World Bank boosts Sri Lanka economic forecasts after inflation progress

The World Bank revised up its forecasts for Sri Lanka’s economy on Tuesday, noting the crisis-hit nation had made strides in reducing inflation and had benefited from tourism revenue as well as an appreciation in its currency.

The bank now expects the economy to expand 1.7% in 2024, up from an earlier forecast of 1%. It also said the economy is likely to shrink 3.8% this year, less than its earlier prediction of a 4.2% contraction.

In the last six months, Sri Lanka has seen runaway inflation drop to 1.3% in September, its currency appreciate by about 12% and foreign exchange reserves improve. It has also benefited from an increase in remittances.

But the World Bank also noted Sri Lanka’s outlook was still clouded by significant uncertainty and there were downside risks.

“Growth prospects will depend on progress with debt restructuring as well as continued implementation of growth enhancing structural reforms,” Richard Walker, a World Bank senior economist told a media briefing.

“We see further monetary loosening and potential exchange rate pressures, which could counter this downward inflationary trend,” he added.

Sri Lanka struck an agreement for a $2.9 billion bailout package from the International Monetary Fund in March but a potential shortfall in government revenue has meant that a second tranche of funds from the package may be delayed.

In contrast to the World Bank, Sri Lanka’s central bank has predicted a milder 2% contraction this year and growth of 3.3% in 2024. The economy shrunk 7.8% in 2022.

For South Asia as a whole, the global lender predicts growth of 5.8%, led by India which is seen expanding 6.3% in fiscal 2023/24.

But it added that regional growth was still slower than its pre-pandemic pace.

“While South Asia is making steady progress, most countries in the region are not growing fast enough to reach high-income thresholds within a generation,” Martin Raiser, World Bank Vice President for South Asia said in a statement.

(Reuters)