LNP – IMF lowers Sri Lanka’s outlook on persistent pandemic pressures

Cites supply chain issues, higher prices make recovery difficult and uneven
Advocates for aggressive vaccination to look past pandemic for durable recovery

Says higher inflation is a global phenomenon but stresses need for central banks to stay ready to act early
Underscores need for near-term fiscal spending with a mid to long-term plan to cut deficits and debt
The International Monetary Fund (IMF) lowered its growth outlook for Sri Lanka, alongside the rest of the world’s, on the risks stemming from the prolonged virus that gave rise to supply chain disruptions and higher price pressures, which made the global recovery a difficult and an uneven affair.

In its latest World Economic Outlook report released on Tuesday, the multilateral lender lowered Sri Lanka’s growth outlook to 3.6 percent in 2021, from its July forecast of 4.0 percent, as the outlook for the low-income and developing countries took a turn for the worst, due to the pandemic and its related ramifications on employment, access to commodities and rising consumer prices, making policy choices tougher than ever.

Citing the spread of the more virulent Delta variant of COVID-19, which predominantly acts as a dampener on the meaningful recovery prospects everywhere in the world, the IMF said the foremost priority is to vaccinate people as many as possible and called on the advanced economies to make good on their pledges to provide vaccines and financial support to countries with less vaccinated populations, to protect the tenuous economic recovery by preventing anymore mutations of the virus.

“While over 60 percent of population in advanced economies are fully vaccinated and some are now receiving booster shots, about 96 percent of the population in low-income countries remain unvaccinated,” said IMF Chief Economist Gita Gopinath in a press conference to announce the key findings of their October report.

“The foremost priority is therefore to vaccinate at least 40 percent of the population in every country by the end of this year and 70 percent by the middle of next year,” she added.

Sri Lanka however remains an outlier on par with the countries with higher vaccination rates.

The IMF trimmed the outlook for the global economy to 5.9 percent in 2021, from their July forecast of 6.0 percent, as a result of the projected decline in the growth in the advanced economies to 5.2 percent, from 5.6 percent in July.

For emerging markets and developing economies, the outlook improved to 6.4 percent for 2021, from 6.3 percent in July, of which the uptick was attributed to the robust performance of some commodities exporting countries on the back of the sharp rise in their prices.

“However, this modest headline revision masks large downgrades for some countries,” Gopinath added as part of her remarks.

The IMF left the global growth in 2022 unchanged at 4.9 percent.

However, in a projection made for the next four years, the IMF showed that while the advanced economies would clawback their lost economic output and record a 0.9 percent gain from the pre-pandemic levels by 2024, the emerging markets and developing economies, excluding China, would still see their economic output at 5.5 percent below the pre-pandemic, reflecting prolong poor living standards for the people in these countries, even after four years since the pandemic.

In referring to the inflation, a hot button issue in the current context, both locally and globally, Gopinath said the supply chain disruptions caused by both the virus outbreaks and pent-up demand caused escalating commodities prices globally, with food prices rising the most particularly in low-income countries, making the low-income households the most vulnerable segment, stoking fears of food insecurity and social unrest.

“A principal common factor behind these challenges is the continued grip of the pandemic on global society,” she said in reference to the inflation and financial sector risks.

The IMF maintains the view that the inflation could however will return to the pre-pandemic levels by mid-2022, albeit uncertainties remain, which would require the central banks to tighten their policies earlier than the anticipated levels.

“The monetary policy will need to walk a fine line between tackling inflation and financial risks while supporting the economic recovery,” Gopinath said.

“While monetary policy can look through transitory increases in inflation, the central banks should be prepared to act quickly to risks if rising expectations of inflation become more material in this unchartered recovery,” she added. Meanwhile, commenting on the fiscal policy, she said while the healthcare spending must be prioritised and other support-style spending must be highly targeted in the short term, when the health outcomes improve, she said the policy should focus increasingly on long-term structural goals.

“With public debt levels at record highs, all initiatives should be routed in credible, medium-term frameworks backed by feasible revenue and spending measures. Such credibility can lower financing cost for countries and increase fiscal space in the near term,” Gopinath added