Sri Lanka is expected to lead South Asia’s strong economic growth together with India and Bangladesh, the World Bank said

Releasing its Global Economic Prospects 2011 earlier this week, the World Bank said South Asia’s relatively strong projected growth path, reaching 7.9 percent in 2013 compared with 6 percent on average from 1998 though 2008, will be led by India, Sri Lanka and Bangladesh, where "acceleration of investment activity is expected to support higher growth outturns".

The World Bank estimates that global GDP[1], which expanded by 3.9% in 2010, will slow to 3.3% in 2011, before it reaches 3.6% in 2012. Developing countries including Sri Lanka grew 7% in 2010, and will grow 6% in 2011 and 6.1% in 2012, WB estimated.

The World Bank warns the regions against inflation and high fiscal deficits and public debts which could crowd out private sector investments required to address the supply side constraints facing these economies.

"Inflation remains a key downside risk to growth, as policymakers face numerous challenges in reducing price pressures. If inflation remains elevated, unless offset by exchange rate depreciation (itself an inflationary impulse) it is likely to begin eating into the region’s international competitiveness and discourage foreign investment—creating headwinds to gains in productivity.

"Elevated international commodity prices are also a negative risk factor, particularly given political resistance to reducing subsidies. In countries such as India that maintain price controls on food, farmers are not fully participating in the global upswing in prices. Higher monetary policy interest rates aimed at crimping price pressures, however, could also prompt a rise in capital inflows and complicate monetary policy—emphasizing the need for fiscal consolidation," the World Banks said.

"Real GDP growth in Sri Lanka remains buoyant, but has decelerated in early-2011, due to floods that damaged a significant share of this year’s early crop.

GDP growth in 2010 (calendar year) registered 8 percent and has been strongly underpinned by the peace dividend following the end of the decades-old civil war. The recovery was led by private consumption and investment. Agricultural output growth was boosted by the return to production of previously fallowed land with the cessation of fighting, while services activity benefitted from an upsurge in tourism. Activity in the first few months of 2011 has slowed due to waning of these rebound effects from the end-of-conflict and more normal growth rates in agriculture (aside from the negative impact of floods)," the World Bank said.

Inflationary pressures are elevated across South Asia reflecting various factors, including higher international food and fuel prices, tight capacity utilization, and past macroeconomic loosening, which have led to elevated inflation expectations and higher core prices. High international fuel and food prices are key factors in South Asia because of its heavy reliance on imports of oil and some staples, such as edible oils. Additionally, food represents a large share (about 40 percent) of the regional household consumption basket, a key concern from a poverty perspective. In particular, international wheat and edible oils prices have surged, while rice prices have remained more stable. Afghanistan, the Maldives and Sri Lanka—where at least one-third of domestic consumption of grains (including rice, wheat, pulses) and edible oils is imported—are most exposed to an imported pass-through of higher international commodity prices."