka are particularly exposed to a downturn in European demand for merchandise," the World Bank said.

"With respect to services, tourism sectors could be especially hard hit in Sri Lanka and the Maldives, although greater diversification (with booming arrivals from Asia) should provide a buffer.

However, the World Bank noted that there could be some "countercyclical benefits" for goods exporters - the so-called 'Walmart effect' - for some sectors such as for Bangladesh's garment industry.

The bank also said that a slowdown in global activity would likely translate into lower oil prices that would ease pressures on current account and fiscal balances for the oil import-dependent nations like Sri Lanka.

"Worker remittances inflows could slow markedly through second round effects of weakened domestic demand in migrant host-countries, largely located in the Arabian Gulf," the report warned.

Worker remittances inflows were the equivalent to 7 percent of GDP in 2010.

"Despite a waning of the post-conflict rebound effects, GDP in Sri Lanka is estimated to have grown 7.7 percent in the 2011 calendar year, slightly below the 2010 pace of 8 percent," the report said.

"While growth was strong at the start of 2011, a deceleration became apparent in the second half of the year, on heightened uncertainty and weakening external demand, as reflected in a modest slowdown in industrial production growth."

Given the possibility of further weakening in the global economy, efforts at greater revenue mobilization particularly in countries like Sri Lanka could pay dividends by allowing governments to maintain critical social and infrastructure programs, the World Bank said.

Governments should also look at further improving the targeting of its safety nets and capacity to respond to a crisis to improve efficiency of social safety net programs, it said.

"With markets in the United States and Europe expected to experience prolonged weakness, South Asian countries have the opportunity to re-think and pursue new sources of growth for their countries," the World Bank said.

© LBO