Sri Lanka is a lower middle-income country located in South Asia off the southern coast of India on the main east-west Indian Ocean shipping lanes. In January 2015, President Maithripala Sirisena was elected to a six-year term, later reduced to five years under the 19thAmendment to the Sri Lankan constitution. He campaigned on a platform of good governance and anti-corruption as well as ethnic reconciliation. Candidates running on a similar platform gained a majority of seats in parliamentary elections held in August 2015. Sirisena leads a coalition government comprising the pro-business United National Party (UNP), the reformist wing of the Sri Lanka Freedom Party (SLFP) and several smaller political parties. The coalition has made progress with regard to governance and political reforms including constitutional reforms aimed at reducing the powers of the executive president. The Sirisena-led Government of Sri Lanka’s (GSL) initial attempts to introduce economic reforms received mixed reactions. As a result, the GSL has reversed several reforms, creating uncertainty among investors. The GSL is working to improve its relations with other countries and to develop its economy to compete more effectively in the global marketplace. Specifically, Sri Lanka is working to position itself as a financial and trading hub in South Asia.
The GSL has identified the following key economic priorities: 1) integration of the economy into the global marketplace; 2) attracting increased foreign direct investment (FDI); 3) job creation; and 4) increased digitalization.
The GSL is eager to enter into trade pacts with Pakistan, China, and Singapore to boost trade and investment and seeks to expand the current Free Trade Agreement (FTA) with India to a broader Economic and Technology Agreement (ECTA). China is investing in strategic ports and port-related industries. The GSL faces considerable domestic opposition to these trade and investment deals and must work hard to win over opponents. The GSL is hopeful of regaining the European Union’s (EU) Generalized Scheme of Preferences (GSP+) privileges for Sri Lankan exports in 2017. The EU withdrew GSP+ status from Sri Lanka in 2010 due to alleged human rights abuses committed by the military and security forces during the 26 year long civil war that ended in 2009. Additionally, several GSL agencies are investigating suspected corruption by the previous administration. A special Presidential Commission is investigating alleged corruption related to GSL bond issuance.
The Sri Lankan economy grew by 4.4 percent in 2016 compared to 4.8 percent in 2015 and 5.0 percent in 2014. Gross domestic product (GDP) reached $81 billion in 2016, and the per capita GDP was $3,835. Sri Lanka experienced inclement weather during the year and the agriculture sector contracted 4.2 percent. Exports also declined in 2016. GDP growth is expected to be approximately 4.8 percent in 2017. Sri Lanka’s annual exports are approximately $10.3 billion, mostly tea and garments. Imports are approximately $19.4 billion creating an annual trade deficit of over $9 billion. The United States is the largest single market for Sri Lankan exports, capturing over $2.8 billion of the total per U.S. Census Bureau data. Remittances from migrant workers, approximately $7.2 billion per year, are Sri Lanka’s largest source of foreign exchange and help to partially offset the external deficits. Tourism is a $3.5 billion industry with two million tourist arrivals in 2016. Sri Lanka’s Foreign Direct Investment (FDI) has dropped 35 percent to about $450 million in 2016 from $700 million in 2015 primarily as a result of economic policy inconsistency.
Sri Lanka suffers from a large foreign debt burden. Foreign debt is comprised of concessional debt and commercial debt, including debt owed to China for infrastructure projects. While official reserves amounted to $5.6 billion in February 2017, external debt obligations payable are approximately $2.5 billion in 2017 increasing to $3.2 billion in 2018 and $3.7 billion in 2019. The GSL entered in to a three-year, $1.5 billion Extended Fund Facility (EFF) with the International Monetary Fund (IMF) in June 2016. Under the terms of the EFF, the GSL is committed to a program of fiscal consolidation, increasing GSL revenue, rebuilding foreign exchange reserves, state owned enterprise reform, a transition to flexible inflation targeting and reforms to the trade and investment regime. In March 2017, after reviewing the reform program, the IMF commended Sri Lanka for achieving all fiscal quantitative targets but raised concerns about low foreign reserves. The IMF also highlighted the importance of introducing new tax laws and structural reforms in public financial management and state owned enterprises. In February 2017, Fitch Ratings affirmed Sri Lanka’s sovereign debt rating at ‘B+’ and revised the outlook to stable from negative citing fiscal consolidation and steady progress made on the IMF program. As of April 2017, Standard & Poor’s credit rating for Sri Lanka was B+ with a negative outlook and Moody’s rated Sri Lanka B1 with a negative outlook.
Future growth will require structural changes to the economy, including a shift away from agriculture, as well as greater diversification of exports, improvements in productivity levels across all sectors, deregulation of land and labor markets and the establishment of a more transparent regulatory and procurement framework. Sri Lanka needs to modernize education and improve government administration in order to build the foundation for long-term economic growth. The bloated civil service and losses at state-owned enterprises are significant challenges for the GSL.
|TI Corruption Perceptions Index||2016||95 of 176||http://www.transparency.org/
|World Bank’s Doing Business Report “Ease of Doing Business”||2016||110 of 190||doingbusiness.org/rankings|
|Global Innovation Index||2016||91 of 128||https://www.globalinnovationindex.org/
|U.S. FDI in partner country ($M USD, stock positions)||2015||$111 million||http://www.bea.gov/
|World Bank GNI per capita||2015||$3,800||http://data.worldbank.org/