#1ESCAP MOVING FORWARD TOGETHER People-centric economic recovery amid the recent crisis in Sri Lanka Hamza Ali Malik Director, Macroeconomic Policy and Financing for Development Division, ESCAP 5 May 2022 Colombo, Sri Lanka#2Key messages ESCAP MOVING FORWARD TOGETHER 。 The ongoing economic crisis in Sri Lanka is going to severely undermine its SDG attainment. о The likely fiscal consolidation should not come at the cost of wellbeing of people of Sri Lanka. Sri Lanka can and should 'build forward better', but this would require much larger fiscal and financial resources. О ESCAP can offer technical support to help Sri Lanka pursue sustained, inclusive and green development, while addressing public debt sustainability concerns.#3Outline of the presentation Ongoing economic crisis and its implications for SDG attainment People-centric policy focus amid likely fiscal consolidation Building forward better in Sri Lanka Fiscal policy options and possible ESCAP support to Sri Lanka ESCAP MOVING FORWARD TOGETHER#4Outline of the presentation Ongoing economic crisis and its implications on SDG attainment People-centric policy focus amid likely fiscal consolidation Building forward better in Sri Lanka Fiscal policy options and possible ESCAP support to Sri Lanka ESCAP MOVING FORWARD TOGETHER#5Sri Lanka is facing a fiscal crisis... ESCAP MOVING FORWARD TOGETHER Fiscal balance (% of GDP) Public debt (% of GDP) Sovereign credit rating (S&P)) 2015 2016 2017 2018 2019 2020 2021 110 ■Foreign Domestic BB- 0 100 B+ -1 90 B -2 -9 -10 -11 -12 -13 ❤ 4 5 6 7 ∞ $ -3 80 B- -4 70 CCC+ -5 60 CCC -6 50 CCC- -7 CC -8 40 C 30 RD 20 SD 10 D.NR 0 2015 2016 2017 2018 2019 2020 2021 May-14 Sep-20 Source: ESCAP, based on CEIC, Central Bank of Sri Lanka, and www.worldgovernmentbonds.com SD = selective default, as of April 2022. Red dot means negative outlook.#62,500 ... coupled with a balance-of-payments crisis Export and import values ($ million) -Imports Exports 2,000 1,500 пр 1,000 500 Tourism receipts (Jan 2019=100) 110 100 90 8,000 7,000 6,000 70 60 5,000 88280232 2 10 50 4,000 40 3,000 2,000 Jan-2019 Apr-2019 Jul-2019 Oct-2019 Jan-2020 Apr-2020 Jul-2020 Oct-2020 Jan-2021 Apr-2021 Jul-2021 Oct-2021 Jan-2022 Source: ESCAP, based on CEIC and Central Bank of Sri Lanka 0 Jan-2019 Apr-2019 Jul-2019 Oct-2019 Jan-2020 Apr-2020 Jul-2020 Oct-2020 Jan-2021 Apr-2021 Jul-2021 Oct-2021 Jan-2022 1,000 0 2015 2016 2017 2018 2019 2020 2021 ESCAP MOVING FORWARD TOGETHER Workers' remittances ($ million)#72014 2015 2016 2017 2018 2019 2020 2021 Source: ESCAP, based on CEIC and Central Bank of Sri Lanka -3.6 In the wake of slowing economic growth, macroeconomic stability deteriorated sharply in the last year or so Real GDP growth rate (%) 5.0 5.0 4.5 3.6 3.3 2.3 20 3.7 18 16 14 12 22 NO 10 8 64 Inflation rates (%) -Inflation (national) -Core inflation 10 10 6 8 7 96 5 4 3 2 ESCAP MOVING FORWARD TOGETHER Official reserves ($ billion) 0 2 Jan-2019 Apr-2019 Jul-2019 Oct-2019 Jan-2020 Apr-2020 Jul-2020 Oct-2020 Jan-2021 Apr-2021 Jul-2021 Oct-2021 Jan-2022 Apr-2022 Jan-2015 Jul-2015 Jan-2016 1 Jul-2016 Jan-2017 Jul-2017 Jan-2018 Jul-2018 Jan-2019 Jul-2019 Jan-2020 Jul-2020 Jan-2021 Jul-2021 Jan-2022#8SDG progress was already limited; it is likely to get worse because of the economic crisis 1 NO POVERTY 2 ZERO HUNGER SSS 3 GOOD HEALTH AND WELL-BEING QUALITY EDUCATION ↑ 5 GENDER EQUALITY 7 AFFORDABLE AND CLEAN ENERGY R 8 DECENT WORK AND ECONOMIC GROWTH 9 INDUSTRY, INNOVATION 13 CLIMATE ACTION ↑ 14 LIFE BELOW WATER ↑ LIFE 15 ON LAND R 10 REDUCED INEQUALITIES 11 AND COMMUNITIES ESCAP MOVING FORWARD TOGETHER 6 CLEAN WATER AND SANITATION R 12 RESPONSIBLE CONSUMPTION AND PRODUCTION QO ↑ ↑ ↑ 16 PEACE, JUSTICE AND STRONG INSTITUTIONS 17 PARTNERSHIPS FOR THE GOALS Major challenges Decreasing Significant challenges Challenges remain SDG achieved Information unavailable Stagnating Moderately improving On track or maintaining SDG achievement Information unavailable Source: https://dashboards.sdgindex.org/profiles/sri-lanka#9Example 1: surging prices of essential items will adversely affect poorer people and rural residents more Inflation rates in Colombo (%) ESCAP MOVING FORWARD TOGETHER Weight in consumer price index basket (%) All Food 35 450 45 40 30 Jan-2022 Feb-2022 25 Health Mar-2022 20 312 ■Apr-2022 15 15 Transport Education 0 10 20 30 40 50 Source: ESCAP, based on CEIC and Sri Lanka Census and Statistics. 