SRI LANKA DEVELOPMENT UPDATE...strategy, institutional fragmentation. Proposed reforms need to accelerate Sri Lanka Development Update –More and better jobs for an Upper -Middle

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SRI LANKA DEVELOPMENT

UPDATE

MORE AND BETTER JOBS FOR AN UPPER MIDDLE-INCOME COUNTRY

June 2018

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http://www.worldbank.org/sldu

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Recent Developments, Outlook, Risks and Policy Priorities

2Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018

Main takeaways

1. Sri Lanka’s improvement in its macroeconomic performance was masked by inclement weather.

2. Fiscal and monetary policy measures contributed to stabilization; however, a prolonged drought took a toll on growth while contributing to raising inflation.

3. Despite a widening deficit of the external current account, exports recovered after shrinking for two consecutive years.

4. Strengthened capital flows improved external buffers. The overall improvement in macroeconomic performance was recognized by rating agencies.

5. To sustain growth, create more and better jobs and reduce poverty Sri Lanka needs to implement reforms that the country has already announced; the outlook will remain stable, provided the government is committed to the reform agenda.

6. Risk balance is tilted towards downside; the key one being the domestic political risk


Main changes from the last update

1. The government recorded a primary fiscal surplus in 2017, a first-in-decades

2. Official reserves reached an all-time-high in April 2018 thanks to capital flow

3. The new Inland Revenue Act came into effect

4. Active Liability Management Act was passed

5. Cost-reflective pricing formula for fuel was implemented

6. 1,200 lines of para-tariffs removed

7. SWIFT, a single web portal for investors, was launched to facilitate investments

8. Some reforms slowed down: further debt management reforms, National Audit Act, Secured Transactions Act, Customs Ordinance, and SOE reforms

9. With the impending election cycle elevating political risk, the window for further reforms is narrowing


Global environment continues to be benign

5

• Global growth has softened but remains robust despite signs of moderation in trade and manufacturing

• Faster withdrawal of monetary policy accommodation in advanced economies have led to rising global interest rates, capital inflows to EMDEs are likely to moderate as global financial conditions tighten

• Risks to the outlook remain tilted to the downside: Trade restrictions, disorderly tightening of global financing conditions, a further rise in oil prices

Takeaway: Need to rebuild monetary and fiscal buffers and restore policy space to mitigate negative external shocks

World Bank Global Economic Prospects, June 2018; South Asia Focus, April 2018

2016 2017 2018 2019 2020 Key financial f low s to Sri Lanka

Actual Estimates

World 2.4 3.1 3.1 3 2.9

United States 1.5 2.3 2.7 2.5 2 Textiles, Portfolio f low s

Euro Area 1.8 2.4 2.1 1.7 1.5 Textiles, Tourism, Portfolio f low s

China 6.7 6.9 6.5 6.3 6.2 Tourism, FDI, Official f inancing

India 7.1 6.7 7.3 7.5 7.5 Tourism, Remittances

Saudi Arabia 1.7 -0.7 1.8 2.1 1.7 Remittances

Russia -0.2 1.5 1.7 1.8 1.8 Tea

United Arab Emirates 3 2 2.5 3.2 3.3 Remittances

Japan 1 1.7 1 0.8 0.5 Official f inancing

Projections

Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018

Growth has decelerated and is still largely driven by non-tradable sectors

6

• Annual average growth decelerated from 8.5% (2010-12) to 4.2% (2013-17)

• Inward orientation is reflected with 70% of the total growth coming from 6 non-tradable sectors

Takeaway: Reforms needed towards a more private investment-tradable sector growth model to sustain growth, jobs and poverty reduction

8.5

4.2

0

1

2

3

4

5

6

7

8

9

10

2010 2011 2012 2013 2014 2015 2016 2017

Perc

ent

GDP growth and inflation

GDP growth

Average GDP growth of the period

Inflation, annual average

12 12 12 1211

98

4 4 43

2 2 1 1 1 1

0 0-2

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Contribution to growth 2010-2017


Zooming in on 2017, natural disasters were a drag on macroeconomy

7

• Agriculture and related industry/service sectors decelerated growth in 2017 to a 16-year low.

