Washington-based World Bank is supporting Sri Lanka’s return to a growth path by helping transform key sectors with more concessional fundsManaging Director of Operations Anna Bjerdesaid, as the island recovers from a sovereign default.
The agency will ensure that its new funding is greater than repayments as the country works on making debt sustainable.
Sri Lanka defaulted on its external debt after the deployment of the most aggressive ‘macro-economic policy’ in the history of its central bank in 2020 involving large liquidity injections while taxes were also cut to close what economic bureaucrats said was a ‘persistent output gap‘.
The central bank from April 2022 Sri Lanka started to market price interest rates, ending liquidity injections to mis-target rates, containing private credit.
Sri Lanka also raised energy prices to reduce state enterprise credit and hiked taxes to contain the deficit, helping contain domestic credit. In September 2022 Sri Lanka recorded a balance of payment surplus asthe central bank re-financed domestic credit, ending currency pressure.
Sri Lanka’s inflation, which rose to 70 per cent as the rupee collapsed from 184 to 360 after two years of macro-economic policy and a failed float, has now come to near zero about a year after the currency stabilized.
“I think the government has come a long way and we have seen some positive signals of stabilization,” Bjerde said in an interview during a visit to the island.
“I think now we need to really make sure that we couple it with the reforms to make sure we can get growth.”
Sri Lanka can move forward with “coordination, capacity, communication” she said.
Transformative Initiatives
Key sectors that will get World Bank support for reforms and re-building are renewable energy, digitalization and human resources as well agriculture.
Bjerde’s and also met other development partners who support the island’s recovery and government officials, during her visit.
“So, we’ve talked a lot about renewable energy and connectivity with the rest of the region,” Bjerde said in an interview during the visit.
“We’ve talked about the opportunity to capitalise on the natural endowment of wind and sun that the country has and is starting to test out.”
Sri Lanka is eyeing a large renewable energy program on a public-private partnership model where the public sector has to ensure necessary reforms are done and there is stable revenues to support new investments.
“So, they have to do their part, which is the restructuring of the sector, the tariffs, the policies,” Bjerde said.
“Then the private sector needs to actually do the investment. And here, we think that generation through wind and solar should be totally private sector, but they need to know that they will have a steady income stream for their investment.”
The World Bank’s private sector arm, the International Finance Corporation has already helped conduct an offshore wind resource assessment.
It Multilateral Investment Guarantee Agency (MIGA) was also ready to help boost private sector investments across the globe by insuring against a range of non-commercial risks like transfer and convertibility; breach of contract; expropriation; and war and civil disturbance.
“So we’re looking at these sort of transformational programs,” Bjerde. “Another one I think the country will benefit from is digitalization.”
“And we’re working on agriculture, as well as looking at what we can do in other sectors.
“The other area I’d like to see is healthcare because the country has some very good experience in building preventive healthcare. And I would like to see that scale up for human capital.”
Digitalization would be a key initiative, which could help transform government services to the public.
However, concerns have been raised by freedom activists about the digital ID and a ‘family tree’ given the country’s tendency to slip into authoritative rule.
Fears of a surveillance state have heightened especially given that there is already an existing ID number for every citizen, which can be extended at their own volition in line with the best liberal practices.
Sri Lanka has a history of cracking down on democratic protests, and surveilling media and human rights activists, especially when monetary instability worsens.
Net Positive Funds
Sri Lanka is working on restructuring bilateral and commercial debt in a bid to emerge from default and re-access bilateral and capital market debt. multilateral agencies are not restructured.
But the World Bank has made Sri Lanka eligible again for cheaper International Development Association funds as the currency collapsed tipping large sections of the people into poverty.
Though still a ‘Middle Income’ country, Sri Lanka was de-graduated more market-based International Bank for Reconstruction and Development credit as the country’s credit rating was downgraded to default.
The World Bank has estimated that about 60 per cent of low-income countries are in debt distress or at risk of debt distress, Bjerde said.
“So, for our IDA countries, we go from credit to grant, if they’re credit IDA countries,” she said.
“And for IBRD countries, like Sri Lanka again, we have gone to shift them from IBRD terms to IDA credit terms.”
As a result, countries in distress may save about one-third of their financing cost, according to World Bank estimates.
The World Bank has already started to give budget support in the stabilization program linked to reforms, but project loans will start to kick in under the agency’s new country partnership network.
A project loan for a social safety net has been approved.
“The reforms will also take time and they will require some difficult adjustments,” Bjerde said.
“So having this social protection that protects the most vulnerable and poor while you’re adjusting the economy will also be very good.”
A 150 million US dollar credit to strengthen a deposit insurance fund was approved in November which will protect small depositors from failures of regulated banks and finance companies.
The World Bank will ensure that its new funding exceeds repayments and Sri Lanka recovers from the monetary and debt crisis.
“…[W]e make sure that we are what we call net positive in our terms,” Bjerde said. “We don’t want to be in a situation where the country actually has its bills greater to us than we have to them.
“So, we make sure every year we are net positive and we encourage everybody to do that.”
Source: Economynext
