Economy of Sri Lanka
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Colombo, the financial centre of Sri Lanka
|Currency||Sri Lankan rupee (LKR)|
|SAFTA, WTO, IOR-ARC, BIMSTEC, AIIB|
|GDP||$98.04 Billion / $319.791 billion PPP (2019 est.)|
|5.0% (2015), 4.5% (2016), |
3.1% (2017e), 4.8% (2018f) 
GDP per capita
|US$ 4,310 / US$ 13,847 PPP|
GDP by sector
|agriculture: 7.8%; industry: 30.5%; services: 61.7% (2017)|
|7.3% (2017 dec.)|
Population below poverty line
|8.937 million (2017)|
Labour force by occupation
|agriculture: 28.4%; industry: 25.7%; services: 45.9% (December 2016 est.)|
|processing of rubber, tea, coconuts, tobacco and other agricultural commodities; telecommunications, insurance, banking; tourism, shipping; clothing, textiles; cement, petroleum refining, information technology services, construction|
|Exports||$15 billion (2018 est.)|
|textiles and apparel, tea and spices, rubber manufactures, pharmaceuticals, precious stones, coconut products, fish|
Main export partners
| USA 27.3% |
Italy 4% (2016)
|Imports||$21.14 billion (2017 est.)|
|petroleum, machinery and transportation equipment, textile fabrics, building materials, mineral products, foodstuffs|
Main import partners
| China 22% |
Japan 5.4% (2016)
|US$1.63 Billion (2017)|
Gross external debt
|~$35 billion (2016 est.) or 76% of GDP (2015 est.)|
|Revenues||$12.64 billion (2017 est.)|
|Expenses||$16.66 billion (2017 est.)|
|Standard & Poor's:|
B+ (T&C Assessment)
|$8 billion (2018.)|
With an economy worth $93.45 billion $298.310 billion PPP and a per capita GDP of about $4,310, $13,480 PPP as of 2018 Sri Lanka has mostly had strong growth rates in recent years. The Sri Lankan economy has seen robust annual growth at 6.4 percent over the course of the 2003-2012 period, well above its regional peers. In GDP per capita terms, it is ahead of other countries in the South Asian region. The main economic sectors of the country are tourism, tea export, apparel, textile, rice production and other agricultural products. In addition to these economic sectors, overseas employment contributes highly in foreign exchange: 90% of expatriate Sri Lankans reside in the Middle East.
Sri Lanka has met the Millennium Development Goal (MDG) target of halving extreme poverty and is on track to meet most of the other MDGs, outperforming other South Asian countries. Sri Lanka experienced a major decline in poverty between 2002 and 2009 – from 23 percent to 9 percent of the population. Despite this pockets of poverty continue to exist. An estimated 9 percent of Sri Lankans who are no longer classified as poor live within 20 percent of the poverty line and are, thus, vulnerable to shocks which could cause them to fall back into poverty. Since the end of the three-decade civil war, Sri Lanka has begun focusing on long-term strategic and structural development challenges as it strives to transition to an upper middle income country. Sri Lanka has one of the lowest tax-to-GDP ratios in the world, and creating jobs for the bottom 40% has become a challenge. Sri Lanka also faces a challenges in social inclusion, governance and sustainability.
According to government policies and economic reforms stated by Prime Minister and Minister of National Policy and economic affairs Ranil Wickremesinghe, Sri Lanka plans to create a knowledge-based social market economy and an export-oriented economy as well as the Western Region Megapolis a Megapolis in the western province to promote economic growth. The creation of several business and technology development areas island-wide specialised in various sectors, as well as tourism zones are also being planned. But Sri Lanka has recently been facing a danger of falling into economic malaise, with increasing debt levels and a political crisis which saw the country's debt rating being dropped.