• Inflation rose due to supply disruptions, demand pressures, and one-off impact of VAT changes before slowing down in mid-2018

Takeaway: growth performance could have been better without the impact of natural disasters

-2

0

2

4

6

8

10

2011 2012 2013 2014 2015 2016 2017

Pe

rce

nt

Agriculture Construction

Other industry Services

Net taxes Overall growth

0

2

4

6

8

10

Jan-1

7

Ma

r-1

7

Ma

y-1

7

Jul-1

7

Sep-1

7

No

v-1

7

Jan-1

8

Ma

r-1

8

Ma

y-1

8

Perc

ent

Food Housing, Water & EnergyHealth EducationCommunication Restaurants & HotelsAlcoholic beverages OthersHeadline (YoY) Core-yoy


Fiscal performance improved; however, significant risks remain

8

• A primary fiscal surplus was recorded in many decades

• New Inland Revenue Act is expected to increase revenues structurally

• However, overall fiscal deficit was higher than projected, as interest expenditure rose

• Central government debt fell to 77% of GDP; contingent liabilities remain a significant fiscal risk

Takeaway: fiscal & debt numbers moving in right direction, but important to manage quality of tax & spending, and composition/risks of debt & contingent liabilities

(5.5)

13.8

19.4

-8

-6

-4

-2

0

2

0

5

10

15

20

25

2012 2013 2014 2015 2016 2017

Perc

ent

of

GD

P

Perc

ent

of

GD

P

Key fiscal aggregates

Overall balance (RHS) Primary balance (RHS)

Total revenue and grants Total expenditure

77.6

62

64

66

68

70

72

74

76

78

80

-10

-5

0

5

10

15

2011 2012 2013 2014 2015 2016 2017

Perc

ent

of

GD

P

Perc

enta

ge p

oin

t contr

ibution

Drivers of central government debt

Real interest effect Growth effectPrimary deficit effect Exchange rate effectResidual Change in debtPublic debt (RHS)


Implementation of fuel price formula will reduce fiscal risks

9

• Cost-reflective pricing of fuel will make CPC less vulnerable to global oil shocks and bring in additional benefits to the economy

• The removal of the fuel subsidy is progressive, even after accounting for indirect effects

• On-going work on targeting is critical to protect the poor and vulnerable from the impact of the reform

Takeaway: Targeting is critical to protect the most vulnerable

(1,500)

(1,000)

(500)

-

500

1,000

20

12

20

13

20

14

20

15

20

16

20

17

US

D m

illio

n

Drivers of refined petroleum bill

Price Volume Change in total cost


0

5

10

15

20

25

30

35

1 2 3 4 5 6 7 8 9 10

Pe

rce

nt

Poorest Richest

Direct Indirect

Debt level falls, but portfolio shows risks

10

• Central government debt to GDP ration declined in 2017 although it remains high by peer standards

• The government has taken some important steps to deal with refinancing risks related to Eurobonds maturing from 2019 (Active Liability Management Act)

• There are important structural challenges that require attention: legal framework, debt management strategy, institutional fragmentation. Proposed reforms need to accelerate


0

10

20

30

40

50

60

70

80

90

2012 2013 2014 2015 2016

Perc

ent

of

GD

P

Non-guaranteed debt of 7 SOBEs

Letters of comfort

Other guaranteed debt

Guaranteed debt of 7 SOBE

RDA guaranteed debt

Central government debt

7 SOBEs included in the graph are Ceylon Petroleum Corporation, Ceylon Electricity Board, Sri Lankan Airlines, Sri Lanka Ports Authority, National Water Supply and Drainage Board, Ceylon Fertilizer Company, Airport and Aviation Services Company.

