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Sri Lanka Development Update November 2017pubdocs.worldbank.org/...presentation-Nov-2-2017.pdf ·...
Transcript of Sri Lanka Development Update November 2017pubdocs.worldbank.org/...presentation-Nov-2-2017.pdf ·...
Sri Lanka Development UpdateNovember 2017
www.worldbank.org/sldu
Creating opportunities and managing risks for sustained growth
Main takeaways
1. Macroeconomic performance continues to be broadly satisfactory, despite significant challenges incl. natural disasters.
2. New Inland Revenue Act, increased VAT collection, relatively high inflation and improved external reserves are key developments since the last update.
3. To increase and sustain growth, create jobs, and reduce poverty in the medium-term, Sri Lanka needs to move towards a more private-investment and tradable sector driven model.
4. Continued fiscal consolidation, improved competitiveness, enhanced accountability and governance are necessary ingredients.
5. Vision 2025 provides a strong platform for the new growth model.
6. To create new opportunities it is important to manage risks.
2Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
Global environment continues to be benign
3
• Global growth prospects have improved• Commodity prices are still low though gradually increasing• Global financial conditions are still benign• GSP+ improves access to EU marketGDP growth 2015 2016 2017 2018 2019 Key financial flows to Sri Lanka
Actual Estimates ProjectionsWorld 2.7 2.4 2.7 2.9 2.9United States 2.1 1.7 1.9 1.8 1.7 Textiles, Portfolio FlowsUnited Kingdom 2.2 1.8 1.7 1.5 1.5 Textiles, Tourism, FDIEuro Area 2.0 1.8 1.7 1.5 1.5 Textiles, Tourism, Portfolio FlowsChina 6.9 6.7 6.5 6.3 6.3 Tourism, FDI, Official FinancingIndia 8.6 7.1 7.0 7.3 7.4 Tourism, RemittancesSaudi Arabia 4.1 1.4 0.6 2.0 2.1 RemittancesRussia -2.8 -0.2 1.3 1.4 1.4 TeaUnited Arab Emirates 3.8 2.3 2 2.5 3.2 RemittancesJapan 1.1 1.0 1.5 1.0 0.6 Official Financing
Takeaway: best time to reform is now
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
World Bank Global Economic Prospects, June 2017; South Asia Focus, October 2017; Global Economic Prospects Preliminary estimateshttp://www.worldbank.org/en/publication/global-economic-prospects
Growth has decelerated and is still largely driven by non-tradable sectors
4
• Annual average growth decelerated from 7.3% (2009-12) to 4.4% (2013-16)• Inward orientation is reflected in 70% of the total growth coming from 6 non-
tradable sectors
Takeaway: need to change to more private investment-tradable sector growth model to sustain growth, jobs and poverty reduction
Rice Tea (Green leaves)
Marine fishing
Other agricultural Mining & quarrying
F& B and tobacco
Textiles & leather
Construction
Other industry
Wholesale & retail trade
Transportation & warehousing
Accommodation, food & beverage
services
Financial services
Real estate and ownership of dwelling
Professional services
EducationHealth, residential care & social work
Other personal services
Other services
-2
0
2
4
6
8
10
12
14
16
-20 0 20 40 60 80 100 120
Con
tribu
tion
to g
row
th 2
010-
2016
(p
erce
nt)
Growth 2010-2016
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
Zooming in on the last 6 months, natural disasters continue to be a drag on macroeconomy
5
• Construction (production side) and investment (expenditure side) drove growth, while agriculture-related output fell due to floods and droughts.
• Inflation rose due to demand pressures, supply disruptions and one-off impact of VAT changes.
