Sri Lanka

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June 2016

Sri Lanka had been among Asia’s fastest growing economies but growth has slowed in recent years. Sri Lanka remains a lower-middle-income country with GDP per capita below the regional average. The business climate and credit worthiness are both challenging and slightly below the regional average. But despite these challenges the increasingly stable political environment, a highly literate population and diversified economy hold immense promise. 

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Economic outlook

Growth is projected to slow over the next five years relative to the post-conflict boom, where growth averaged 6.4% between 2010-2015. Tighter lending conditions to curb domestic credit expansion and fiscal consolidation to address the significant budget deficit and growing public debt burden will weigh on domestic demand, but these policies will pave the way for more sustainable growth in the future. Externally, the weaker than expected global recovery will cap growth in export receipts.

Elevated public debt—expected to reach 78% of GDP by 2020, almost double the regional average—threatens financial stability. Sri Lanka’s graduation to middle-income status has caused a shift away from concessional, bilateral debt, towards external debt issuance on commercial terms by state-owned and commercial banks. Greater access to commercial funding could lead to greater investment. But if the commercial loans aren't invested in profitable ventures that (at least indirectly) generate foreign exchange earnings, this could lead to repayment difficulties. Sri Lanka has recently entered an IMF program to help manage its balance of payment difficulties.

Looking ahead, the benefits from favourable demography, a highly educated population (92% of the population is literate) and diversified economy will support the outlook. But Sri Lanka will need to address inadequate infrastructure to fulfil its potential.

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Sri Lanka is a lower-middle-income economy. Its GDP per capita, however, is forecast to climb rapidly by the end of the decade, pushing it into upper-middle-income ranks. The United Nation’s Human Development Index, a broader measure of prosperity, ranks Sri Lanka 73rd out of 188 countries, the highest of all South Asian economies.

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Business climate

Sri Lanka has an OECD country credit grade of 6 and speculative grade sovereign debt ratings from all three major ratings agencies. These ratings underline Sri Lanka’s vulnerability to business, financial and economic setbacks. 

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The World Bank gives Sri Lanka an ease of doing business rank of 107 out of 189 countries. It outperforms the regional average in most categories, but underperforms on contract enforcement, registering property and getting electricity.

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Sri Lanka scores poorly on the World Bank’s governance indicators. It is in the bottom half on most measures and scores particularly poorly for voice and accountability, political stability and absence of violence. The UN has completed its preliminary investigations into alleged war crimes at the end of the civil war and has recommended a special court be convened to investigate individuals responsible for the worst atrocities.

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But a peaceful transition of power at the last election and functioning democracy bode well for the political outlook. A coalition between Sri Lanka’s two largest political parties, the United National Party (UNP) and the Sri Lanka Freedom Party (SLFP), should usher in a period of political stability.

Bilateral relations

Sri Lanka was Australia's 49th largest trading partner in 2014-2015. Merchandise export receipts from Sri Lanka were up 35% y/y in 2014-2015 at A$295m. Vegetables, dairy and wheat were the main exports.  Imports from Sri Lanka were up 12% (A$192m) made up mostly of textiles and tea.

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Service exports to Sri Lanka are negligible. Sri Lankan students studying in Australia account for only 1% of total foreign enrolments. Even so, Sri Lankan students wishing to study overseas rank Australia as their most popular destination. Monash University, the Australian College of Business and Technology and the Royal Melbourne Institute of Technology all offer distance learning programs in Sri Lanka.

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Though Sri Lankan tourists account for only 0.4% of total tourist arrivals in Australia; their numbers have grown 12% annually over the last five years.

 

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Bilateral investment between Sri Lanka and Australia remains small. Australian businesses such as the Australian subsidiary of Finnish company Outotec involved in the construction of water treatment plants in the Ampara District.

Australia contributes 10% of total aid inflows into Sri Lanka.  The Australian government has been involved with several aid and development projects in education, sanitation, water and housing.

Remittances are becoming an important source of income and foreign exchange for Sri Lanka—equivalent to 9% of GDP up from 7% in 2008. Money transfers from the Middle-East and the European Union account for over 70% of the total.   Australia accounts for only 2% of the total, although inflows from Australia have risen 14% pa. over the last five years.

Useful links

Department of Foreign Affairs
Sri Lanka country brief

Austrade
Sri Lanka Market Profile

OECD
Country Risk Classification

Asialink Business
Sri Lanka profile