- 1 Economic history
- 2 Macro-economic trend
- 3 Economy
- 4 External sector
- 5 Financial institutions
- 6 Economic infrastructure and resources
- 7 Economic sectors
- 8 Major companies
- 9 Global economic relations
- 10 See also
- 11 References
- 12 External links
Since becoming independent from Britain in February 1948, the economy of the country has been affected by natural disasters such as the 2004 Indian Ocean earthquake and a number of insurrections, such as the 1971, the 1987–89 and the 1983–2009 civil war. Between 1977 and 1994 the country came under UNP rule in which under President J.R Jayawardana Sri Lanka began to shift away from a socialist orientation in 1977. Since then, the government has been deregulating, privatizing, and opening the economy to international competition. In 2001, Sri Lanka faced bankruptcy, with debt reaching 101% of GDP. The impending currency crisis was averted after the country reached a hasty ceasefire agreement with the LTTE and brokered substantial foreign loans. After 2004 the UPFA government has concentrated on mass production of goods for domestic consumption such as rice, grain and other agricultural products. however twenty five years of civil war slowed economic growth, diversification and liberalisation, and the political group Janatha Vimukthi Peramuna (JVP) uprisings, especially the second in the early 1980s, also caused extensive upheavals.
Following the quelling of the JVP insurrection, increased privatization, economic reform, and a stress on export-oriented growth helped improve the economic performance, increasing GDP growth to 7% in 1993.
Economic growth has been uneven in the ensuing years as the economy faced a multitude of global and domestic economic and political challenges. Overall, average annual GDP growth was 5.2% over 1991–2000.
In 2001, however, GDP growth was negative 1.4%--the first contraction since independence. The economy was hit by a series of global and domestic economic problems and affected by terrorist attacks in Sri Lanka and the United States. The crises also exposed the fundamental policy failures and structural imbalances in the economy and the need for reforms. The year ended in parliamentary elections in December, which saw the election of United National Party to Parliament, while Sri Lanka Freedom Party retained the Presidency.
During the short lived peace process from 2002 to 2004, the economy benefited from lower interest rates, a recovery in domestic demand, increased tourist arrivals, a revival of the stock exchange, and increased foreign direct investment (FDI). In 2002, the economy experienced a gradual recovery. During this period Sri Lanka has been able to reduce defense expenditures and begin to focus on getting its large, public sector debt under control. In 2002, economic growth reached 4%, aided by strong service sector growth. The agricultural sector of the economy staged a partial recovery. Total FDI inflows during 2002 were about $246 million
The Mahinda Rajapakse government halted the privatization process and launched several new companies as well as re-nationalising previous state owned enterprises, one of which the courts declared that privatizationis null and void. Some state-owned corporations became overstaffed and less efficient, making huge losses with series of frauds being uncovered in them and neopotism rising. During this time EU revoked GSP plus preferential tariffs from Sri Lanka due to alleged human rights violations, which cost about USD 500 million a year.
The resumption of the civil-war in 2005 led to a steep increase defense expenditures. The increased violence and lawlessness also prompted some donor countries to cut back on aid to the country..
A sharp rise in world petroleum prices combined with economic fallout from the civil war led to inflation that peaked 20%. However, as the civil war ended in May 2009 the economy started to grow at a higher rate of 8.0% in the year 2010 and reached 9.1% in 2012 mostly due to the boom in non-tradable sectors. However the boom didn't last and the GDP growth for 2013 fell to 3.4% in 2013 and only slightly recovered to 4.5% in 2014.
In 2016 the government succeeded in lifting an EU ban on Sri Lankan fish products which resulted in fish exports to EU rising by 200% and in 2017 improving human rights conditions resulted in the European Commission proposing to restore GSP plus facility to Sri Lanka. Sri Lanka's tax revenues per GDP also increased from 10% in 2014 which was the lowest in nearly two decades to 12.3% in 2015 Despite reforms, Sri Lanka was listed among countries with the highest risk for investors by Bloomberg.
The chart below summarizes the trend of Sri Lanka's gross domestic product at market prices. by the International Monetary Fund with figures in millions of Sri Lankan Rupees.
|Year||Gross Domestic Product||US Dollar Exchange|
|1980||66,167||16.53 Sri Lankan Rupees|
|1985||162,375||27.20 Sri Lankan Rupees|
|1990||321,784||40.06 Sri Lankan Rupees|
|1995||667,772||51.25 Sri Lankan Rupees|
|2000||1,257,637||77.00 Sri Lankan Rupees|
|2005||2,363,669||100.52 Sri Lankan Rupees|
|2016||6,718,000||145.00 Sri Lankan Rupees|
For purchasing power parity comparisons, the US Dollar is exchanged at 113.4 Sri Lankan Rupees only.
