The World Bank, in its Systematic Country Diagnostic (SCD) report titled “Sri Lanka – Ending Poverty and Promoting Shared Prosperity” which was launched at the soothing environs of ‘Ape Gama’, Battaramulla on February 16, presents an assessment of the constraints and drivers of progress towards the twin goals of ending poverty and boosting shared prosperity. [...]

The Sunday Times Sri Lanka

Monetary and financial issues missing in WB report on poverty


The World Bank, in its Systematic Country Diagnostic (SCD) report titled “Sri Lanka – Ending Poverty and Promoting Shared Prosperity” which was launched at the soothing environs of ‘Ape Gama’, Battaramulla on February 16, presents an assessment of the constraints and drivers of progress towards the twin goals of ending poverty and boosting shared prosperity.

Preparation of SCDs preceding the development of country partnership frameworks is said to be a requirement of the World Bank Group under its new approach.  The report highlights five challenges that need to be addressed in order to sustain Sri Lanka’s progress on the twin goals and fulfill its development potential. They are the challenges of (a) fiscal imbalance, (b) competitiveness, (c) social inclusion, (d) governance and (e) sustainability.

Monetary policy is  overlooked
Surprisingly, the much celebrated “leave-no-stone-unturned” SCD review of the World Bank makes no reference to monetary policy which is a core component of macroeconomic management, essential to ensure economic and price stability for poverty elimination, shared prosperity and inclusive growth by means of none other than high economic growth.

The Central Bank has had very little space to operate its interest rate and exchange rate policy instruments prudently in the midst of fiscal imbalances that led to accumulate public debt commitments exponentially during the last decade as elaborated in my last Sunday column. Such monetary policy constraints had detrimental effects on economic stability as well as on economic growth, and thereby hampering poverty reduction efforts.  No country review can be claimed to be comprehensive without taking into account monetary policy implications.

Exchange rate’s influence on competitiveness critical
In generating more and better jobs for the bottom 40 per cent, the SCD report emphasizes the need to prioritize export-led and private-sector led growth. According to the report, there has been a noticeable slide towards protectionism in Sri Lanka depressing export growth during the last decade. The adoption of para-tariffs and most favoured nation tariffs is a major factor that contributed to this trend, according to the report. Hence, it recommends that the country’s trade-related policies be reviewed and revised to improve competitiveness.

The other priority areas suggested in the report to improve competitiveness are gearing education for skills development and promoting innovations. However, the report totally ignores the exchange rate which is one of the most important determining factors of competitiveness in an open economy. The failure to sustain a realistic exchange rate to compensate for domestic inflation vis-à-vis trading partners’ inflation so as to ensure export competitiveness has been a major impediment to export growth in Sri Lanka during the post-liberalization period.

Attempts of the Central Bank to defend the rupee by releasing its foreign reserves to the market so as to avoid abrupt downturns of the rupee led to overvalue the currency and, thereby to erode export competitiveness, as discussed in a previous column in this series. The overvalued rupee characterized by anti-export bias shifted the economy backwards to the inward-looking phase.  The exchange rate had been insensitive to market realities for a long time until it began to reflect some flexibility in recent months with its anticipated favourable effects on external finances. In its SCD report, however, the World Bank is totally silent on the exchange rate issue which has so many domino effects.

Financial sector is neglected
There is no discussion in the report on the challenges relating to the financial sector, apart from some bullet-points on access to finance appearing in a brief appendix table. The points given in that table are mostly value judgements based on anecdotal evidence.  Some of the information given in the table looks outdated. For instance, the table starts with the bullet-point, “Financial innovation among commercial banks has been limited, with lending practices based on collateral and limited interest in development of other credit processes such as cash-flow based lending and financial instruments beyond loans”. This information is incorrect, as several commercial banks have effectively taken action to outreach their financial facilities to the bottom 20 per cent by extending their loan schemes beyond collateral by stepping into new areas of microfinance during the last decade or so.

The SCD report pays no attention to the nexus between interest rates and inclusive growth either. Needless to say, that market interest rates are vital in determining savings as well as investments. As in the case of the exchange rate, interest rates too have been rather rigid deviating from market realities in the last several years. It is only during the last two weeks the market interest rates begin to rise in response to the Central Bank’s decision to tighten monetary policy by raising its statutory reserve ratio and policy rates. Such monetary policy considerations have not been accommodated in the SCD report at all.

Financial inclusion
A major dimension that has drawn greater attention worldwide in empowering the poor, particularly among women, is financial inclusion, i.e. providing financial facilities to as many people as possible at an affordable cost. Financial inclusion enables the poor to engage in economic activities and to get out of poverty. In terms of bank deposit penetration and credit delivery, Sri Lanka has achieved much progress in financial inclusion though there is considerable room for improvement spatially.

Although microfinance has increasingly contributed to sustain the living conditions of the poor around the subsistence level, most of them are unable to cross the poverty line due to various structural weaknesses in their micro-enterprises, which are mostly home-based activities, according to the field surveys conducted by this writer. The major shortcomings of such small enterprises are limited product diversification, lack of economies of scale, low productivity, low-tech and low value added products and poor market integration.  In diagnosing the economic ailments of Sri Lanka, the World Bank’s SCD report has missed many such critical factors which are pertinent to end poverty and to promote shared prosperity.

(The writer, an
economist, academic and former central banker
can be contacted at

Advertising Rates

Please contact the advertising office on 011 - 2479521 for the advertising rates.