Sri Lanka’s economy is transitioning from a predominantly rural-based economy towards a more urbanised one oriented towards manufacturing and services.

Impressive progress in economic development has markedly improved its social indicators and Sri Lanka has been classified as a middle-income economy by the International Monetary Fund (IMF) since 2010. Its per capita GDP reached $4,065 in 2017 from $393 in 1980.

Sri Lanka has met the Millennium Development Goal (MDG) target of halving extreme poverty. Despite this pockets of poverty continue to exist. An estimated nine per cent of Sri Lankans, who are no longer classified as poor, live within 20pc of the poverty line.

Following a series of weather-related shocks in 2017, the growth cooled sharply to 3.1pc in 2017, from 4.5pc in 2016, the lowest since 2001 as agriculture took a major blow from repeated floods and droughts while tight monetary and fiscal policies also crimped demand.

Nevertheless, the economy is gradually normalising. Sri Lanka’s central bank governor expects economic growth in 2018 to be between 5-5.5pc. The IMF expects the economy to continue to grow around four per cent in 2018.

Since the $81 billion economy remains vulnerable to adverse shocks given the sizable public debt, large refinancing needs and low external buffers, the IMF suggested more reforms, improving competitiveness, governance and public financial management to temper fiscal risks.

While the government remains committed to the IMF’s recommended structural reforms, the 2018 growth forecast is expected to be weak due to a fragile agriculture recovery, lower household spending and moderating credit growth especially in the services sector.

Government debt at about 80pc of GDP remains among the highest of the emerging markets. The budget deficit is estimated to have reached five per cent of GDP in 2017. Sri Lanka’s low tax efficiency and collection provide significant scope to broaden the tax base and increase the tax revenue/GDP ratio, which was only 12pc in 2016.

A number of measures have been proposed to increase the tax revenue, chief amongst them being motor vehicles excise duty and luxury tax revisions, duty revisions on VAT and introduction of a Debt Repayment Levy.

The government has also proposed several expenditure proposals mainly aimed at developing small- and medium-sized enterprises. With these initiatives, it aims at reducing the budget deficit to 4.8pc of GDP in 2018.

The economy will face its highest debt repayment in the next two years. According to the IMF, the government needs repay debt estimated at $12.68bn in 2018 — a record high — including $2.9bn of foreign loans and a total of $5.36bn in interest.

The domestic debt repayments will reach a peak next year, following a bunching up of external debt repayments every year from 2019 onwards for three years. External debt stands at $47.8bn.

Bangladesh

Bangladesh’s $250bn economy has grown roughly six per cent annually since 1996 despite prolonged periods of political instability, poor infrastructure, corruption, insufficient power supplies, and slow implementation of economic reforms.

Its per capita GDP has shown robust growth from $523 in 2006 to an estimated at $1,446, faster but smaller than the regional average in 2016. Classified in the lower middle income group, the economy relies on its enormous human resources, rich agricultural soils and abundant water resources.

Nearly half of Bangladeshis are employed in agriculture with rice as the single most important product. Bangladesh is the world’s fourth biggest rice producer; the sector contributes 15pc to the GDP.

Industry represents 29pc of GDP and employs 19pc of the population. The backbone of the industrial sector is garments production, with textile exports representing 80pc of the total exports. Three quarters of exports revenues come from producing ready-made garments.

Despite GDP growth, almost one-third of Bangladesh’s 150 million people live in extreme poverty. According to the World Bank, Bangladesh’s poverty rate fell from 82pc in 1972 to 12.9pc in 2016 but the country still remains a poor, overpopulated country.

Bangladesh’s export-led growth over the last two decades has been supported by sound macroeconomic policies, strong export demand, high remittances, and low commodity prices which have combined to yield solid output growth, falling inflation, moderate public debt, and greater resilience to external shocks.

Steady export growth in the garment sector and remittances from overseas Bangladeshis were key contributors to Bangladesh’s sustained economic growth and rising foreign exchange reserves.

Official statistics reported GDP grew by 7.2pc in FY16 from 6.5pc in the preceding fiscal year, supported by both robust domestic demand — particularly government consumption and private investment — and external demand.

On the supply side, growth was driven mainly by industry and services. Tax revenue performance improved somewhat, with revenues-to-GDP ratio increasing moderately. International reserves have risen and the public debt-to-GDP ratio has remained largely stable.

In FY2017, GDP growth was estimated at 7.1pc, supported by remittances from nearly 7.5m Bangladeshi living abroad who remitted $12.85bn in 2017, garment exports, increased wages and low inflation.

However, the government has eyed an economic growth of 7.8pc in the 2017-18. Bangladesh is projected to be among the fastest-growing least developed countries in 2018, supported by vigorous domestic demand.

According to the Bangladeshi planning minister, the economy has proven resilient despite political and social unrest in the country.

He is hopeful that 2018 will be good for the country, with GDP growing by eight per cent.

Published in Dawn, The Business and Finance Weekly, May 7th, 2018