The following table shows the main economic indicators in 1980–2017.
|GDP in $
|16.58 Bln.||27.43 Bln.||37.74 Bln.||56.28 Bln.||83.03 Bln.||112.59 Bln.||124.94 Bln.||136.99 Bln.||147.99 Bln.||154.39 Bln.||168.80 Bln.||186.76 Bln.||207.60 Bln.||218.11 Bln.||233.01 Bln.||247.37 Bln.||261.72 Bln.||274.72 Bln.|
|GDP per capita in $
|5.8 %||5.0 %||6.2 %||6.1 %||8.4 %||6.2 %||7.7 %||6.8 %||6.0 %||3.5 %||8.0 %||8.4 %||9.1 %||3.4 %||5.0 %||5.0 %||4.5 %||3.1 %|
|26.1 %||1.5 %||21.5 %||7.7 %||6.2 %||11.0 %||10.0 %||15.8 %||9.6 %||3.4 %||6.3 %||6.7 %||7.5 %||6.9 %||2.8 %||2.2 %||4.0 %||6.5 %|
(Percentage of GDP)
|...||...||82 %||80 %||82 %||79 %||77 %||74 %||71 %||75 %||72 %||71 %||70 %||72 %||72 %||78 %||80 %||79 %|
In 1977, Colombo abandoned statist economic policies and its import substitution trade policy for market-oriented policies and export-oriented trade.
Sri Lanka's most dynamic industries now are food processing, textiles and apparel, food and beverages, telecommunications, and insurance and banking.
By 1996 plantation crops made up only 20% of exports (compared with 93% in 1970), while textiles and garments accounted for 63%. GDP grew at an annual average rate of 5.5% throughout the 1990s until a drought and a deteriorating security situation lowered growth to 3.8% in 1996.
The economy rebounded in 1997–98 with growth of 6.4% and 4.7% – but slowed to 3.7% in 1999. For the next round of reforms, the central bank of Sri Lanka recommends that Colombo expand market mechanisms in nonplantation agriculture, dismantle the government's monopoly on wheat imports, and promote more competition in the financial sector.
Pre 2009 there was a continuing cloud over the economy the civil war and fighting between the Government of Sri Lanka and LTTE. However the war ended with a resounding victory for the Sri Lankan Government on 19 May 2009 with the total elimination of LTTE.
Last Updated on 24 June 2018
GDP growth for 2018 and 2019 calendar years
2018E: 4.5%, 2019E: 4.8%
Following a real GDP expansion of 3.1% in 2017, the economy is however anticipated to be in the "negative output gap" territory in 2018E and 2019E (i.e. below its potential output of 5.25% - estimated by the IMF)
Global Environment not likely to assist in reducing the Negative Output Gap of Sri Lanka
Even though the CBSL tried to adopt a soft monetary policy by early April 2018 to reduce the output gap of the Sri Lankan economy, the chances of the Regulator opting for further policy interest rate cuts seem to be limited at this juncture, given hawkish approach of the FED in the near term (as there could be a potential capital flight from domestic markets as already seen with the domestic fixed income market's foreign holding). The expected FED rate (at least more than a couple in 2H2018E) hikes are anticipated to continue to reduce foreign participation in the domestic fixed income markets as seen during previous rate hikes of the FED.
Climatic Change Impact on South Asia to Hinder Agri allied output in the Short to Medium Term
Another reason why the Sri Lankan (real GDP) output is likely to be low in the near to medium term is low absolute output expected from Agriculture and Agri-allied manufacturing processes. There was a flood in May 2018 (followed by floods in May 2016 and May 2017), and based on the World Bank’s recent Annual Reports, world climatic change related impact may likely result in annual floods and / or droughts for the South Asian region in the near to medium term (that includes Sri Lanka).
