Sri Lanka is forecast to grow 3.3% in 2021, largely in line with the average for South Asia, after economic expansion contracted by 6.7% last year, the latest World Bank report has said, warning of significant risks from prolonged virus infection rates, debt distress and slow recoveries in partner economies.
The World Bank’s latest report, ‘Global Economic Prospects,’ forecast global growth to expand 4% in 2021, assuming an initial COVID-19 vaccine rollout becomes widespread throughout the year. A recovery, however, will likely be subdued, unless policy makers move decisively to tame the pandemic and implement investment-enhancing reforms, the report warned.
Sri Lanka’s forecast of 3.3% growth is lower than the Government estimate of 5.5% growth outlined in Budget 2021. The Central Bank in its Road Map released this week put the contraction at 3.9%, much lower than the World Bank estimated 6.7%. While Sri Lanka’s performance this year is expected to be better, concerns over growth sustainability remains with the World Bank forecasting 2022 growth to be only 2%.
Other countries in the region have had mixed fortunes with India forecast to grow 5.4%, Bangladesh 3.4%, Afghanistan 2.5%, Nepal 2.5% and Pakistan 2%. Maldives, which depends on tourism for a large chunk of its growth is expected to rebound by an impressive 9.5% in 2021 after suffering a 21.5% contraction last year- the largest in the region.
“Overall the region is projected to grow by 3.3% in 2021. Weak growth prospects reflect a protracted recovery in incomes and employment, especially in the services sector, limited credit provisioning constrained by financial sector vulnerabilities, and muted fiscal policy support. The forecast assumes that a vaccine will be distributed on a large scale in the region starting the second half of 2021 and that there is no widespread resurgence in infections,” the report said.
India’s growth of 5.4% is from a low base and could be offset by muted private investment growth given financial sector weaknesses. In the financial sector, non-performing loans were already high before the pandemic. In Pakistan, the recovery is expected to be subdued, with growth at 0.5% in FY 2020/21. Growth is projected to be held back by continued fiscal consolidation pressures and service sector weakness.
“In economies that rely on external sources of growth such as manufacturing exports (Bangladesh) and tourism (Bhutan, Maldives, Nepal, Sri Lanka), the recovery is likely to be particularly modest. Tourism revenue is likely to remain significantly below pre-pandemic levels because of depressed demand as potential tourists remain wary of social interactions and continued restrictions on international travel, although recent vaccine news offers hope.”
The report went onto say risks to the outlook are tilted to the downside. They include more severe and longer-lasting infection rates from the pandemic, financial and debt distress caused by an abrupt tightening of financing conditions or possible widespread corporate bankruptcies, adverse effects of extreme weather and climate change, weaker than-expected recoveries in key partner economies, and a worsening of policy- and security-related uncertainty.
Additional stress on domestic banks in the region could be triggered by the economic consequences of a more protracted recovery from the pandemic, which in turn could lead to a rise in bankruptcies and weaken the balance sheets of the banking and non-banking sectors among several economies of the region (Bangladesh, Bhutan, India, Sri Lanka). Extreme weather events also remain an important regional risk, the report added.
In advanced economies, a nascent rebound stalled in the third quarter following a resurgence of infections, pointing to a slow and challenging recovery. U.S. GDP is forecast to expand 3.5% in 2021, after an estimated 3.6% contraction in 2020. In the euro area, output is anticipated to grow 3.6% this year, following a 7.4% decline in 2020. Activity in Japan, which shrank by 5.3% in the year just ended, is forecast to grow by 2.5% in 2021.
Aggregate GDP in emerging market and developing economies, including China, is expected to grow 5% in 2021, after a contraction of 2.6% in 2020. China’s economy is expected to expand by 7.9% this year following 2% growth last year. Excluding China, emerging market and developing economies are forecast to expand 3.4% in 2021 after a contraction of 5% in 2020. Among low-income economies, activity is projected to increase 3.3% in 2021, after a contraction of 0.9% in 2020.
Analytical sections of the latest Global Economic Prospects report examine how the pandemic has amplified risks around debt accumulation; how it could hold back growth over the long term absent concerted reform efforts; and what risks are associated with the use of asset purchase programs as a monetary policy tool in emerging market and developing economies.
“The pandemic has greatly exacerbated debt risks in emerging market and developing economies; weak growth prospects will likely further increase debt burdens and erode borrowers’ ability to service debt,” World Bank Acting Vice President for Equitable Growth and Financial Institutions Ayhan Kose said. “The global community needs to act rapidly and forcefully to make sure the recent debt accumulation does not end with a string of debt crises. The developing world cannot afford another lost decade.”
As severe crises did in the past, the pandemic is expected to leave long lasting adverse effects on global activity. It is likely to worsen the slowdown in global growth projected over the next decade due to underinvestment, underemployment, and labour force declines in many advanced economies. If history is any guide, the global economy is heading for a decade of growth disappointments unless policy makers put in place comprehensive reforms to improve the fundamental drivers of equitable and sustainable economic growth, the report warned.
Policymakers need to continue to sustain the recovery, gradually shifting from income support to growth-enhancing policies. In the longer run, in emerging market and developing economies, policies to improve health and education services, digital infrastructure, climate resilience, and business and governance practices will help mitigate the economic damage caused by the pandemic, reduce poverty and advance shared prosperity.
In the context of weak fiscal positions and elevated debt, institutional reforms to spur organic growth are particularly important. In the past, the growth dividends from reform efforts were recognised by investors in upgrades to their long-term growth expectations and increased investment flows.
(FT)