Sri Lanka should enact reforms to grow the economy annually at 4-6% in order to reduce the debt burden and avoid another debt restructuring in the coming years, World Bank Lead Economist Gregory Smith said.
Writing for the latest report on Sri Lanka by ODI, which is an independent, global affairs think tank, Smith said that economic growth is a necessity not only for prosperity in Sri Lanka but also to further reduce the debt burden as without sufficient growth, the need for another debt restructuring becomes an increasingly likely scenario in the years to come.
“There is little choice but to try and enact the reforms that return growth to an annual average of 4%, 5% or 6%,” he said.
Smith, who is also the World Bank programme leader for Sri Lanka, Nepal and Maldives, said that countries in debt distress have reduced their debt burden in several ways, including by running repeat primary surpluses, through financial repression and via economic growth.
He said that running repeat primary surpluses in a low-spend economy will prove politically challenging beyond a few years, especially if the primary surplus target is set too high, as it will drag on economic recovery and growth.
He added that it will take much more than simply avoiding policy blunders for economic growth in Sri Lanka, and that it will require ‘passenger’ growth as Sri Lanka hangs to the coattails of regional giants’ robust growth.
“It will also entail long-awaited structural reforms that permit some ‘creative growth,’ so that Sri Lankan firms can compete with entrepreneurs and firms by more actively tapping into global supply chains,” he said.
Moreover, he said that alongside growth-enhancing reforms, there are several technical steps Sri Lanka can take towards better borrowing which include implementation of debt legislation that requires and allows a modern debt management office to function; pursuing active debt management and (considering how a sustainable brand can be utilised to attract better borrowing and non-debt-creating flows linked to the climate and conservation.
Further, Smith said that post debt restructuring Sri Lanka should not over-borrow on commercial terms and be active, not passive as frontier market economies should assume that markets may close during crises or interest rate hiking cycles while spikes in refinancing should be tackled in advance; even when the market is awash with lending ability.
“A frontier market needs to be cautious and to think about how this money will be refinanced or paid back, even if markets don’t care at that point,” he added.