0

500

1000

1500

2000

2500

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

20

31

External sector reported mixed messages

11

• External trade balance weakened due to increased petroleum and food imports while remittances shrank and tourism slowed down.

• FDI hit a historic-high (Port City and Hambantota)

• Official reserves recorded an all-time-high in April 2018 with forex purchases and external borrowings.

• External debt related risks remain high.

• Exchange rate: depreciation pressures amid global financial tightening; felt by many EMEs

Takeaway: to strengthen external account, important to strengthen exports and FDI by implementing investment climate, trade and FDI reform agendas, use GSP+ as window of opportunity

(10,000)

(5,000)

-

5,000

10,000

15,000

Jan-1

4

Ma

y-1

4

Sep-1

4

Jan-1

5

Ma

y-1

5

Sep-1

5

Jan-1

6

Ma

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6

Sep-1

6

Jan-1

7

Ma

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7

Sep-1

7

Jan-1

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US

D m

illio

n

Gross official reservesReserves net of swaps and ISBsReserves net of short-term liabilities


- 5

10 15 20 25 30 35 40

Au

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Depreciation from the beginning of 2018

Sri Lanka’s macro outlook continues to be steady

12

• Expected to reach 4.4 percent in 2018, driven by private consumption and investment. Growth

• will stabilize around mid-single digit level, although the upward trend in oil prices may exert some upward pressure with the implementation of fuel-price formula; inflation targeting in the medium-term is expected to help

Inflation

• Will narrow to 5.0% of GDP for 2018, the budgeted fiscal target of 4.8% is likely to be missed

• Primary surpluses supported by the ongoing implementation of revenue measures will reduce the overall fiscal deficit in the medium term

Fiscal deficit

• Projected to gradually fall, supported by primary fiscal surplus and growthPublic debt

• Will benefit from tourism, and GSP+ in 2018; however, imports of petroleum will mask the improvement

• FDI and debt flows to close the financing gapExternal sector

• Expected to improve with forex purchases, a more market-determined exchange rate, monetary policy and divestment/lease out of some government assetsReserves

Outlook will remain stable, provided the government is committed to the reform agenda .


13

External risks:

• Disappointing growth performance in key countries

• Tightening global financial conditions

• Faster than expected rises in commodity prices

Balance of risks is tilted towards downside


Domestic risks:

• Political-economy related risks closer to an election cycle

• Delay in implementing revenue and debt management reforms

• Natural disasters

Policy priorities

14

• Improve tax administration

• VAT reforms

• Align spending to priorities

Stay on fiscal consolidation

• Trade policy & facilitation

• FDI attraction

• Innovation & business environment

• Institutional capacity and coordination

• Communication, trade adjustment package

More private investment and

export-led growth model

• Implementation of Right to Information

• Public Financial Management reforms

• State-Owned Enterprise reforms

• Audit function

Governance & Accountability

Manage risks

• Macroeconomy stability• Debt sustainability• Fiscal space for health,

education, social protection, disaster management and other public investment

• Prepare for ageing

• A competitive economy• Sustained growth towards UMIC

status• More and better jobs• Poverty reduction

• Public sector effectiveness• Improved service delivery• Improved citizens engagement

and public trust

• Debt and contingent liabilities (PPPs and SOEs)

• Natural disasters

• Impact of reforms on households

• Resilient economy


Special Focus:

More and Better Jobs for an Upper Middle-

Income Country


Labor supply

The labor markets in Sri Lanka

16

Retirement age

Labor force participation

Migration

Education and skills

Job supply

Growth & competitiveness: Trade, FDI, investment climate

Innovation & Entrepreneurship

Labor laws

Informality

Public and private sectors


Characteristics of the Sri Lanka’s labor market

17

• Low employment rate

• High informality

• Absence of many working-age women from both the informal and formal labor market (i.e., low female labor force participation)

