The latest edition of the World Bank’s Sri Lanka Development Update (SLDU) finds the island in a challenging macroeconomic landscape. The post-conflict high growth momentum has decelerated. A volatile global environment and structurally weak competitiveness continue to weaken growth and external sector performance. High interest costs mask limited fiscal improvement.
The report’s special focus examines the challenges associated with a change in demographic composition and suggests that a multi-year program of policy reforms and institutional strengthening could help prepare Sri Lanka for the decades ahead.
The SLDU, which analyses key developments in Sri Lanka’s economy over the past six months, notes that while post-conflict growth has decelerated, the outlook remains stable, conditional on political stability and reform implementation.
Sri Lanka is stepping up to the plate at a time when the global environment remains turbulent. Key reforms, such as the implementation of the Inland Revenue Law, passing of the Active Liability Management Act, are helping to prepare for heightened external debt refinancing risks in 2019 and beyond.
“It is important to consolidate on previous reforms to ensure maximum benefits,” says Fernando Im, an author of the SLDU and the senior country economist for Sri Lanka-Maldives. He explains that future reforms could yield high development impacts, such as further strengthening public finance management and supporting the implementation of a social registry to improve coverage and targeting of social safety nets.
Below are some of the recent developments highlighted in the report:
Sri Lanka’s debt portfolio carries significant risks
At an estimated 83 percent of its Gross Domestic Product, Sri Lanka’s central government debt level is high. As the country approached upper middle-income status, it has been borrowing on more commercial terms with increased cost and risk.
The majority of foreign currency denominated debt is now largely made up of market borrowings including International Sovereign Bonds (ISBs) and Sri Lanka Development Bonds (SLDBs), which in 2017 accounted for 53 percent, up from just 3 percent of total foreign currency denominated debt in 2000.
In total, maturities of bullet repayments on Eurobonds from 2019 to 2023 and from 2025 to 2028 alone amount to USD 12.15 billion. The SLDU notes that this is new territory for the country and could expose the island nation to refinancing risks.
In response, the government has adopted policies designed to address these risks, however, the slow progress of key structural reforms remains a cause for concern. It is hoped that improvements in debt management will help manage costs and risks of the portfolio, develop the domestic financial market and improve access to finance.
Despite the fast poverty reduction, there remain areas with significant poverty
Over the past two decades, Sri Lanka’s economy expanded at a rapid pace and the country has done much to address extreme poverty with a decline from 15.4 percent in 2013 to 9.7 percent in 2016, as measured against the World Bank’s international poverty line of $3.20 per day for lower middle-income countries.
Measures, such as the expansion of the Samurdhi programme in 2015, offered dividends although better targeting of social assistance would have resulted in larger gains. However, it is vital to note that a large number of people remain just a small shock away from falling back into poverty, says the report, noting that adverse weather conditions have become increasingly influential in recent years.
Critically, there is a disparity between various districts, with the highest poverty headcount being reported in the Northern and Eastern provinces, where regions like Ratnapura, Kandy and Badulla account for more than a quarter of the poor population combined. It is clear, Sri Lanka must design different strategies to address the varied issues around human capital, basic services, the availability of jobs and access to markets.
Sri Lanka is undergoing profound demographic change – the country needs to do more to prepare
Like many other countries in the world, Sri Lanka is staring down a dramatic demographic shift – Sri Lanka’s share of working-age population peaked in 2005 and it is expected to gradually decline over time. This has implications for labor supply, service delivery in sectors such as health and education, and of course for pensions, employment and public finances overall.
A particular concern are the limited savings and instructional support mechanisms in place to support this rapidly expanding elderly population. Increasing costs mean that programs such as the Public Servants Pension Scheme (PSPS) could struggle to deliver on their benefit promises over the long run, while the EPF – the employer-based defined contribution saving scheme for formal private sector workers – appears inadequate to meet the costs associated with over two decades of retirement.
As can be expected formidable challenges exist, but improving various aspects of delivery systems will prove critical to broadening worker coverage. By prioritising educational attainment, addressing the skills mismatch that hurts new graduates in the market, and nurturing entrepreneurship, younger people could be encouraged to participate in the workforce. Finally, improving female labour force participation could also help buffer the adverse impacts of demographic factors on growth.
Commitment to ESG Reporting is Driving Change within Global Corporations
New case studies from the World Economic Forum show how comprehensive environmental, social and corporate governance (ESG) reporting has started to drive corporate transformation around the world, particularly in sustainability efforts and company culture.