-2
0
2
4
6
8
10
12
14
1H 2
011
1H 2
012
1H 2
013
1H 2
014
1H 2
015
1H 2
016
1H 2
017
Perc
ent
Contributors to growth
Agriculture ConstructionOther industry ServicesNet taxes Overall growth
-1012345678
Jan-
16
Mar
-16
May
-16
Jul-1
6
Sep-
16
Nov
-16
Jan-
17
Mar
-17
May
-17
Jul-1
7
Sep-
17
Contributors to inflation
Alcoholic beverages OthersRestaurants & Hotels CommunicationEducation HealthHousing, Water & Energy Food
Takeaway: growth performance could have been better without the impact of natural disasters
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
Natural disasters had widespread impact; poor were disproportionately affected
6
Good news: poverty rate fell in 2016 from 2012/13 and rise in inequality stoppedFloods and landslides in late May 2017• Affected 15 of the 25 districts of Sri Lanka: significant loss of life (213) and property (LKR 70 billion)• Total recovery needs are estimated at 1% of GDP
Drought in 2016 and 2017• Affected 1,927,069 people across 17 districts• Contraction of agriculture sector, food inflation: rice production for 2017 expected to be the lowest in
the last 10 years (sufficient only for 7 months)• Need for more food and petroleum imports
Takeaway: Disaster risk management should be an integral part of the growth model
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
Fiscal performance improved; however, significant risks remain
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• New Inland Revenue Act is the key highlight that could lead to structural increase in revenues
• Primary fiscal surplus in 4 months of 2017 thanks to increased VAT revenue• However, overall fiscal deficit probably higher than projected, as interest expenditure often
underestimated• Public debt is high at 79% of GDP, but likely to stabilize; contingent liabilities are a
significant fiscal risk
(5.6) (5.4) (5.7)
(7.6)
(5.4)
-8-7-6-5-4-3-2-10
0
5
10
15
20
25
2012 2013 2014 2015 2016
Perc
ent o
f GD
P
Perc
ent o
f GD
P
Key fiscal aggregates
Overall balance (RHS)Total revenue and grantsTotal expenditure
0
1
2
3
4
5
6
7
8
0
100
200
300
400
500
600
700
800
900
2011 2012 2013 2014 2015 2016
Perc
ent
LKR
billi
on
Treasury guaranteed debtCPC CEB RDA
Others Share of GDP
Takeaway: fiscal & debt numbers moving in right direction, but important to manage quality of tax & spending, and composition/risks of debt & contingent liabilities
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
Growth Negative real interest rates
Exchange rate depreciation
Primary fiscal deficits
Why is fiscal consolidation important to manage debt-to GDP?Before 2012
Decreasing debt-to-GDP
Increasing debt-to-GDP
Growth Negative real interest rates
Exchange rate depreciation
Primary fiscal deficits
Decreasing debt-to-GDP
Increasing debt-to-GDP
Why is fiscal consolidation important to manage debt-to GDP?Before 2012
Growth Negative real interest rates
Exchange rate depreciation
Primary fiscal deficits
Decreasing debt-to-GDP
Increasing debt-to-GDP
Why is fiscal consolidation important to manage debt-to GDP?Before 2012
Growth Negative real interest rates
Exchange rate depreciation
Primary fiscal deficits
Decreasing debt-to-GDP
Increasing debt-to-GDP
Why is fiscal consolidation important to manage debt-to GDP?Before 2012
Growth Positive real interest rates
Exchange rate depreciation
Primary fiscal deficits
2013-16
Decreasing debt-to-GDP
Increasing debt-to-GDP
Growth Positive real interest rates
Exchange rate depreciation
Primary fiscal deficits
2013-16
Decreasing debt-to-GDP
Increasing debt-to-GDP
Growth Positive real interest rates
Exchange rate depreciation
Primary fiscal surpluses
2017-20
Decreasing debt-to-GDP
Increasing debt-to-GDP
Growth Positive real interest rates
Exchange rate depreciation
Primary fiscal surpluses
2017-20
Decreasing debt-to-GDP
Increasing debt-to-GDP
Title of Presentation 16
-3.7%
2.6%
-1.5%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
2003-12 2013-16 2017-20
Annual average change in debt-to-GDP ratio and the four forces
Real interest effect Growth effect Primary deficit effect
Exchange rate effect Change in debt
Takeaway: With a more market-determined exchange rate and increasingly commercial terms on borrowing, sustained growth and fiscal consolidation is necessary to manage public debt-to-GDP ratio
External sector reported mixed messages
17
• External trade balance weakened due to increased petroleum and food imports while remittances shrank (Middle East) and tourism slowed down (airport closure and dengue).
• FDI more than doubled in the first half of 2017 due to inflows (Port City)• Official reserves increased with forex purchases and external borrowings.• External debt related risks remain high.
