Sri Lanka: Tough year ahead

Country Report

Economic growth slowed to +4.4% in 2016 (down from +4.8%). Real GDP growth decelerated in the first half of 2016 due to floods. In the second half, the economy showed signs of improvement and growth picked up as services and manufacturing improved. 

In 2017, economic growth is set to stabilize around +4.4% before accelerating in 2018. Exports should recover gradually on the back of higher global demand and the competitive tourism industry.  In the short-run, domestic demand expansion will be limited due to monetary tightening and continued fiscal consolidation. 

Risks to the outlook are elevated and stem from domestic and external sources. On the domestic front, they are related to weather conditions (drought, e.g.), the capacity of the government to reduce debt sustainability risk and drive crucial economic reforms (SOE, e.g.).  

Externally, cause for concern lies in potential shocks such as lower exports, since the country has a very weak external position. Moreover, the authorities are scrutinized by the IMF. In June 2016, the latter approved a 36-month Extended Fund Facility for around USD1.5bn to support the economy in its reform agenda.