Sri Lanka flag Sri Lanka:

Country risk of Sri Lanka : Economy

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

Sri Lanka has experienced strong and sustained growth in recent years since the end of the conflict between the government and the Tamil Tigers in 2009. After growing 2.3% in 2019, the country’s GDP contracted by an estimated 3.6% in 2020 due to the global COVID-19-induced crisis (IMF and the Department of Census and Statistics), which prompted a decline in both external and internal demand, as well as in tourism activities (the sector accounts for one-tenth of GDP and had already suffered after the Easter 2019 terrorist attacks). As the situation stabilized in 2021, the IMF forecast of a rebound of 3.6% verified itself. Growth should reach 3.3% in 2022 and 3.9% in 2023 subject to the post-pandemic global economic recovery.

With a wide deficit, Sri Lanka’s public finances should remain weak and, thus, face tighter external financing conditions. Public debt is sky high and weighs on the budget: over 70% of government revenues were spent on interest payments in the first half of 2021 (Coface, 2022). The adverse situation caused public finances to further deteriorate in 2020, bringing the budget deficit to an estimated 8.8% (from 6.9% one year earlier), despite a USD 800 million (1% of GDP) grant received from the IMF under the Rapid Credit Facility. The reforms implemented by the government in recent years to improve public accounts are expected to be postponed temporarily because of the ongoing crisis. Presenting Sri Lanka's 2022 budget in November 2021, the country's Finance minister announced that the government would cut its budget deficit to around 8.8% of gross domestic product in 2022. The deficit target for 2021 was revised to 11.1% (Reuters, 2021).

Debt-to-GDP ratio increased to 100.1% in 2020, from 86.8% in 2019. Half of it is denominated in foreign currencies and therefore exposes the country to the risk of depreciation, with the IMF forecasting an increase to 107.7% by 2022. Inflation – at 4.6% in 2020 - reached 5.1% in 2021 and is expected to remain high (6.3% in 2022 and 6.5% in 2023) due to rising demand and import controls, which reduce competition in the domestic market (IMF, 2022). The political situation is still very unstable: nationalist Gotabaya Rajapaksa won the November 2019 presidential elections, and his party also obtained the majority in the parliamentary elections of August 2020. In October, the parliament approved a reform strengthening most of the constitutional powers of the president, which caused concerns among ethnic minorities.

The country has been classified as a middle-income economy by the IMF since 2010. The COVID-19 crisis caused a spike in unemployment, with the rate going up to 8.4% in 2020 from 4.8% one year earlier. Unemployment remained high in 2021 and weighted on household consumption (70% of GDP). Youth Unemployment rate in Sri Lanka increased to 30% in the second quarter of 2021 from 28.10% in the first quarter of 2021 (Department of Census and Statistics - Sri Lanka, 2022). In recent years, Sri Lanka’s record of poverty reduction has been encouraging. The poverty headcount rate fell from about 22.7% in 2002 to 4.1% in 2016 (Asia Development Bank, latest data available). The country’s poverty - at $3.20 per day poverty line - was projected to reach 10.9% in 2021, which was still significantly above the 2019 level of 9.2 percent (World Bank, 2021). However, living standards remain low and pockets of severe poverty persist. Additionally, poverty rates are disproportionately high for vulnerable groups such as youth and ethnic minorities; and unemployment is high for youth and women. Still, the country’s 21.9 million inhabitants have achieved some of the best human development results in South Asia. The literacy rate in 2019 was close to 100% and the country’s life expectancy is the highest in the region. Low mortality rates and the steadily declining population growth, reflect the country’s progress in the sphere of social development. However, the social and economic situation of the Tamil community remains largely unequal to that of the Sinhalese, and ethnic tensions have been on the rise in recent years.

 

Indicator of Economic Freedom

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.

 

Business environment ranking

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:
5.26/10
World Rank:
66/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2020-2024

 
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Latest Update: May 2022