Population 20.681 million
GDP 59.773 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
8 |
8.3 |
6.8 |
6.8 |
|
Inflation (yearly average) (%)
|
6.2 |
6.7 |
7.4 |
7.1 |
|
Budget balance (% GDP)
|
-8 |
-6.9 |
-8 |
-7.5 |
|
Current account balance (% GDP)
|
-2.3 |
-7.7 |
-4.7 |
-3.9 |
|
Public debt (% GDP)
|
81.9 |
78.5 |
80.9 |
79.4 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Diversified agricultural production (tea, rice, coconut, rubber)
- Poverty reduction
- Level of human development and governance higher than that of its South Asian neighbours
- End of the civil war enabling an investment rebound
- Indian and Chinese interest
- Tourism growing strongly
WEAKNESSES
- Marked dependence on textiles sector
- Lack of infrastructures
- Low public capital spending because of heavy burden of public debt servicing
- Vulnerability linked to dependence on short-term external funding
Risk assessment
Growth slowdown due to export market difficulties
Growth has slowed slightly in 2012. The economy was hit by the economic difficulties of its main economic partners (the United States and Europe accounting for 60% of exports). Moreover, agricultural yields were lower than average due to the persistent drought in certain regions. The sector also suffers from inadequate investment despite the policy of bringing under cultivation the agricultural land in the north of the country, ravaged by war. Services are expanding strongly, driven by the dynamism of telecommunications, financial services and tourism. For lack of the comparative competitive advantage needed for exports (except for quality textiles), industrial production is directed towards domestic consumption, stimulated by higher wages and the government’s rural development policies.
Private consumption (70% of GDP) is expected to benefit from a general growth in incomes as well as continued transfers from expatriate workers in 2013. Public and private investment will remain robust and directed towards reconstruction of the war-affected areas (mainly in the north and east), the construction of new infrastructures (transport, telecommunications) and the property sector, particularly hotels.
Inflation accelerated in 2012, due to the depreciation of the rupee (by more than 10%) and higher energy and food prices. It should decline somewhat in 2013 under the condition that the rupee remains stable and domestic agricultural production grows.
Public finances still in deficit, current account deficit lower
Following the $2.6 billion loan granted by the IMF in 2009 spread over several years, the country began in return to take steps to reduce the fiscal deficit, although it widened slightly in 2012. Despite reduced public spending, revenues were not high enough. Tax collection is still imperfect, there is significant tax evasion and VAT revenues have been weakened by the slowdown in demand. Income is expected to rise in 2013 thanks to the introduction of new taxes and restrained capital spending, slightly reducing the deficit.
As for the external accounts, after defending the exchange rate for several months (quickly depleting foreign exchange reserves), the government decided to allow the rupee to depreciate in February 2012, which immediately checked domestic demand and reduced imports. However, because of the difficulties experienced by the main trading partners, as well as the instability reigning in tea-importing countries (2nd biggest export), like Syria and Libya, exports fell in 2012. The trade deficit has thus scarcely declined. It is expected to remain stable in 2013, with domestic demand still restrained and growth in the advanced economies remaining weak. This trade balance will continue to be partly offset by rising tourism revenues and steady private transfers.
Despite loss of confidence in the rupee, the country will remain attractive for foreign investment, the scale of which will reduce the balance of payments deficit. Growing competition between China (in energy) and India (in telecommunications) is taking shape, at present benefitting Sri-Lankan interests. This recent trend comes on top of the lively support of multilateral and bilateral partners such as Japan or the Asian Development Bank.
The country’s fiscal vulnerability remains palpable, given the high level of public debt, rising each year due to the growth in external debt necessary to fund the trade deficit.
Stable political context
The Sri-Lankan Freedom Party and its President Mr Rajapaksa, hold all the power. The party has remained very popular since it ended the conflict begun by the Tamil Tigers in 2009. However, this political concentration is criticised - more abroad than in the country itself - for its stranglehold on the judiciary (the President of the Supreme Court was dismissed in 2012) and for not having sufficiently investigated the human rights violations during the civil war.
Improving the business environment is one of the current government’s priorities. Nevertheless, accusations of favouritism and corruption are sometimes made against the rulers.