60 60 70 70 10 5 Nationwide Colombo 0 Food and beverages Housing, water, electricity, gas and other fuels#1080 60 Mar-2019 Jun-2019 Sep-2019 Dec-2019 Mar-2020 Jun-2020 Sep-2020 Dec-2020 Mar-2021 Jun-2021 Example 2: subdued employment in major industries would dampen living conditions of women and informal workers 105 100 95 90 95 85 Employment in selected sectors (Q1 2019=100) ―Manufacturing -Wholesle & retail, vehicles repair, personal & household -Accommodation & food services ESCAP MOVING FORWARD TOGETHER 。 Two major employment sources are hard hit by the pandemic and the Russia-Ukraine conflict 。 Tourism: border closures, within-country mobility restrictions, higher inflation in tourists' countries 。 Garment: supply chain disruption, weaker demand in developed countries, cotton price rise 。 81% of garment workers in Sri Lanka are women 。 80% of workers employed in the tourism sector are informal workers#11Outline of the presentation Ongoing economic crisis and its implications on SDG attainment People-centric policy focus amid likely fiscal consolidation Building forward better in Sri Lanka Fiscal policy options and possible ESCAP support to Sri Lanka ESCAP MOVING FORWARD TOGETHER#12Spending on social protection in Sri Lanka is OK, but coverage can be expanded 16 14 12 IRN 10 Public spending on social protection as % of GDP 00 LO + cl ⚫ TLS KGZ ⚫ PLW Asia-Pacific coverage Global spending (% of GDP) TUR JPN • RUS MNG NZL 80 80 70 0 ESCAP MOVING FORWARD TOGETHER Share of people in respective groups who receive a government benefit (%) 60 60 50 50 AUS⚫ 40 40 AZE IKA MYS NRU ARM • CHN KOR GEO Asia-Pacific spending (% of GDP) KAZ TJK VNM IND • MHL ⚫ THA MDV ⚫ PHL PAK FJI NPL AFG BTN KIR WSM • VUT PNG IDN LAO KHM-MMR TON FSM BGD ⚫ BRN 20 40 60 80 Aggregate social protection coverage of at least one scheme Source: ESCAP, based on ILO World Social Protection database. 30 30 20 20 10 Sri Lanka Asia-Pacific 0 Child and 100 family Maternity Disability Old-age benefits benefits pensions benefits#13Poverty-targeted social protection schemes commonly miss half of intended beneficiaries Indonesia - PKH India - OAP Bangladesh OAP - Sri Lanka Samurdhi - Uzbekistan - CA Georgia - TSA Viet Nam - Poor List Philippines 4Ps Source: Kidd and Athias (2020). Exclusion errors (% of intended beneficiaries) 48.8 47.9 59.4 57.9 57.2 52.7 68.2 81.8 ESCAP MOVING FORWARD TOGETHER#14Providing universal social protection benefits would cut poverty and boost private consumption in Sri Lanka Poverty reduction impact of social protection spending 0 (%, based on national poverty line) Child Disability ESCAP MOVING FORWARD TOGETHER Increase in per capita consumption by recipients (%) Nationalwide Old age Lowest income decile 2 3 ױן -10 -20 -30 -40 -50 -60 Source: ESCAP Social Protection Simulator. 4569 7 8 9 Higest income decile 0 10 20 20 30 40 50#15More broadly, public spending on social areas should be maintained to avoid rising income inequality Impact of fiscal crisis on Gini income inequality in Asia-Pacific ESCAP MOVING FORWARD TOGETHER Impact of social spending (1% of GDP) on Gini income inequality 0.6 0.5 0.4 0.3 0.2 0.1 0 0.5 0.0 -0.5 -1.0 -1.5 -0.1 0 1 2 3 4 5 -2.0 Years after fiscal episode Source: ESCAP estimates (Survey 2022). Education Heath care Direct transfers " • ESCAP member States. " Rest of the world. ☐ •#16Fiscal consolidation that relies on social spending cuts could notably widen income inequality in Sri Lanka Impact of fiscal policy change (at 1% of GDP) on Gini income inequality in Sri Lanka 0.2 ESCAP MOVING FORWARD TOGETHER 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 Education Health care Direct transfers Value-added tax Source: ESCAP estimates (Survey 2022).