OSL 2019 Economic Update

Sri Lanka is a low-middle-income nation situated on the primary East-West Indian Ocean shipping routes in South Asia off India's southern shore. Gross domestic product (GDP) amounted to USD 88.7 billion and USD 4.100 per capita GDP in 2018. Sri Lanka's economy is moving from a predominantly rural economy to a more urbanized economy based on manufacturing and services after 30 years of civil war.

In its socio-economic and human development indicators, the nation has produced significant strides and ranks among the highest in South Asia. The export economy of Sri Lanka is dominated by exports of clothing and cash crops, primarily tea, but exports of technology services are an essential growth industry.

The tourism industry expanded quickly before the terrorist attacks on April 21, 2019. As a consequence of the assaults, severe contractions to that sector are anticipated, with potential follow-up impacts in other service economy industries as well as in building and agriculture. With external shocks and national political uncertainty, the Sri Lankan economy rose by 3.2 percent in 2018. GDP development was anticipated to enhance to about 3.5% in 2019 and over 4% in the long term before the assaults on April 21. By the end of 2019, inflation was expected to reach 4.5 percent.

Due to an increase in foreign exchange outflows precipitated by the constitutional crisis of 2018, the Sri Lankan rupee depreciated over 16 percent, one of the biggest for emerging markets. Migrant workers ' remittances of about USD 7.0 billion a year are a significant source of foreign exchange. Tourism, with 2.3 million tourist arrivals in 2018, is a USD 4.4 billion sector. In 2019, before the terrorist attacks of April 21, Lonely Planet named Sri Lanka its top travel destination.

Foreign direct investment (FDI) in Sri Lanka, including loans, rose in 2018 to about USD 2.3 billion, compared with USD 1.7 billion in 2017. Recent FDI focused on immovable property, blended development projects, ports, and telecommunications industries.

The tourism industry is a priority industry for investors, with more than two million visitors per year and a range of cultural, wildlife, and outdoor products. The outsourcing business process industry is also increasing, and U.S. companies are actively involved. Investors also see possibilities in franchise, retail, and services as well as light manufacturing with an increasing middle class.

Another challenge in 2019 will be looming debt service payments. The foreign debt payments of the government currently amount to USD 5.9 billion and the constitutional crisis of 2018 resulted in three leading credit rating agencies downgrading the rating of the country. The government has committed to a fiscal consolidation program under a three-year Extended Fund Facility (EFF) with the International Monetary Fund (IMF), rebuilding foreign exchange reserves, state-owned corporate reform, and trade and investment system reforms.

National elections are anticipated in late 2019, and the potential for significant economic reforms is likely to be limited.  The United States is Sri Lanka's biggest single export market, importing USD 2.7 billion, while exports to Sri Lanka in 2018 amounted to USD 373 million. Sri Lanka's total exports risen by 4.7 percent to USD 11.9 billion in 2018, while imports amounted to about USD 22 billion. The trade deficit in Sri Lanka in 2018 was an all-time high of USD 10 billion.

VBS/AT/08102019/Z_TB1