Investment Environment and Sustainable Revenue allied Limitations
Sri Lanka's investment to GDP ratio (average for past five years) hovers ~ 31% which is made up of 24% Private Sector Investment, 5% Public Investment (or Government Capex) and 2% via Foreign Direct Investment (FDIs). For an economy to reach a sustainable productive capacity (or real GDP growth rate) equivalent to 6% - 7%, the investment to GDP ratio has to at least increase to the level of ~34% - 35%, which requires an increase in the said investments level. Given Sri Lanka's natural savings rate of ~23% - 24%, private sector investment may continue to remain at 24% levels at least in the near term. Given Government of Sri Lanka's (GoSL) commitment to contain fiscal deficits in the near term, Public investment in GoSL' s best case will be at ~5% level in the short to medium term. This leaves room only for one area of focus in the near term, if Sri Lanka needs to increase its potential output level, which is FDIs. For this to improve, few indices like the "doing business index (Sri Lanka stood at 111 for 2018 which deteriorated its rank from 85th position during 2014)", the overall tariff structure & allied reforms and infrastructure project execution pace (to increase economic efficiency) play a key role. However, increasing FDI level to 5% - 6% in the medium term may require fast pacing the matters mentioned above.
From a sustainable revenue point of view, Sri Lanka has continued to perform low, given its declining Export to GDP ratio, which was at 33% in 2000, that deteriorated to 15% in 2014 which has now (by end of 2017) further deteriorated to 12%, emphasizing the fact that policies by the successive Governments during past few decades have not helped in increasing the country’s sustainable revenue. A classic example for this is, during 1992, Sri Lanka’s absolute Export Value was on par with countries like Vietnam and Bangladesh (at US$2bn), which has only grown to a shade below US$12bn by end of 2017 (compared to Vietnam’s US$214bn and Bangladesh’s US$36bn for 2017)
Inflation by June 2018
Head line CCPI and NCPI will hover at 6% by 30 June 2019
Even though the Government did not adopt the fuel pricing formula, the Government took action to increase domestically controlled Petrol and Diesel prices, that will eventually increase non-financial SOE gains (which were in the red zone up to 2015) in the near term. This reform (even though, it is a spot action) and the anticipated adoption of the electricity pricing reform or a similar adjustment to electricity prices by end of September 2018 (as agreed with IMF's reform agenda for Sri Lanka), may transfer Ceylon Petroleum Corporation - CPC and the Ceylon Electricity Board - CEB (two of the top three loss making SOEs – other being Sri Lankan air lines) in to the green zone (profits), in SOE financials.
These changes may however, result in upward inflationary pressures in the short to medium term which will also be further slightly stimulated by supply side shocks anticipated via adverse weather related mishaps in the near term.
However, given the tighter monetary approach in the world economy, commodity prices may likely ease at least commencing 2019, which will eventually help sustain imported inflation to the country. As a result inflation in Sri Lanka could be possibly contained at around 6% by mid-2019.
Interest rates - 1 year T bill market rate by June 2019
12 Month T bill to be at 10% by 30 June 2019
The CBSL has reduced its T bill holding significantly from April 2017 to date reversing any monetary stimulated inflationary actions. Thus the resultant liquidity levels in the money market broadly reflects natural market conditions compared to the market that was there an year ago, which reflected more realistic banking sector interest rates as of June 2018.
Private sector credit growth declined from high levels of 29% YoY in July 2016 to 15% YoY levels in 1Q2018. One of the main features of this decline includes a significant reduction in the uptake of credit from the Corporates, which is depicted by the declining Prime - Net Interest Margins (Prime - NIMs) since September 2016. Prime - NIMs declined from 5.2% in Sep 2016 to 2.2% in May 2018, which is a 300bps reduction in corporate lending business for the local banking system. However, retail margins in the economy declined only 30bps to 5% during the same period, which confirms the tilt of credit towards less credit worthy from high credit rated corporates (pausing possible NPA threats for the banking system in the near term).
Given the changes taking place in the private credit space (i.e the retail tilt), and provided the CBSL's recent policy rate cut in April 2018, credit growth may still continue to move either horizontally (i.e. at 15% level) or continue to reduce slightly given anticipated near term inflationary pressures, as the consumption led borrowings may also tend to decline on account of anticipated reduction in near term disposable income. This will however not add any excessive upward pressures on interest rates (including 12 month T bill yields) especially during 2H2018E. As a result 12 month Treasury bill yields may in fact slightly decline from its June 2018 --> 9.4% to 9% levels by end of 2018E. However, given the International Sovereign Bond (ISB) bullet payments >US$3bn p.a. commencing from 2019E may likely add some upward pressure on interest rates, resulting in the 12 month T bill yields rising to at least 10% by 30 June 2019.