#17Protecting people during crisis: key policy considerations ESCAP G FORWARD TOGETHER 。 Provide universal coverage: expand existing schemes and introduce schemes for uncovered contingencies. 。 Develop methods to identify those excluded from existing schemes. 。 Cover the "missing middle": informal workers whose income level is too high to qualify for poverty-targeted non-contributory schemes, but are not eligible to participate in contributory schemes. o Ensure that benefits levels are high enough to make real impact.#18Outline of the presentation Ongoing economic crisis and its implications on SDG attainment People-centric policy focus amid likely fiscal consolidation Building forward better in Sri Lanka Fiscal policy options and possible ESCAP support to Sri Lanka ESCAP MOVING FORWARD TOGETHER#19Building forward better: an illustrative policy package ESCAP MOVING FORWARD TOGETHER • Social services Digital access Green development Spending increases on • Spending increases on • Abolish fuel subsidies . Social protection • ICT • • Health care Introduce a carbon tax • Education Spending increases on • Energy access and Source: ESCAP (Survey 2021). • . efficiency Climate-resilient infrastructure Biodiversity#20Sri Lanka's additional investment needs to implement the BFB package amount to about 9% of GDP per year ... Additional annual investment needs (% of GDP) 10 3.8 9 8 7 CO 6 5 + 3 2 1 3.1 2.3 0 Social services Digital access Green development Source: ESCAP estimates (Survey 2019). ESCAP MOVING FORWARD TOGETHER "Ambitious" spending scenario#21however, based on current trends, financial flows needed seem small - around 17% of investment needs Additional investment needs (% of GDP per year) Afghanistan Bangladesh Bhutan India Iran (Islamic Rep.) Maldives Nepal Pakistan Sri Lanka 7 8 65432-0 1 ESCAP MOVING FORWARD TOGETHER Projected increase in financial flows (% of GDP) ■2% growth (actual rate during 2016-19) ■5% growth (optimistic case) "Business-as-usual" spending scenario Turkey 0 5 10 15 20 Source: ESCAP estimates (Survey 2019). 25 25 30 30 Source: ESCAP estimates (Survey 2021). UNITED NATIONS * FSCAP Ecoutic and Social Commission for Asia and the Pacific#22Percentage change 0.5 0.0 -0.5 GN 3.0 2.5 2.0 1.5 1.0 Source: ESCAP estimates (Survey 2021). 2020 2021 2022 2023 2024 2025 2026 Percentage change 8 96543210 2020 6 10 Potential output level Implementing the BFB package brings notable economic gains in Sri Lanka... Household consumption level Percentage point change 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 Ambitious spending -Business-as-usual spending 2020 2021 2022 2023 2024 2025 Percentage point change 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2 -1.4 -1.6 -1.8 2020 2021 2022 2023 2024 Inflation rate 2025 2026 2027 2028 Unemployment rate ESCAP MOVING FORWARD TOGETHER#23-20 5 Percentage change -15 -10 Source: ESCAP estimates (Survey 2021). 