Sustained high
growth in South Asia depends on government's relentless commitment to
structural change. The structural change includes the reversal of protectionism
and integration with the global economy, a prominent economist said this week,
warning Sri Lanka may not have the necessary fiscal space for ambitious
stimulus.
Hans Timmer,
Chief Economist for South Asia at the World Bank's Center for Banking Studies
on Tuesday, delivered a public lecture entitled 'Global Economic Outlook and
Challenges with a Focus on Sri Lanka’. In the speech, he said South Asia was
seeing a sharp decrease in its growth projections after five years of being the
fastest-growing region in the world.
He indicated out
that the main reason for this was because South Asian nations were affected by
global economic challenges. He also said that governments had added them to the
existing internal structural problems with which the countries had been
struggling for decades. In response to questions, Timmer also cautioned about
the wide-ranging economic stimulus package proposed by the government last
month and noted that policymakers would have to strike a delicate balance so
that fiscal policy loosening would not lead to economic overheating.
"Try to
mitigate the impact by counter-cyclical policies is what you usually do in a
situation like this. Especially when viewed as a temporary slowdown, fiscal
policies seem to be very successful. If there are structural problems, making
changes to monetary policy tempts governments. Nonetheless, there is no fiscal
space to participate in counter-cyclical procedures in South Asia's big
problem. The lack of fiscal space is valid for most South Asian countries
because they didn't build any reserves they could use in tough times in the
past.
"It's a
challenge for Sri Lanka. Fiscal stimulus is appropriate, but there may not be
space to do so. You also need to be careful to maintain the right balance
because if you over-stimulate and there is no room, then you could destabilise
the economy while trying to do the opposite, "he said.
Several
institutions and experts, including the World Bank, have urged Sri Lanka to
pursue reforms that would see crucial structural changes in its economy,
including continued fiscal consolidation, by broadening the tax base and
allying spending with priorities; Shifting to a private investment-tradable
sector-led growth model by improving trade, employment, innovation and the
business environment; improving governance and SOE performance; addressing the
effect of ageing workforce by growing labour participation, promoting longer
working lives and investing in skills to improve productivity; and mitigate the
impact of reforms with well-targeted social protection investment on the poor
and vulnerable. Timmer acknowledged that Stimulus would not sidestep the need
to pursue such efforts.
In addition to
standard problems such as infrastructure, urbanisation, energy, water
protection, and environmental issues, according to Timmerman, South Asia also
has concerns that are special to the country. In Timmerman's view, this not
only leads to underproductive economies and less attraction for investment, but
a limited formal sector can also lead to problems such as low participation in the
female labour force.
OSL Take: The
World Bank Chief Economist for the South Asia Region is visiting Sri Lanka to
gain further knowledge on the country’s development agenda. The Bank and its
subsidiaries have already pumped in large amounts of monies for development
projects covering several vital economic sectors. Further improving the
discussion between the World Bank and the Sri Lankan government would result in
a further increase in development assistance to the island nation. An increase
in development assistance is an encouraging sign for foreign
businesses/investors keen on doing business with Sri Lanka since the interest
shown by multinational lending agencies would help secure funding for largescale projects.
VBS/AT/20200114/Z_TB1