2.8
3.3
3.8
4.3
4.8
5.3
01,0002,0003,0004,0005,0006,0007,0008,0009,000
Feb-
15
Apr-1
5
Jun-
15
Aug-
15
Oct
-15
Dec
-15
Feb-
16
Apr-1
6
Jun-
16
Aug-
16
Oct
-16
Dec
-16
Feb-
17
Apr-1
7
Jun-
17
Aug-
17
Mon
ths
USD
milli
on
Official reserves
Reserves
Official reserves to months of merchandise imports (RHS)
0
20
40
60
80
100
120
140
160
180
0
2
4
6
8
10
2010 2011 2012 2013 2014 2015
Perc
ent
Year
s
External debt indicators
Share of foreign currency commercial debt/official reserves (RHS)
Average time to maturity
Takeaway: to strengthen external account, important to strengthen exports and FDI by implementing investment climate, trade and FDI reform agendas, use GSP+ as window of opportunity
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
Monetary policy remained tight and financial sector remained stable
18
• Banking sector’s capital adequacy, liquidity ratios, non-performing loans are stable, but credit growth in certain sectors needs to be monitored
• High monetary growth showed signs of deceleration in response to tight policy
10
20
30
40
50
60
70
80
90
2011 2012 2013 2014 2015 2016_P
erce
nt
Sector Credit as a share of Sector Value Addition
Agriculture ConstructionTextiles & Apparel Other industryWholesale& retail TourismFinancial business
-10
-5
0
5
10
15
20
25
30
35
40
6
7
8
9
10
11
12
Jun-
09D
ec-0
9Ju
n-10
Dec
-10
Jun-
11D
ec-1
1Ju
n-12
Dec
-12
Jun-
13D
ec-1
3Ju
n-14
Dec
-14
Jun-
15D
ec-1
5Ju
n-16
Dec
-16
Jun-
17
Perc
ent,
y-o-
y
Perc
ent
Monetary policy and credit growth
Repo rateReverse repo rateGrowth in banking credit to Pvt sector (RHS)
Takeaway: monetary policy improved, but continued close monitoring of credit quality required
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
Sri Lanka’s macro outlook continues to be steady
19
• Expected to reach 4.6 percent in 2017 and grow marginally over 5.0 percent beyond, driven by private consumption and investment. Growth
• Will increase for the full year 2017 due to one-off impact of VAT and stabilize, low but gradually increasing international commodity prices and base-effect will maintain downward pressure
Inflation
• Will narrow to 5.1% of GDP for 2017, although the budgeted fiscal target of 4.6% is likely to be missed
• Revenue-led fiscal consolidation will continue with improving primary fiscal balancesFiscal deficit
• Projected to stabilize at 79% of GDP and gradually fall, supported by primary fiscal surplus and growthPublic debt
• Will benefit from tourism, and GSP+ in the second half of 2017 and 2018; however, imports of food and petroleum will mask the improvement
• FDI and debt flows to close the financing gapExternal sector
• Expected to improve with forex purchases, a more market-determined exchange rate, monetary policy and divestment/lease out of some government assetsReserves
Outlook remains steady, thanks to a strengthened global outlook, revenue-led fiscal consolidation program and pro-active monetary policy – reform implementation is necessary.
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
Substantial downside risks could weigh on outlook
20
Internal risks:
• Delay in implementing revenue and debt management reforms
• Natural disasters
• Delays in structural reforms in a complex political environment
External risks:
• Disappointing growth performance in key countries
• Tightening global financial conditions
• Faster than expected rises in commodity prices
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
Policy priorities
21
• Implementation of new IR Act• Improve tax administration• VAT reforms• Align spending to priorities
Stay on fiscal consolidation
• Trade policy & facilitation• FDI attraction• Innovation & business environment• Institutional capacity and coordination• Communication, trade adjustment
package
More private investment and
export led model
• Implementation of Right to Information• PFM reforms• SOE reforms• Audit function
Governance & Accountability
Manage risks (Special focus
section)
• Macroeconomy stability• Debt sustainability• Fiscal space for health,
education, social protection, disaster management and other public investment
• Prepare for ageing
• A competitive economy• Sustained growth towards
UMIC status• More and better jobs• Poverty reduction
• Public sector effectiveness• Improved service delivery• Improved citizens
engagement and public trust
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
Vision 2025 envisions a new growth model: a knowledge-based, highly competitive, social market economy focused on inclusion
22
• Become a rich country by 2025
By 2020• Per capita income
of USD 5,000• One million new
jobs • FDI USD 5 billion
p.a.• Exports USD 20
billion p.a.
Targets for 2020
• Less competitive, Inward-oriented, non-tradable driven growth model
• Weak public finances
• Strong anti-export bias
• Weaknesses in SOEs
• Low female labor force participation
Key challenges
• Growth framework• Macroeconomic
framework• Factor market
reforms • Governance and
accountability• Social safety nets• Sustainable
development• Technology
Areas of focus
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
23Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
Special focus on creating opportunities and managing risks for sustained growth
Special focus on creating opportunities and managing risks for sustained growth
24
• New growth model will create many opportunities to make Sri Lanka more resilient to risks, but it will also expose them to new ones
• Risks need to be managed well to maximize opportunities
• Risks impact different levels of society: households, firms, public sector and the macroeconomy
• An integrated approach to risk management is recommended (WDR, 2014) to deal with risks.