0.00 -0.05 -0.10 -0.15 Million persons -0.25 -0.30 -0.35 2020 2021 -0.20 2022 2023 2024 2025 Carbon emissions level 2026 2027 2028 2029 as well as sizeable social and environmental benefits Number of poor people ESCAP MOVING FORWARD TOGETHER Gini income coefficient 2030 Percentage change -20 -30 -40 -50 Ambitious spending -Business-as-usual spending -10 0 -0.9 0.0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 -0.7 -0.8 2020 2021 2022 2023 2024 2025 2026 Air quality (PM2.5) 2027 2028 2028 2029 2029 2030 2030 2027#24Nevertheless, implementing the BFB policy package would have fiscal/debt implications 35 30 25 20 15 10 5 0 -5 Government debt-to-GDP ratio (percentage point change, relative to the baseline) Ambitious spending -Business-as-usual spending Source: ESCAP estimates (Survey 2021). ESCAP MOVING FORWARD TOGETHER#25Outline of the presentation Ongoing economic crisis and its implications on SDG attainment People-centric policy focus amid likely fiscal consolidation Building forward better in Sri Lanka Fiscal policy options and possible ESCAP supports to Sri Lanka ESCAP MOVING FORWARD TOGETHER#26Selected fiscal and public debt challenges in Sri Lanka ESCAP MOVING FORWARD TOGETHER Wide fiscal deficits • Low tax revenue (8.1% of GDP) • Below-potential tax collection (3.2% of GDP gap, ESCAP estimates) Rigid public spending (2/3 on wages, pensions and interest payments) • Large debt servicing and deficit financing burdens Large upcoming foreign debt service ($5.6 billion between Apr-Dec 2022) Small, shrinking foreign exchange reserves ($1.7 billion) Sizeable monetary financing is weakening macroeconomic stability • High financing cost Rapidly deteriorating sovereign credit rating (from CCC+ to 'selective default' in 9 months) Surging government bond yields (now 24.4% from 12.6% six months ago)#27Policy options to address fiscal and public debt challenges Debt relief Bilateral debt service • suspension and restructuring Debt swaps for development • . • Fiscal space Better and effective tax administration Progressive income tax Taxing carbon emissions and digital economy Rationalized tax privileges • Spending efficiency • . Deficit financing Green or social sovereign bonds • Leveraging diaspora savings • Emergency financing National reserve funds ⚫ Catastrophe insurances ESCAP MOVING FORWARD TOGETHER Public debt management • Medium-term debt management framework Contingent liabilities from state-owned enterprises#28ESCAP MOVING FORWARD TOGETHER Examples of recent ESCAP work on fiscal policies Policy option Improve tax administration ESCAP analysis and product Better tax administration can increase tax revenues; around 2-5% of GDP in several Asia-Pacific economies. Enhance public spending efficiency Rationalize tax privileges Asia-Pacific countries can spend 30% less on education and health care and 50% less on infrastructure to achieve the same outcomes. Rationalizing tax incentives (to try and attract FDI) can save considerable resources. Improve public debt management Explore sovereign bond financing A policy brief on good public debt management practices in Asia-Pacific A study on offshore bonds and diaspora bonds#29Examples of ESCAP work on SDG-aligned fiscal policies ESCAP MOVING FORWARD TOGETHER Policy option Rationalize fuel subsidy & introduce carbon tax ESCAP analysis and product If part of additional fiscal resources are directed towards social protection, both poverty and inequality decline while economic growth rises in the long run. Debt swaps for development A study on debt-for-climate swaps in the Pacific Sovereign thematic bonds A policy brief on feasibility study for sustainability bonds in the Pacific#30Possible ESCAP supports to Sri Lanka on economic analysis ESCAP 1OVING FORWARD TOGETHER A detailed analysis on the potential implications of the economic crisis on SDG achievement Macroeconomic simulations on the medium-term socioeconomic, environmental and public debt impacts of selected national policy scenarios A focused study on fiscal policy options to enhance fiscal space and address public debt sustainability concerns A capacity-building project to enhance the Government's readiness in adopting selected fiscal policies while remaining focused on debt sustainability concerns#31ESCAP MOVING FORWARD TOGETHER Thank you / Bohoma istuti! ESCAP Macroeconomic Policy and Financing for Development Division [email protected]