Growth rebounded last year from a slowdown in 2012, and the current account deficit narrowed substantially. As inflation eased, the central bank relaxed monetary policy. The outlook is for sustained rapid growth leveraging easy private access to credit and the government’s continued drive to expand infrastructure. An improving external environment will lift trade, but the current account deficit will expand on higher imports. Fiscal consolidation will focus on revenue enhancement.

Economic performance

Growth in gross domestic product (GDP) rebounded to 7.3% in 2013. The recovery reflected domestic demand strengthening and a pickup in exports and tourism. Faster growth in wholesale and retail trade, hotels and restaurants, transport, banking, insurance, and real estate lifted performance in the large service sector to 6.4% from 4.6% a year earlier, providing the impetus for the rebound. Industry grew by 9.9%, slightly less than a year earlier, as slower growth in mining and quarrying and in construction offset a pickup in manufacturing and utilities. Favorable weather helped maintain agriculture growth at a relatively favorable 4.7%.

Selected Economic Indicators (%) - Sri Lanka 2014 2015
GDP Growth 7.5 7.5
Inflation 5.0 6.0
Current Account Balance (share of GDP) -2.6 -3.5

Source: ADB estimates.

Economic prospects

An improving external environment, higher investments, and a recovery in domestic consumption will sustain a rapid pace of GDP growth in the next 2 years. The recent relaxation in monetary policy will allow more lending to the private sector and provide an impetus for expansion. Sri Lanka’s post-conflict growth has been buoyed by construction, which has increased its share of GDP from 6.6% in 2009 to 8.1% in 2012, and by transport and telecommunications, its share up from 12.8% to 14.3% in the same period. The government’s focus on infrastructure and post-conflict reconstruction and development has supported this expansion and will continue to drive growth in the medium term. The expansion in tourism and related construction has been noteworthy and is reflected in hotel and restaurant expansion, though modest scale limits the contribution to growth. As tourist numbers continue to rise rapidly and large hotel projects in the pipeline open their doors, economic growth and foreign exchange earnings from tourism will continue to be buoyant over the next several years.

On the demand side, the investment ratio improved from 28% in 2010 to 31% in 2013. This gradual gain reflects the government’s infrastructure drive and the expansion in construction. Monetary policy relaxation will start to take effect on private sector credit around mid-2014 and continue in 2015, facilitating private investment.

Moreover, foreign direct investment is expected to continue to expand as the economy strengthens and the investment climate improves. Exports, having recovered since mid-2013, will continue to expand.

With these factors pushing up income, private consumption will pick up after slowing in 2013 and contribute significantly to higher growth. GDP growth is thus expected to accelerate to 7.5% in 2014 and maintain that rate in 2015.

Source: ADB. 2014. Asian Development Outlook 2014. Manila.