Based on case studies from companies reporting on the Stakeholder Capitalism Metrics, the white paper found examples of specific strategy and operations changes as a result. These include initiatives such as new approaches to water management in real estate and implementing biodiversity strategies and targets.
The case studies also indicate that despite some progress, companies are still struggling with competing and disparate ESG frameworks around the world. As regulators begin to roll out mandatory ESG reporting across regions, alignment will be key to ensuring that the clarity and efficacy of ESG reporting continues to improve globally.
We’re happy that support continues to grow for this set of metrics even in the face of geopolitical challenges, the lingering global pandemic and economic disruptions of the past two years,” said Emily Bayley, Head of Private Sector Engagement, ESG, World Economic Forum. “As this growth continues and jurisdictions transition from voluntary to mandatory sustainability reporting standards, we hope these learnings can provide valuable insights for companies that are just getting started on sustainability reporting and those that have been doing it for years.”
ESG-Driven Corporate Impacts
The Stakeholder Capitalism Metrics Initiative case studies engaged a global set of companies to gather how, and if, their ESG reporting has informed corporate transformation both internally and externally.
Examples of these transformations include:
Stakeholders told Ecopetrol their report was too long – the Forum’s core metrics helped the company focus on reporting topics that are most material and will generate value.
The metrics go beyond ESG to capture commercial metrics on employment, economic contribution, investment and tax. This delivers “an annual dashboard of comparable data on both sustainability and prosperity that will provide us with a snapshot of how healthy our company is”.
The core metric on water consumption and withdrawal in water-stressed areas led the company to encourage its teams and clients to agree water management plans and targets. It may even influence where the company rents office space in the future.
Accurate reporting on the environmental and social impacts of its operations. For example, the metric on resource circularity points customers towards the most impactful products on the market and drives the company’s innovation agenda to design more sustainable solutions.
Reporting on the Forum’s metrics has increased the value of transparency within the company, leading to conversations and progress on difficult issues.
The metric on land use and ecological sensitivity contributed to Schneider’s new approach to biodiversity, as it adapted its reporting and asked all sites to set specific biodiversity action plans.
ESG Regulatory Landscape
While progress has been made on the creation and implementation of meaningful and effective ESG disclosures globally, concerns remain about the disparate nature of the competing and complex ESG reporting mechanisms that exist today.
There are also concerns that as reporting becomes mandated there could be less transparency because people will not want to disclose more than they have to. As mandated ESG reporting becomes more widespread, both regulators and internal advocates should ensure corporations understand the full value of transparency on sustainability and other ESG issues.
Addressing this issue is particularly important as regulators in different regions begin to roll out their mandatory reporting requirements. Focus on a common set of comprehensive and material metrics will be important for both the efficacy and feasibility of ESG reporting in the coming months. As much as possible, the European Union, the US Securities and Exchange Commission (SEC) and the International Financial Reporting Standards (IFRS) Foundation should align their metrics to ensure companies are able to implement effective ESG reporting globally.
Stakeholder Capitalism Metrics Initiative
The World Economic Forum and the coalition of companies adopting the Stakeholder Capitalism Metrics, engaged with the preparatory working group and are continuing the dialogue with the International Sustainability Standards Board (ISSB) technical teams under the IFRS Foundation as they go through the standard-setting process. The metrics are expected to form part of the ISSB “exposure draft” next year on cross-thematic disclosures and metrics.
Announced at the World Economic Forum Sustainable Development Impact Meetings 2022, these case studies build on the earlier report to showcase progress on the commitment made by companies at the Annual Meeting in 2020. Since then, 186 global companies, with a combined market capitalization of over $6.5 trillion, have adopted the Stakeholder Capitalism Metrics. Of these, 126 companies have disclosed against the metrics in their mainstream reports for either one or two years.
Trade in 25 Technologies Can Help Climate Action
Based on 30 interviews with industry and academia, the Accelerating Decarbonization through Trade in Climate Goods and Services report highlights technologies with high, immediate emissions-cutting potential, in five categories – refrigerants, energy supply, buildings, transport and carbon capture and storage (CCS). The list of technologies can guide trade ministers looking to support climate action.
“Climate change is a global concern,” says Sean Doherty, Head of International Trade at the World Economic Forum. “Our response must draw upon the innovation and capacities of the whole world, not be held back by protectionism.”
Trade collaboration on climate has been limited to date with trade and climate practitioners working in separate silos. New efforts are emerging now, however, to address the linkages between these two areas.
