The global economy which is projected to edge up to 3.1 percent this year and then moderate in the next two years could offer economic tailwinds for Sri Lanka, the World Bank (WB) office in Colombo said.
In an interview with the Observer Business, Senior Country Economist for Sri Lanka and the Maldives, World Bank, Ralph VanDoorn said that Sri Lanka could benefitf rom the global economic rebound through greater integration with the rest of the world.The World Bank in its January 2018 Global Economic Prospects forecasts global economic growth to edge up to 3.1 percent in 2018 after a much stronger-than-expected 2017, as the recovery in investment, manufacturing, and trade continues and as commodity-exporting developing economies benefit from firming commodity prices.
However, the Bank says that Sri Lanka will have to brush up it competitiveness in the global arena if it is to gain from the upswing.
Excerpts of the interview:
Q: The World Bank forecasts global economic growth to edge up to 3.1 percent in 2018 in its January 2018 Global Economic Prospects. What are the driving forces of this growth and how would Sri Lanka and other emerging economies stand to benefit from the upswing?
A: Global growth is projected to edge up to 3.1 percent in 2018, and then slightly moderate to an average of 3 percent in 2019-20. For the first time since the global financial crisis in 2008-09, all major regions of the world are experiencing an uptick in economic growth.
The current, broad-based growth acceleration is a welcome trend and could be self-reinforcing. The improved outlook is mainly driven by a cyclical recovery, reflecting a rebound in investment, manufacturing activity, and trade.
This improvement comes against the backdrop of benign global financing conditions, generally accommodative policies, rising confidence, and firming commodity prices.
Growth in most regions with large numbers of commodity exporters recovered in 2017, with the notable exception of the Middle East and North Africa, mainly due to oil production cuts. In many commodity-importing emerging market and developing countries, export and import growth accelerated, reflecting firming global and domestic demand, respectively.
Sri Lanka could benefit from the global economic recovery by integrating more with the rest of the world. The country is strategically located in the middle of the Indian Ocean which provides access both to the west and to the emerging Asia.
Regaining GSP+ from the European Union (EU) provides a window of opportunity to increase export revenues in the next few years before it becomes a fully-fledged Upper Middle Income country despite the slow growth projected for the Euro Area.
China’s slow down – by its own recent standards - can have implications on Sri Lanka in tourism, FDI and official financing flows. However, its ambitious One Belt One Road initiative could pave the way for further integration of the region and lead to opportunities for FDI and trade.
The anticipated recovery of India, the other regional powerhouse, and faster growth in the EMDEs in the East would offer avenues to enhance trade in merchandise and services and financing flows.
It is critically important for Sri Lanka to improve its competitiveness in the global landscape to benefit from the global growth. The World Bank recommends the following measures to improve trade, business environment and FDI leading to improvement of overall competitiveness of the economy.
• Trade policy: (1) adopt trade policy with a gradual but firm liberalisation schedule, allowing time for adjustment to avoid a sudden shock to fiscal revenue and the balance of payments; and (2) make progress on bilateral trade agreements while carefully evaluating the costs and benefits to Sri Lanka, with a particular focus on non-tariff barriers and Mutual Recognition Agreements.
• Trade facilitation: (1) adopt a systematic and effective risk management system, the absence of which imposes a huge burden in terms of time and cost, adversely impacting competitiveness; and (2) create a single trade information portal, which will help meet the informational needs of businesses.
• Innovation: improve the innovation landscape in Sri Lanka especially for SMEs and start-ups.
• FDI attraction: (1) enhance effectiveness of the BOI as a ‘one-stop shop’ for foreign investors; (2) strengthen the BOI’s capacity to attract and retain FDI
Q: According to the World Bank president, the global growth is an opportunity to invest in human and physical capital. What is your message for Sri Lanka?
A: While the global economy is experiencing a broad-based cyclical upturn, which is expected to be sustained over the next couple of years, contrast, growth in potential output (that is output if the economy were operating at full employment) is flagging, languishing below its longer-term and pre-crisis average both globally and among emerging market and developing economies (EMDEs).
The forces depressing potential output growth will continue unless countered by structural policies. Across all emerging markets and developing countries, there is room for policy improvements. Policy initiatives to lift physical and human capital, encourage labor force participation, and improve institutions could help raise potential growth and reduce inequality.
For Sri Lanka, with its rapidly ageing population, the focus should be on implementing reforms that would help to improve quality of education and health services.
While tax revenue is improving, still-low levels of fiscal revenue combined with largely non-discretionary expenditure in salary bill, transfers, and interest payments has constrained critical development spending and squeezed expenditure on health, education and social protection, which is low compared to peer countries in South and South East Asia.
Sri Lanka also needs to increase the quality and efficiency of public investment, and improve the business climate to attract more domestic and foreign private investment. Maintaining macroeconomic stability and staying on the revenue-led fiscal consolidation to create fiscal space are pre-conditions.
Q: However, global growth is seen as a short-term upswing by the bank and over the longer-term growth is expected to slow down. How would it affect improving living standards and reducing poverty across the world?
A: Over the longer term, a more pronounced slowdown in potential output growth in advanced economies and EMDEs would make the global economy more vulnerable to shocks and worsen prospects for improved living standards.
Policymakers in advanced economies and EMDEs need to shift their focus toward boosting potential growth in the longer term to boost growth, create jobs and reduce poverty.
Beyond cyclical considerations, EMDEs face the challenge of an expected further decline in potential growth. This argues strongly for the urgency of implementing structural policies, such as improvements in education and health systems; high-quality investment; and labor market, governance, and business climate reforms.
All of these efforts will be critical to boost long-term growth prospects, alleviate poverty, and, if accompanied by a rising number of skilled workers in EMDEs thanks to better education outcomes, to help reduce global inequality.