SRI LANKA

Sri Lanka’s economic growth path has been somewhat volatile, but it has exhibited robust long-term averages: +5% in the 2000s and +5.3% in the 2010s. Economic growth in 2019 was soft in part due to the tourism sector being negatively impacted by terrorist attacks. The Covid-19 pandemic led to a full-year recession in 2020, with GDP contracting by -3.6%. The economic recovery that started in 2021 (+3.5%) should extend into 2022 albeit at a slower pace (+3.3%). Exports are supported by the favorable global demand environment, but domestic demand could be hampered by elevated inflation and difficult public finances.

Fiscal policy reacted with cash transfers and tax payment deferrals to mitigate the impact of the Covid-19 crisis. Weak revenue collection, given the slump in economic activity and tourism, led to a widening of the fiscal deficit to 13.8% of GDP in 2020, compared with 8.0% in 2019. The deficit has since narrowed and could continue to do so in the coming years, but should remain at a high level.

On the monetary front, the central bank reacted to the Covid-19 crisis by cutting policy rates and providing lending facilities. Rate hikes have been implemented since mid-2021 in the context of a slump in the Sri Lankan rupee. Monetary policy is likely to tighten further from 2022, in line with advanced economies’ central banks going in the same direction.

Sri Lanka was ranked 99th in the 2020 World Bank Doing Business survey. Despite a relatively satisfactory performance in protecting minority investors, the country ranks poorly in most components of the survey, in particular enforcing contracts, paying taxes, registering property and getting credit. Ambitious infrastructure plans, if well implemented, could help improve the business environment in the medium run.

The ruling Sri Lanka Podujana Peramuna (SLPP) party enjoys a significant majority – five seats short of two thirds – after its victory in the parliamentary election in 2020. President Gotabaya Rajapaska thus enjoys stable power, with his brother as prime minister and other family members in the government. However, the Rajapaska brothers, aligned with the interests of the Sinhalese Buddhist ethnic majority in the population, might risk exacerbating existing tensions between the different religious communities in the country.