The Asian Development Bank’s (ADB) flagship annual economic publication, the Asian Development Outlook (ADO) 2021, forecasts a significant rebound in Sri Lanka’s economy as domestic and global economic activity strengthens and vaccination campaigns gather momentum domestically and abroad. ADB projects Sri Lanka’s economic growth to rise to 4.1% in 2021 and moderate to 3.6% in 2022.
Growth in the near term will come from increased private consumption supported by low-interest rates and as pent-up demand is released, as well as recovery in investment supported by low-interest rates, stronger global demand, and base effect following the contraction in 2020. Progress in the development of the Colombo Port City and Hambantota Industrial Zone will foster foreign direct investment and support growth, which will also benefit from various reforms planned by the government.
“The coronavirus disease (COVID-19) pandemic reached Sri Lanka’s shores just as the country was recovering from terror attacks in April 2019. The economy suffered from the simultaneous supply and demand shocks but showed resilience in the last quarter of 2020. That momentum has carried into 2021 and will support growth,” said ADB Senior Country Economist for Sri Lanka, Utsav Kumar.
“At the same time, Sri Lanka faces significant economic challenges stemming from high public debt and external financing requirements. Measures to attract non-debt creating capital inflows, enhance domestic revenue mobilization, and expenditure management will be critical to reducing vulnerabilities.”
The base effects of high food inflation in 2020 and good agricultural growth are expected to keep annual average inflation contained at 4.5% in 2021, before rising to 5.0% in 2022.
The current account deficit is expected to edge lower to 1.1% of the gross domestic product in 2021. Exports will grow as demand recovers in major export markets. Domestic demand recovery and higher oil prices will raise imports, but continued import restrictions are expected to limit import growth and help contain the deficit.
Uncertainty of the ongoing pandemic, pace of vaccination, limited fiscal space, debt vulnerabilities, structural issues, and extreme weather pose a risk to the strength of the recovery.
Tourism is Sri Lanka’s third-largest foreign exchange earner behind worker remittances and garment exports. The sector was devastated with the dual blow of the 2019 terror attacks and the pandemic. Resurrecting this sector calls for a new strategy to attract and win back the confidence of both domestic and international travelers.