Sri Lanka’s reforms need to be targeted to support the poor, World Bank says

While Sri Lanka can claim a low poverty rate compared to other countries in in South Asia, significant poverty still exists in certain areas and the social safety net programs need to be better targeted to support the poor, a World Bank senior economist says.

Ralph van Doorn, Senior Country Economist for Sri Lanka and the Maldives, says in a blog that a large share of the population subsists on little more than the extreme poverty line and the families who are living below the poverty line, are extremely vulnerable to the natural disasters such as last year’s floods and landslides and the prolonged drought.

Pointing out that approximately 12 percent of those affected by the landslides were poor, the World Bank official says the proposed reforms need to be aimed at supporting the country’s poor in long tern not just when disaster strikes.

Taking the removal of VAT exemptions as an example, van Doorn says the measure will raise the cost of living, pushing some households further into poverty, while reforms in trade and business could put pressure on associated businesses and lead to certain households facing income insecurity.

He explains that VAT exemption benefit the households in the top 60 percent income bracket who account for 75 percent of spending, compared to the bottom 40 percent, who account for just 25 percent. This means that many VAT exemptions are effectively subsidies to the non-poor. Instead, if VAT exemptions were limited to goods and services primarily consumed by the poor, the latter could actually benefit.

Similarly low fixed fuel prices mainly benefit the richer households who are in the top 30 percent accounting for 70 percent of direct consumption of fuel.

“VAT reforms should go hand in hand with strengthening safety net and targeted public expenditure to mitigate the impact on the poor, such as investment in infrastructure in districts with a high poverty incidence, and in the quality of public health and education services, even as we ensure that public funds are used wisely and channeled effectively,” the World Bank official says.

He notes that successful fuel subsidy reforms should channel the fiscal savings into social expenditure, such as the expansion of free schooling and social protection programs.

However, Sri Lanka needs to pursue reforms since the reform agenda, as outlined in the ambitious Vision 2025 agenda, is designed to bolster Sri Lanka’s economy, create a stronger public balance sheet and reduce the likelihood of serious shocks to the public and private sectors.

“This will be a time of change, and will offer new opportunities for development. For households, trade reforms can mean more and better paying jobs. More business opportunities will become available. As markets open up, Sri Lankan consumers will benefit as quality improves and prices drop.”

Van Doorn says reforms and projects focused on boosting Sri Lanka’s physical resilience will help prevent natural disasters, save lives when people are exposed to them, and help families recover from losses to their property and livelihoods.

In the meantime, fiscal reforms will increase the government’s capacity to support new infrastructure projects, bringing desperately needed roads and health and education facilities to underserved areas.

Most importantly, households will be protected from shocks. By adopting responsible and rigorous measures to manage public debt and drive fiscal consolidation, the Government is protecting the Sri Lankan rupee and insuring that households can benefit from a stable economy.

Read full World Bank official’s blog here .

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