Exchange Rate (ER) June 2019
US$ / LKR spot mid-rate anticipated at Rs.166.1 as at end June 2019
The CBSL became a net purchaser from the Forex market since March 2017, and thus managed to increase its Gross Official Foreign Reserve to ~US$10bn as at mid June 2018, as a result of its market driven ER strategy.
However, given the relatively high elasticity1 of Sri Lanka's exports (e.g. Tea, Textile etc.) and relative high inelasticity1 of Sri Lanka's imports (such as crude oil etc.), and given near term ISB bullet payment requirements, The LKR is anticipated to depreciate -4.1% YoY to Rs.166.1/US$ as at end June 2019
1 : Marshall–Lerner condition applicable to Sri Lanka
Trade account issues
In the recent past, the Sri Lankan Government has identified some key focal areas to address the external imbalances of the economy, especially with regard to reducing its high trade deficit (~15% of GDP for 2012) in order to make the economy comply with the Marshall–Lerner condition. Sri Lanka's oil import bill accounts for an estimated 27% of total imports while its pro-growth policies have resulted in an investment goods import component of 24% of total imports. These inelastic import components have led to Sri Lanka's Export goods price elasticity + Import goods price elasticity totalling less than 1, resulting in the country not complying with the Marshall–Lerner condition.
Some of the suggested proposals include:
- Import substitution of investment goods and consumer goods
- Tax concessions towards value added exports
- Negotiating longer credit periods for oil imports
- Allowing the external value of the currency to be determined by market forces (with minimal central bank intervention).
- Within the capital account, borrowings still account for a significant proportion as opposed to Foreign direct investments.
- FDIs were estimated at ~US$800mn for FY2012
Overall balance (BOP)
- The economy ended with an overall positive balance of US$151mn for 2012 (vs. a US$1,061mn deficit in FY2011)
The Central Bank of Sri Lanka is the monetary authority of Sri Lanka and was established in 1950. The Central Bank is responsible for the conduct of monetary policy in the country and also has supervisory powers over the financial system.
The Colombo Stock Exchange (CSE) is the main stock exchange in Sri Lanka. It is one of the most modern exchanges in South Asia, providing a fully automated trading platform. The vision of the CSE is to contribute to the wealth of the nation by creating value through securities. The headquarters of the CSE have been located at the World Trade Center Towers  in Colombo since 1995 and it also has branches across the country in Kandy, Matara, Kurunegala, Negombo and Jaffna. In 2009, after the 30 years long civil war came to an end, the CSE was the best performing stock exchange in the world.
Economic infrastructure and resources
Transportation and roads
Most Sri Lankan cities and towns are connected by the Sri Lanka Railways, the state-run railway operator. The Sri Lanka Transport Board is the state-run agency responsible for operating public bus services across the island.
The government has launched several highway projects to bolster the economy and national transport system, including the Colombo-Katunayake Expressway, the Colombo-Kandy (Kadugannawa) Expressway, the Colombo-Padeniya Expressway and the Outer Circular Highway to ease Colombo's traffic congestion. The government sponsored Road Development Authority (RDA) has been involved in several large-scale projects all over the island in an attempt to improve the road network in Sri Lanka. Sri Lanka's commercial and economic centres, primarily the capitals of the nine provinces are connected by the "A-Grade" roads which are categorically organised and marked. Furthermore, "B-Grade" roads, also paved and marked, connect district capitals within provinces. The grand total of A, B and E grade roads are estimated at 12,379.49 km.
The energy policy is governed by the Ministry of Power and Energy, while the production and retailing of electricity is carried out by the Ceylon Electricity Board. Policy recommendations and planning comes under the oversight of the Public Utilities Commission of Sri Lanka. Energy in Sri Lanka is mostly generated by hydroelectric power stations in the Central Province.