• High unemployment rates amongst young people and those with higher education

• High share of the service sectors across the country

• A high share of workers in the public sector including state-owned enterprises

• Low average productivity in agriculture sector

• Regional disparities in employment


Employee: Public sector7.5%

Employee: Private sector22.3%

Employer1.4%

Own-account worker16.3%

Contributing family worker4.0%

Unemployed2.3%

Not in labor force

46.2%

Overall

Start with the working-age population

18

AFG

BGD

BTN

IND

NPL

PAKSri Lanka

30

40

50

60

70

80

90

0 20000 40000 60000 80000 100000

Tota

l em

plo

ymen

t ra

te (

Perc

ent)

GDP per capita (constant USD, PPP adjusted)

Sri Lanka’s LFP below what can be expected from GDP per capita, along with other South Asian countries


Share of informal in total, per sector:• Overall: 60%• Own-account: 94% • Family worker: 90%• Employer: 59%• Employee: 37%Public sector: 14% of labor force

Source: DCS Labor Force Survey Annual Report 2016


Large differences in working population between men and women

19

Employee: Public sector

9%

Employee: Private

sector34%

Employer3%

Own-account worker

25%

Contributing family worker

2%

Unemployed

2%

Not in labor force25%

Male

Employee: Public sector

6%

Employee: Private sector12%

Employer0%

Own-account worker

9%


6%

Unemployed

3%

Not in labor force

64%

Female

• Men: mainly private sector and own account

• Women: mainly not in labor force, relatively high public sector

• Men: mainly education, retired

• Women: mainly housework

Title of Presentation 20

Engaged in studies,

38.4

Engaged in housework

, 6

Retired/Old age, 32.5

Physically illness/Disabled, 15.9

Other, 7.2

MaleEngaged

in studies,

14.3

Engaged in

housework, 62.2

Retired/Old age, 15.6

Physically illness/Disabled,

5.2

Other, 2.6

Female

0

10

20

30

40

50

60

70

80

90

100

15 19 23 27 31 35 39 43 47 51 55 59 63 67 71 75 79 83 87

Age

Male Female

Large differences in economically inactive (out of labor force) population between men and women

• Men: wholesale/retail, transport, public admin, tourism

• Women: wholesale/retail, education, public admin, HHs, health

• Manufacturing: male 14%, female 24% of labor (textiles)


Large differences in service sector employment between men and women

Wholesale/retail, repair

of motor vehicles

31%

Transportation/storage

20%

Public admin/defense/compulsory soc. sec.

16%

Accomm/food services

5%

Activities of HHs as

employers/own use

5%

Other23%

MaleWholesale/retail, repair

of motor vehicles

27%

Education19%

Public admin/defense/compulsory soc. sec.

18%

Activities of HHs as

employers/own use

7%

Health&social work

7%

Other22%

Female

Unemployment: high amongst youth and young graduates


0

2

4

6

8

10

12

14

Total Grade 5 &Below

Grade 6-10

G.C.E.(O/L) (Gr

10-11)

G.C.E.(A/L) &

above (Gr12-13)

Male Female

0

5

10

15

20

25

30

35

Total 15 - 24 25 - 29 30 - 39 Over 40

Male Female

• High unemployment graduates and young people

• Skills mismatch and challenges in education access and quality

• Low unemployment rates for grade <5, 6-10: largely informal

23

What is the informal sector?


0 2,000,000 4,000,000 6,000,000 8,000,000

By employment

Informal Formal

60%

4.8m 3.2m

Informal if: • not registered with EPF and IRD and • does not keep formal accounts and • total number of regular employees below 10

Otherwise formal

Title of Presentation 24Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018

What is the informal sector?