• Potential key sources of risks include:
Fiscal policy reforms (VAT and energy price reforms)
Trade policy reforms
Public debt and contingent liabilities
Natural disasters
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
1. Managing risks in fiscal reforms
25
• VAT and energy price reforms to increase revenue and reduce fiscal risksReform
• Simpler and more predictable tax system for firms• Increased fiscal space for education, health, other public investment; social
protection• Macro stability with low inflation good for households, firms and the economy as a
whole
Opportunity
• Remove VAT exemptions (Often top-60% consumes 90%)• Introduce cost-reflective fuel and energy pricing (Top-30% consumes 70% of fuel)How
• Increased cost of living leading to vulnerable households falling into poverty• Implications on firm competitivenessRisk
• Couple the reform with targeted fiscal expenditure (cash transfers, focused public investment, education and health); on VAT 25% needs to be transferred to compensate
• The better the targeting, the larger the net fiscal gainManage risks
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
2. Managing risks in trade reforms
26
• Further liberalization of trade: Low and declining export-to-GDP and concentration on a few export products/markets could lead to slower growth and a less competitive economy creating fewer jobs
Reform
• More and better jobs in some sectors, more productive firms and new markets• More export oriented FDI• Increased tax revenue due to increased activity, in the medium-term• Strengthened external position in the medium to long-term
Opportunity
• Phase out tariffs, rationalize duties• Bilateral agreements• Trade facilitation• FDI attraction and retention
How
• Impact not uniform• Shifts in relative prices of inputs and outputs faced by households and firms• Revenue loss from reduced tariffs, offset by increasing revenue of remaining duties• Weakened BoP in the short-run
Risk
• Strengthen social safety nets• Improve business environment• Implement trade adjustment programs
Manage risks
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
3. Managing risks from public debt and contingent liabilities
27
• High public debt, deterioration of debt profile and increased cost and risk of debt, fiscal risks from guaranteed and non-guaranteed SOE debt (12% of GDP estimated)
• Bunching of Eurobond repayments from 2019• Structural challenges in debt management
Challenge
• Reduced cost or risk of debt portfolio• Fiscal and macroeconomic stability• Lower interest costs and improved access to finance for SMEs and households• Domestic market development• Reduced fiscal risks from SOEs
Opportunity
• Update legal framework and expedite unified debt management office • Medium Term Debt Management Strategy to guide borrowing decisions and help
develop more liquid domestic debt market • Active Liability Management to reduce refinancing risks • Formulate a guarantee policy to manage contingent liabilities• SOE reforms to improve performance and reduce fiscal risks
How
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
4. Managing risks from natural disasters and impacts of climate change
28
• Increased frequency, severity and economic impact of natural disasters• Disproportionate impact on poor households• Slow response and lack of readily available dataChallenge
• Households less at risk from harm, loss of life, houses and jobs, food insecurity• Fewer business interruptions• Fewer fiscal shocks• More stable macroeconomy
Opportunity
Better preparednessPhysical resilience:
• Identify current and future climate and disaster risks• Disaster and climate-resilient investment• Improve disaster preparedness and physical response
Financial resilience:• National disaster risk financing strategy• Fast-disbursement mechanism of post-disaster operations• National recovery plan for floods and landslides• Catastrophic risk insurance for public assets
How
Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
Summarizing
29
• There can be new opportunities for Sri Lanka,
if risks are managed well
• Risk management needs to happen at all
levels:• Small shocks: households, firms and budget can cope
• If shock exceeds ability of households and firms to cope:
special role for government
• Sometimes even public sector and macroeconomy cannot
cope: role for international community and financial markets
• Strengthen capacity to analyze risks and
design and implement mitigation mechanisms;
special role for budget
• Need to communicate better about the risks
and opportunities as well as pragmatic
mitigation measuresSri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017
Takeaway: • Anticipate• Mitigate• Communicate
Full report at: www.worldbank.org/sldu
Previous editions:• June 2017: Unleashing Sri Lanka’s trade potential• October 2016: Structural challenges identified in the Systematic Country Diagnostic
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30Sri Lanka Development Update – Creating Opportunities and Managing Risks for Sustained Growth - November 2017