“There is no time to waste to limit global warming to 1.5°C,” adds Jean-Pascal Tricoire, Chairman and Chief Executive Officer, Schneider Electric. “We need to decarbonize three times more, three times faster. The good news is that we have the technologies to do it. Solutions are not limited to renewable energy. It actually starts with energy efficiency, electrification and digitization. If deployed at full potential, we can eliminate 70% of what we’re emitting today.”
The report also highlights non-tariff barriers that affect trade in climate technologies. Regulatory cooperation around product testing or labelling requirements, for example, could reduce friction in getting emissions-cutting goods to market. Interviewees also noted that climate action is held back by trade barriers to the services needed to operate climate technologies. The report suggests a way to identify these climate services for priority trade cooperation.
“Our transition to a low-carbon economy will hinge on the deployment of a number of key technologies that are both mature and widely available, as detailed in this important report on the nexus of decarbonization and international trade, including energy efficiency, electric vehicles, green hydrogen, smart buildings and more,” says Björn Rosengren, Chief Executive Officer of ABB. “ABB’s contributions to this new report from the Alliance of CEO Climate Leaders underscore our support for removing and reducing barriers to trade in climate goods and services to speed the drawdown of global emissions.”
More efforts are needed to engage developing countries in trade efforts on climate. Over 750 million people worldwide lack reliable electricity access, mainly in sub-Saharan Africa. Developing economy industries must decarbonize and leapfrog the latest technologies to remain competitive in global value chains moving towards net zero. Some developing economies will need support in creating a climate-friendly trade and technology strategy. Global and local industries can help policymakers understand the criss-crossing of value chains that drive economic activity and how to align these flows to the climate agenda.
“Climate change knows no borders and encouraging better trade between countries can ensure the transfer of valuable knowledge, new technologies and skills to improve energy efficiency in homes around the world,” says Hakan Bulgurlu, Chief Executive Officer of Arcelik. “It is critical to our ultimate goal of achieving net-zero targets.”
To support an increased understanding of trade, value chains and climate action, the Climate Trade Zero community will host dialogues and support countries with actionable analysis.
East Asia and Pacific Sustaining Growth, Restraining Inflation, but Facing Risks Ahead
Growth in most of developing East Asia and the Pacific rebounded in 2022 from the effects of COVID-19, while China has lost momentum because of continued measures to contain the virus, a World Bank report said on Monday.
Looking ahead, economic performance across the region could be compromised by slowing global demand, rising debt, and a reliance on short-term economic fixes to cushion against food and fuel price increases.
Growth in developing East Asia and the Pacific outside of China is forecast to accelerate to 5.3% in 2022 from 2.6% in 2021, according to the World Bank’s East Asia and Pacific October 2022 Economic Update. China, which previously led recovery in the region, is projected to grow by 2.8% in 2022, a sharp deceleration from 8.1% in 2021. For the region as a whole, growth is projected to slow to 3.2% this year from 7.2% in 2021, before accelerating to 4.6% next year, the report says.
“Economic recovery is under way in most countries of East Asia and the Pacific,” said World Bank East Asia and Pacific Vice President Manuela V. Ferro. “As they prepare for slowing global growth, countries should address domestic policy distortions that are an impediment to longer term development.”
Growth in much of East Asia and the Pacific has been driven by recovery in domestic demand, enabled by a relaxation of COVID-related restrictions, and growth in exports. China, which constitutes around 86% of the region’s output, uses targeted public health measures to contain outbreaks of the virus, inhibiting economic activity.
The global economic slowdown is beginning to dampen demand for the region’s exports of commodities and manufactured goods. Rising inflation abroad has provoked interest rate increases, which in turn have caused capital outflows and currency depreciations in some East Asia and Pacific countries. These developments have increased the burden of servicing debt and shrunk fiscal space, hurting countries that entered the pandemic with a high debt burden.
As countries of the region seek to shield households and firms from higher food and energy prices, current policy measures provide much-needed relief, but add to existing policy distortions. Controls on food prices and energy subsidies benefit the wealthy and draw government spending away from infrastructure, health and education. Lingering regulatory forbearance, aimed to ease lending through the pandemic, can trap resources in failing firms and divert capital from the most dynamic sectors or businesses.
“Policymakers face a tough tradeoff between tackling inflation and supporting economic recovery,” said World Bank East Asia and Pacific Chief Economist Aaditya Mattoo. “Controls and subsidies muddy price signals and hurt productivity. Better policies for food, fuel, and finance would spur growth and insure against inflation.”
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