From crisis to inclusive economic growth in Sri Lanka

Wed, 23 March 2022, 09:13 a.m. SL time, ColomboPage News Desk, Sri Lanka.

World Bank Blog by Faris Hadad-Zervos, World Bank Country Director for the Maldives, Nepal and Sri Lanka and Hans Timmer Chief Economist, South Asia, World Bank

March 23, Colombo: Sri Lanka has handled the health and safety aspects of the COVID-19 pandemic commendably.

The nation has been and continues to be quick to protect the health of its people, including vaccinating its citizens. However, the devastating economic effects of the pandemic are far from over.

In South Asian countries, global and local supply disruptions caused by the COVID-19 pandemic have created daunting macroeconomic challenges. Rising energy and food prices are fueling inflation and increasing the import bill. Relief efforts and reduced tax revenues have deteriorated budget balances. Deteriorating private sector balance sheets have created financial sector vulnerabilities that are easily underestimated as short-term central bank support measures have so far masked the weakening structure of many corporate beneficiaries. In a difficult macroeconomic environment, considerable inequalities have emerged. Workers in the informal sectors, most of whom are in precarious employment conditions, have been the hardest hit by the pandemic while being barely protected by social support systems.

Indeed, the pandemic has left real scars on Sri Lanka’s economy. Tourism has been hit hard, with only a few buffers to respond, and it’s still only half of what the industry was two years ago. The transport sector is still operating at 14% below its pre-pandemic capacity and the remaining deficit in the accommodation sector is 54% despite recent promising trends. The government is also seeking to address the current diesel shortage to avoid a prolonged impact on exports and GDP. For decades, Sri Lanka has experienced a double deficit: a budget deficit and a balance of payments current account deficit. Year-on-year inflation has now reached 15% and debt servicing has become difficult.

There are no easy solutions to these challenges in the current circumstances. Firefighting measures such as import restrictions and price controls, meant to provide short-term relief, risk backfiring as they reinforce supply distortions and undermine confidence.

However, if the solutions are not easy, they are not impossible, with will and broad support. The balance of payments can be stabilized through international coordination. And this is not the first time that countries have emerged stronger from a crisis: Sri Lanka’s telecommunications sector is already producing 32% more than before the pandemic, its information technology sector has grown by 20% and the financial services sector 28%. percent. Seen from this angle of a marked expansion of digital technologies and services, the future of Sri Lanka looks quite promising.

Boosting inclusive development through digital technologies

This rapid growth of digital services sectors in Sri Lanka, despite the pandemic, reflects a general trend of increasing importance of digital services: they are increasingly tradable internationally and become the main source of increased productivity in other sectors. The good news is that Sri Lanka has a comparative advantage in these sectors and is well positioned to make them a powerful engine of growth. After all, services in Sri Lanka are already larger as a percentage of GDP than other South Asian countries and the country has the highest share of service workers in manufacturing. Sri Lanka also has the highest human capital index in South Asia, an important factor, as the production of digital services requires skilled workers. And digital technologies will provide young people, who make up around 24% of the country, with business opportunities, either in digital services or in sectors that gain market access through them.

In particular, the new service economy can generate export and GDP growth and sustain inclusive growth. Currently, almost half of the service sector workers in Sri Lanka are women. Therefore, the growth of services can further contribute to gender equality. Digital services can also unlock the underutilized potential of the informal sector. The work and sharing economy, a result of technological advances and flexible jobs, matches the flexible and small-scale characteristics of the informal sector. Digital platforms such as Odesk and Pickme enable small businesses to access markets and digital payment systems bring financial inclusion.

To create a sustainable development path, inclusion is as important as growth itself.

However, key reforms are needed to fully enable inclusive development: (1) the constraints small businesses face in accessing digital services need to be addressed; (2) digital platforms require appropriate regulation; and (3) trade barriers in services should be lowered.

The time for reform has come. However, the existing macroeconomic imbalances described above may hamper the development of new production potential. This is why macroeconomic stabilization is an essential element to generate inclusive growth. As Sri Lanka stabilizes the balance of payments, it is essential to keep an eye on the long-term reward of developing new potential, especially in the informal sector. Through concerted efforts, a more robust and inclusive economy is within reach for Sri Lanka. The nation is ready to turn challenge into opportunity, to emerge stronger and ultimately victorious from the COVID-19 crisis.