Starting in 2024, Sri Lanka’s real GDP is projected to expand slowly, growing by 1.2% in 2024, according to the World Bank’s South Asia Economic Forecast report.
This is supported by upcoming debt restructuring and growth-enhancing structural reforms.
Three months into 2023, global energy prices, and fertilizer prices have fallen from their peaks, which has eased domestic inflationary pressures, reduced import bills, and reversed some of the large terms-of-trade losses during the past year.
Due to this inflation is projected to come down from a high base as monetization of fiscal deficits is reined in.
The report states that Sri Lanka’s economy will continue to contract in 2023, albeit at a slower pace than in 2022, even with the IMF program that will help close the country’s financing gap.
Sri Lanka’s real GDP is expected to contract by 4.3 % in 2023 following a sharp contraction in 2022, as its ongoing economic crisis continues. South Asian countries have finally started fiscal consolidation by reducing inefficient subsidies, raising tax revenues, and tightening expenditures. In Bangladesh and Sri Lanka, fiscal consolidation is supported by recently agreed IMF programs, while negotiations in Pakistan are ongoing.
While most South Asian countries were slower to raise interest rates than other EMDEs, Sri Lanka and Pakistan have been most aggressive in rate hikes to contain inflation and external sector pressure. Since the start of this episode of increasing rates, Sri Lanka and Pakistan have increased the key policy rates.
As the US dollar exchange rate stabilized since late 2022 the contribution of the exchange rate to inflation has moderated in India and Sri Lanka Going forward, broad reform programs are needed to put countries in South Asia on a more robust growth path.
“A sustainable fiscal outlook must be at the centre of these reform programs.”
“South Asia to be the fastest-growing region in the world”
A World Bank report predicts that over the next two decades, South Asia is expected to be the fastest-growing region in the world. South Asia’s economy is expected to grow by 5.6% in 2023 and 5.9% in 2024, as growth moderates after the initial post-pandemic recovery in 2021.
The growth rate forecast for 2023 was revised down by 0.5% point compared with the October 2022 forecast. Report says that South Asia’s production potential is not being fully utilized.
Inflation in South Asia is expected to have peaked in 2022, but the decline starting in 2023 will be slower than previously expected. As global commodity prices decline and consumption growth is expected to remain weak, domestic inflationary pressure will also ease in the region. Falling global energy prices and fertilizer prices have helped to ease domestic inflationary pressures in South Asia, although consumer inflation is sticky in most countries.
The annual average inflation rate will fall to 8.9% in 2023 and below 7% in 2024, after reaching 9.4% in 2022.
“However, addressing existing social and economic divides in South Asia is crucial for the region to fully realize its economic potential.”
Calls for a more equal income distribution are higher in South Asia than in any other region and have increased significantly since the 1990s, suggesting that public support for policies to promote inclusive growth in the region is rising.
The share of people in favour of a more equal income distribution is nearly twice as high in South Asia compared with other regions, according to data from the World Values Survey. More than two decades of sustained economic growth across most of South Asia has brought significant poverty reduction, yet inclusive social progress has remained elusive.
Sustained economic growth over the past two decades in the South Asian region has lifted some 250 million people out of extreme poverty and improved average living standards considerably. However, economic growth has not benefited all groups equally.
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