Economic Indicators of Sri Lanka

by The Economist Intelligence Unit, March 7, 2008

• The president, Mahinda Rajapakse of the People's Alliance (PA, the largest constituent of the ruling United People's Freedom Alliance), will continue to pursue populist policies, with an emphasis on rural development and infrastructure. Continuing political volatility may make it difficult to push through reforms such as privatisation, despite the weakness of the opposition United National Party. Constitutional reforms may bring about an adjustment in the balance of power between the president and the legislature.
• The conflict between the rebel Liberation Tigers of Tamil Eelam (LTTE, Tamil Tigers) and the government will escalate in 2008-09, following the government's decision in early January 2008 to end formally the 2002 ceasefire agreement. The LTTE may now attack soft targets more ruthlessly. Significant progress towards peace may come only if the rebel leader, Velupillai Prabhakaran, is killed. Foreign powers have criticised the government's decision to end the ceasefire, and are likely to reduce aid significantly.
• The budget deficit (including grants) will fall gradually in 2008-12, to stand at 5.7% of GDP in 2012. Deviations from fiscal targets are likely, owing to the government's populist bias and a failure to hit revenue-collection targets. Partly as a result of the country's reliance on aid from multilateral agencies, which are in favour of free markets, and partly owing to the need to improve the fiscal situation, the government will pursue gradual economic liberalisation.
• GDP growth will average 5.5% a year in 2008-12. Exports and the services sector will remain the main drivers of the economy during the forecast period.
• Consumer price inflation will ease from its current double-digit rate to average 4.9% in 2012. The decline in the rate of price rises will be the result of supply-side improvements, easing inflation in global commodity markets, and increased local food and energy production.
• The currency will depreciate relatively quickly against the US dollar in 2008-09 as security concerns and inflation undermine confidence in the Sri Lanka rupee. However, depreciation will slow to manageable rates in 2010-12, taking the exchange rate to an average of SLRs130:US$1 in 2012, compared with SLRs110:US$1 in 2007.
• The poor security environment will undermine tourism earnings in 2008, but strong merchandise export growth and a recovery in tourism late in the forecast period, as well as rapidly rising nominal GDP, will see the current-account deficit narrow to 3.6% of GDP in 2012 from a forecast 4.5% in 2008.