Sri Lanka

Growing with difficulties

D4

High RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD87,2bn (World ranking 65, World Bank 2017)
Population 21,4mn (World ranking 57, World Bank 2017)
Form of state Republic
Head of government Maithripala Sirisena (President)
Next elections 2020, Parliamentary and Presidential
  • Growing tourism revenues
  • Economic policies broadly supportive of business and economic growth
  • Increasing workers’ remittances
  • Strategic location for trade
  • Fragile external position and weak public finances
  • Fractured nature of the political system, with generally weak coalition governments
  • Vulnerability of export base (highly depending on textiles and clothing)
  • Vulnerability to climate and natural disasters
  • Ethnic tensions remain a threat to stability and growth prospects

A modest pick-up

Economic growth slowed markedly in 2017-18 to a range of 3%-4%, compared to +4.4% in 2016. Domestic demand growth was particularly weak due to tight monetary conditions, continued fiscal consolidation, recurrent political instability and adverse weather conditions. Net exports also underperformed due to elevated oil prices.

Looking ahead, we expect economic growth to experience a modest pick-up to +3.5% in 2019 (after an estimated +3.2% in 2018). On trade, exports are expected to gather speed as ties with the EU (as the Generalized Scheme of Preferences (GSP+) is reinstated) and China (as part of the Belt and Road Initiative) strengthen. Domestically, the outlook will depend on political development and weather conditions. More cohesion at the government level, fiscal discipline and continued progress on reforms as prescribed by the IMF will be pivotal to reassure private investors.  Assuming that the political environment improves gradually, we pencil a progressive improvement of domestic demand, driven by investment in construction, low-end manufacturing and services (tourism). 

Macroeconomic vulnerabilities are significant

The economy continues to carry significant imbalances. Public finances are poor: Government debt is c.80% GDP and the government deficit is expected at -5% GDP in 2019. The external position is also vulnerable. The current account balance has been chronically in deficit and is expected at -3% GDP in 2019. External debt is elevated (expected at 60% GDP in 2019) and foreign exchange reserves are at a low level (covering barely three months of imports). Moreover, currency risk is elevated. The LKR lost close to 20% against the USD between end 2017 and end 2018. 

Business environment and political context: Difficult for corporates

The World Bank's Doing Business 2019 survey ranks Sri Lanka 100th out of 190 economies. The breakdown of the overall index reveals a low ranking in the enforcing contracts, paying taxes and registering property sub-components. Moreover, the Institute’s Worldwide Governance Indicators show weaknesses with regard to regulatory quality, rule of law and control of corruption. The political context is complicated with significant tensions within the ruling coalition. 

Trade structure by destination/origin

(% of total)

Exports Rank Imports
United States 27%
1
22% China
United Kingdom 10%
2
20% India
India 7%
3
5% United Arab Emirates
Germany 5%
4
5% Singapore
Italy 4%
5
5% Japan

Trade structure by product

(% of total)

Exports Rank Imports
Articles of apparel & clothing accessories 46%
1
13% Textile yarn and related products
Coffee, tea, cocoa, spices, and manufactures thereof 15%
2
10% Petroleum, petroleum products and related materials
Rubber manufactures, n.e.s. 6%
3
7% Road vehicles
Miscellaneous manufactured articles, n.e.s. 3%
4
4% Non metallic mineral manufactures, n.e.s.
Vegetables and fruits 3%
5
4% Specialised machinery

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings