The World Bank expects Sri Lanka to lead South Asia in economic growth this year, benefiting from recent rebound and enhanced capacity, but the country faces many risks to the positive outlook, it said in its latest report on Friday.
"Sri Lanka would continue to grow at 7.3 percent this year as the economy was sustained by new capacity from infrastructure investments and rebuilding after the country's recent conflict," the World Bank said in its biannual South Asia Economic Focus.
The forecast is far above the South Asian average of 5.2 percent, as well as the estimate for India of 5.7 percent, Pakistan's 4 percent, 5.4 percent for Bangladesh and 3.2 percent for Afghanistan.
Sri Lanka's Central Bank has predicted a 7.8 percent growth.
The World Bank said the stronger momentum of activity projected for the second half of 2013 will also lead to stronger carry-over into 2014 for Sri Lanka.
"This growth is supported by an increase in capacity from new infrastructure investments and rebuilding. But a relatively protracted recovery in high-income countries and tightening of international financial conditions will constrain a more robust rebound for Sri Lanka within the forecast horizon," the World Bank added.
It said South Asia in general appeared to have largely recovered from last year's financial turmoil caused by changes in U.S. Federal Reserve monetary policy.
Many were rebuilding currency reserves while curbing current account deficits. But these successes on the external side were accompanied by looming problems in the domestic economy.
However, economic growth could be held back by unstable banking sectors, inflation, fiscal deficits and debt, and persistent shortfalls in energy and transport infrastructure across the region, said the bank.
"Now that external pressures are waning, it's time to refocus on addressing problems within the economies in South Asia so that countries can boost growth and reduce poverty," said World Bank's South Asia Chief Economist Martin Rama.
"The good news is that across South Asia there is a growing momentum in support of reforms to increase growth because governments recognize this is the best way to overcome poverty."
On Sri Lanka, the World Bank report said risks to the outlook include maintaining fiscal consolidation, weathering global commodity prices, declining exports-to-GDP and managing the economic fundamentals in the face of currency fluctuations of major trading partners.
It noted that given the growth in two key export sectors, tea and apparel remains stagnant, there is a risk that there will be a continued decline in the exports to GDP ratio.
"There needs to be a new thrust towards diversification of both product and export markets to ensure that the trade balance remains manageable," the World Bank said./.