Sri Lanka has a well established education system which has successfully created vast supply of skilled labor. The Sri Lanka's population has a literacy rate of 92%, higher than that expected for a third world country; it has the highest literacy rate in South Asia and overall, one of the highest literacy rates in Asia. Information technology literacy of the urban sector population is also satisfactory at 39.9 percent and people around the country use web based job boards to find skilled employment together with other sources such as news papers and government gazette. In Sri Lanka all persons above age limit 15 years and above of either gender are identified as working age population. In the fourth quarter of 2017, Sri Lanka had an unemployment rate of 4.2 percent and is shown to reduce gradually over the years.
Tourism is one of the main industries in Sri Lanka. Major tourist attractions are focused around the islands famous beaches located in the southern and the eastern parts of the country and ancient heritage sites located in the interior of the country and resorts located in the mountainous regions of the country. Also, due to precious stones such as rubies and sapphires being frequently found and mined in Ratnapura and its surrounding areas, they are a major tourist attraction.
The 2004 Indian Ocean Tsunami and the past civil war have reduced the tourist arrivals, however the number of tourists visiting have been recently increasing, beginning in early 2008. March 2008 by 8.6% and Sri Lanka attracted 1,003,000 tourists in 2012 according to the Central Bank of Sri Lanka's 2013 roadmap.
The tea industry, operating under the Ministry of Public Estate Management and Development, is one of the main industries in Sri Lanka. It became the world's leading exporter in 1995 with a 23% share of global tea export, higher than Kenya's 22% share. The central highlands of the country have a low temperature climate throughout the year and annual rainfall and the humidity levels that are suitable for growing tea. The industry was introduced to the country in 1867 by James Taylor, a British planter who arrived in 1852.
Apparel and textile industry
The apparel industry of the Sri Lanka mainly exports to the United States and Europe. There are about 900 factories throughout country serving companies such as Victoria's Secret, Liz Claiborne and Tommy Hilfiger. Textiles & Apparels, as categorized and reported by the Sri Lanka Export Development Board, made up to around 44% of Sri Lankan merchandise exports, in the year 2017.
The agricultural sector of the country produces mainly rice, coconut and grain, largely for domestic consumption and occasionally for export. The tea industry which has existed since 1867 is not usually regarded as part of the agricultural sector, which is mainly focused on export rather than domestic use in the country.
Sri Lanka is known for producing a variety of gemstones, including chrysoberyl, corundum, garnet, ruby, spinel, and tourmaline, and is a leading producer of the Ceylon Blue sapphire. The best known areas for gemstone mining in Sri Lanka were Balangoda, Elahera, Kamburupitiya, Moneragala, Okkampitiya, and Ratnapura. In addition Sri Lanka has a variety of industrial minerals, which include ball clay, kaolin, and other clays, calcite, dolomite, feldspar, graphite, limestone, Ilmenite, mica, rutile mineral sands, phosphate rock, quartz, zircon, dolomite and silica sand. Pulmoddai beach sand deposit is the most important non-ferrous mineral reserve in Sri Lanka as well as one of the world's most richest mineral sand deposits with heavy mineral concentrates of 50% to 60% and contain manyminerals including titanium.
Sri Lanka is specially for its highly valued and high-purity vein graphite. As of 2014, graphite was produced at the two largest graphite mines in Sri Lanka, the Bogala and the Kahatagaha Mines. Major investors in graphite mining are Graphite Lanka Ltd., Bogala Graphite Lanka Plc, Bora Bora Resources Ltd. (BBR) of Australia, MRL Corp. Ltd. of Australia, and Saint Jean Carbon Inc. of Canada.
Sri Lanka has developed several multi-national companies and international brands. The most notable companies include:
Global economic relations
Exports to the United States, Sri Lanka's most important market, were valued at $1.8 billion in 2002, or 38% of total exports. For many years, the United States has been Sri Lanka's largest market for garments, receiving more than 63% of the country's total garment exports. India is Sri Lanka's largest supplier, with imports worth $835 million in 2002. Japan, traditionally Sri Lanka's largest supplier, was its fourth-largest in 2002 with exports of $355 million. Other important suppliers include Hong Kong, Singapore, Taiwan, and South Korea. The United States is the 10th-largest supplier to Sri Lanka; US imports amounted to $218 million in 2002, according to Central Bank trade data.