0 20 40 60 80 100

Total

Below Grade 6

Grade 6 - 10

G.C.E. (O/L) (Gr 10-11)

G.C.E. (A/L) & above (Gr 12-…

By level of education

0 20 40 60 80 100

Total

Employees

Employer

Own account worker


By type of employment

0 20 40 60 80 100

Education

Manufacturing

Accommodation and food…

Construction, utilities,…

Non-agricultural, of which:

Agriculture, forestry and…

By sector0 20 40 60 80 100

Total

Male

Female

By gender

1.5m

3.3m

1.7m

2.4m

1.1m

2.7m

1.9m

2.9m

507k

118k

692k

67k

Regional disparities in employment: in Northern and Eastern Provinces typically amplified


0

10

20

30

40

50

60

70

80

90

100

NorthernProvince

EasternProvince

WesternProvince

OtherProvinces

Agriculture Industry Services

44 4250 54

0

10

20

30

40

50

60

70

80

90

100

Northern Province Eastern Province Western Province Others Provinces

Employed Unemployed Student Housewife Others not working

• Lower employment, lower female labor force participation than national average

• But more workers in service sector than anywhere but Western Province

• Skills and access to finance seem to be greater constraints to employment

Newhouse, David Locke; Silwal, Ani Rudra. 2018. The state of jobs in post-conflict areas of Sri Lanka (English). Policy Research working paper; no. WPS 8355. World Bank Group. http://documents.worldbank.org/curated/en/443541519651773814/The-state-of-jobs-in-post-conflict-areas-of-Sri-Lanka

http://documents.worldbank.org/curated/en/443541519651773814/The-state-of-jobs-in-post-conflict-areas-of-Sri-Lanka

Job supply (or labor demand)

26

• 497,000 vacancies in 2017

• Of which 210,000 hard-to-fill vacancies

• More vacancies than unemployed: mismatch between supply & demand

Construction

4%

Industry except

construction

35%

Trade22%Tourism

2%

Services except

tourism36%

Plantation1%

Vacancies


Sewing Machine

Operators 22%

Security Guards

22%

Commercial and Sales

Representatives15%

Other Manufactu

ring Labourers

8%

Cleaners and

Helpers in Offices,

Hotels and Other

Establishments4%

Other29%

Hard-to-fill vacancies

Source: DCS Labor Demand Survey 201

Labor supply

27

Retirement age

Labor force participation

Migration

Education and skills

Job supplyGrowth & competitiveness: Trade, FDI, investment climate

Innovation & Entrepreneurship

Labor laws

Informality

Public and private sector

What is the agenda?


Job supply = largely competitiveness agenda

Update labor laws to promote flexibility of private sector to respond to changing market demands

Innovation: Improve ecosystem, early-stage funding, incubation, intellectual property rights

Encourage large informal firms to formalize; assess how to support subsistence firms; protection for formal and informal sector workers

Level playing field between public and private sectors to encourage more mobile labor force (pensions)

Pools of underutilized labor: encourage female and youth employment, Sri Lankans abroad

Improve education/TVET to reduce skills mismatches and adapt to new types of jobs

Female: • Barriers to work• Career

development• Gender equality

in labor market• Education/skills

Full report at: www.worldbank.org/sldu

Previous editions:• November 2017: Creating opportunities and managing

risks for sustained growth• June 2017: Unleashing Sri Lanka’s trade potential• October 2016: Structural challenges identified in the

Systematic Country Diagnostic,

Stay in touch with World Bank Sri Lanka!

www.worldbank.lk

@WorldBankSAsia Follow the discussion at #SLDU2018


http://www.worldbank.org/sldu

http://openknowledge.worldbank.org/handle/10986/28826

https://openknowledge.worldbank.org/handle/10986/27519

https://openknowledge.worldbank.org/handle/10986/25351

http://www.worldbank.org/en/country/srilanka

https://twitter.com/worldbank

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SRI LANKA DEVELOPMENT UPDATE...strategy, institutional fragmentation. Proposed reforms need to accelerate Sri Lanka Development Update –More and better jobs for an Upper -Middle