sri lanka development update...strategy, institutional fragmentation. proposed reforms need to...
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www.worldbank.org/sldu#SLDU2018
SRI LANKA DEVELOPMENT
UPDATE
MORE AND BETTER JOBS FOR AN UPPER MIDDLE-INCOME COUNTRY
June 2018
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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
3Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
4Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
0
2
4
6
8
10
12
14
Fin
anci
al s
ervi
ces
Tran
spo
rtat
ion
&…
Co
nst
ruct
ion
Oth
er
per
son
al s
erv
ices
Wh
ole
sale
& r
eta
il tr
ade
Rea
l est
ate
& o
wn
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ip o
f…
Oth
er
ind
ust
ry
Min
ing
& q
uar
ryin
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F& B
an
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ob
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Oth
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serv
ice
s
Oth
er
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cult
ura
l
Acc
om
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dat
ion
, fo
od
&…
Pro
fess
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ervi
ces
Text
iles
& le
ath
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Hea
lth
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iden
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e &
…
Edu
cati
on
Mar
ine
fish
ing
Tea
(Gre
en
leav
es)
Ric
e
Per
cen
t
Contribution to growth 2010-2017
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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)
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
y-1
6
Sep-1
6
Jan-1
7
Ma
y-1
7
Sep-1
7
Jan-1
8
US
D m
illio
n
Gross official reservesReserves net of swaps and ISBsReserves net of short-term liabilities
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
- 5
10 15 20 25 30 35 40
Au
stra
lia
Ch
ile
Isra
el
Ind
on
esia
Tu
nis
ia
Can
ada
Sri
Lan
ka
Po
lan
d
Mex
ico
Hu
nga
ry
Sw
eden
Nep
al
Ind
ia
Ph
ilip
pin
es
So
uth
Afr
ica
Ru
ssia
Pak
ista
n
Bra
zil
Tu
rkey
Arg
enti
na
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 .
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
Special Focus:
More and Better Jobs for an Upper Middle-
Income Country
15Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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%
Contributing family worker
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)
21Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
22Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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?
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
Contributing family 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
25Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
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
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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?
Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018
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
28Sri Lanka Development Update – More and better jobs for an Upper-Middle-Income Country - June 2018