A new port is being built in Hambantota in Southern Sri Lanka, funded by the Chinese government as a part of the Chinese aid to Sri Lanka. This will ease the congestion in Sri Lankan ports, particularly in Colombo. In 2009, 4456 ships visited Sri Lankan ports.
Credit rating and commercial borrowing
Sri Lanka had applied for credit ratings from international agencies in its efforts to apply for loans from international markets in 2005 after the election of Mahinda Rajapakse as president. Standard and Poor's has rated Sri Lanka a "B+" speculative rating, four grades below investment grade. Fitch has rated Sri Lanka with "BB-" which is three grades below investment grade. Standard and Poor's maintains Sri Lanka is constrained by providing widespread subsidies, a bloated public sector, transfers to loss-making state enterprises, and high interest local and international burdens . Standard and Poor's estimates public sector debt has reached 95% of GDP , in comparison to CIA estimates of 89% of GDP . Sri Lanka in mid-2007 sought to borrow $500 million from international markets to shore up the deteriorating exchange rate and reduce pressure on repayment of the domestic debt market . The head of the opposition UNP, Ranil Wickremasinghe has warned that such intense borrowing is unsustainable and will not repay these loans if elected to power .
Sri Lanka is highly dependent on foreign assistance, and several high-profile assistance projects were launched in 2003. The most significant of these resulted from an aid conference in Tokyo in June 2003; pledges at the summit, which included representatives from the International Monetary Fund, World Bank, Asian Development Bank, Japan, the European Union and the United States, totalled $4.5 billion.
Debt and IMF assistance
During the past few years, the country's debt has soared as it was developing its infrastructure to the point of near bankruptcy which required a bailout from the International Monetary Fund (IMF). "Without an IMF loan, Sri Lanka would have been in a precarious position," in May 2016 according to Krystal Tan, an Asia economist at Capital Economics who added, "foreign exchange reserves only covered around 80 percent of short-term external debt." The IMF had agreed to provide a $1.5 billion bailout loan in April 2016 after Sri Lanka provided a set of criteria intended to improve its economy.
By the fourth quarter of 2016 the debt was estimated to be $64.9 billion. Additional debt had been incurred in the past by state-owned organizations and this was said to be at least $9.5 billion. Since early 2015, domestic debt increased by 12 percent and external debt by 25 percent.
In late 2016 the World Bank provided US$100 million in financing and the Japan International Cooperation Agency provided a US$100M loan, both intended to "provide budget financing and to support reforms in competitiveness, transparency, public sector and fiscal management", according to the World Bank. The bank also reported that the country's government had agreed that there was a need for reforms "in the areas of fiscal operations, competitiveness and governance" and if fully implemented, "these could help the country reach Upper Middle Income status in the medium term" according to the bank.
In November 2016, the International Monetary Fund reported that it would disburse a higher amount than the US$150 million originally planned, a full US$162.6 million (SDR 119.894 million), to Sri Lanka. The agency's evaluation was cautiously optimistic about the future: "While inflation has abated, credit growth remains strong. The central bank indicates its readiness to tighten the monetary policy stance further if inflationary pressures resurge or credit growth persists. The authorities intend to continue building up reserves through outright purchases while allowing for greater exchange rate flexibility. The banking sector is currently well capitalized. Steps are being taken to find a resolution mechanism for the distressed financial institutions. Going forward, there is a need to strengthen the supervisory and regulatory framework, and identify and mitigate vulnerabilities in the financial sector, particularly with regard to non-banks and state-owned banks."
As part of the debt management program the Sri lankan government carried out several reforms which including the implementation of a new Inland Revenue Act as well as an automatic fuel pricing formula. Tax reforms also increased VAT rates and narrowed exemptions and the third review by the IMF noted that performance was on track regarding fiscal consolidation, revenue mobilization, monetary policy management, and reserves accumulation. In the fourth review in June 2018 the IMF claimed that " Sri Lanka has made important progress under its Fund-supported program." but stressed the need of further progress with revenue-based fiscal consolidation and a prudent monetary policy with sustained efforts to build up international reserves. In 2018 China extended a loan of $1.25 Billion consisting of a below market rate syndicated loan and smaller Panda bond to bailout Sri Lanka.
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