Sri Lanka: Economy

The election in January of a new president and the change in government, as well the prospect of parliamentary elections later in the year, slowed activity as investors adopted a wait and see approach. With political uncertainties now diminished, private sector investment is expected to revive.

Selected economic indicators (%) 2015 2016
ADO 2015 Update ADO 2015 Update
GDP Growth ... 6.3 ... 7.0
Inflation 2.0 2.0 5.0 5.0
Current Account Balance (share of GDP) ... -2.9 ... -3.6

Note: In light of Sri Lanka’s revisions to the GDP series in July 2015, the ADO 2015 GDP growth and current account balance as a share of GDP forecasts are not comparable with current estimates and have been omitted.
Source: Asian Development Outlook 2015; Asian Development Outlook 2015 Update

Economic performance

Sri Lanka’s economy grew by 4.4% in the first quarter of 2015 and 6.7% in the second quarter (base year 2010). Of note, however, is the fact that changes to national accounting required that Gross Domestic Product (GDP) growth projections be revised.

Construction, which had driven growth for the previous 5 years, declined markedly in the first half of the year from the period a year earlier. Offsetting this in part, robust spending in consumption-related sectors such as wholesale and retail trade sustained relatively strong growth.

Inflation slowed markedly, and Sri Lanka experienced deflation in July and August, with the consumer price index recording each month a 0.2% contraction year on year. Food inflation that was 12.0% in December 2014 fell to 2.5% in August, and the nonfood component has been deflationary since the last quarter of 2014, largely due to lower administered fuel prices. Reflecting declines in food and fuel prices, inflation in August averaged only 1.0% over the preceding 12-month period while core inflation stood at 3.9%.

Exports fell by 0.6% over the first half of 2015 from the same period last year, rather than improving as expected in ADO 2015, while imports grew by 5.7%, higher than expected. Export performance was affected by declining exports of textiles and garments to the European Union, a ban on seafood exports to that market from January 2015, and poor performance in tea production. Rapid import growth was driven mainly by goods for consumers and investment (in particular transport equipment now with a lowered tariff), despite a marked decline in fuel imports from lower global oil prices. Remittances expanded marginally by 2.2%, while earnings from tourism grew by 14.0%. Reflecting weakening in the current and financial accounts, the overall balance recorded a deficit of $792 million, and gross official reserves fell at the end of June to $7.5 billion, which is cover for 4.5 months of imports.

Economic prospects

The parliamentary elections on 17 August substantially expanded the majority of the new government’s coalition. With political uncertainties diminished, private sector investment is expected to revive, as assumed earlier.

With price developments unfolding largely as expected, the Asian Development Outlook (ADO) 2015 inflation forecasts are maintained, with inflation rebounding in 2016.

The current account deficit, as revised to accommodate the rebasing of the national accounts, is expected to expand in 2016.

Excerpted from the Asian Development Outlook 2015 Update.