Discusses key economic indicators and trade statistics, which countries are dominant in the market, and other issues that affect trade.
Sri Lanka is a lower middle-income country in South Asia off the southern coast of India on the main east-west Indian Ocean shipping lanes. Gross domestic product (GDP) reached $80.7 billion and per capita GDP was $3,682 in 2020. After 30 years of civil war, which ended in 2009, Sri Lanka’s economy is transitioning from a predominantly rural-based economy towards a more urbanized economy oriented around manufacturing and services. The country has made significant progress in its socio-economic and human development indicators and ranks among the highest in South Asia. Sri Lanka’s export economy is dominated by apparel and cash-crop exports, mainly tea, rubber, and coconut-based products, but technology services exports are a significant growth sector. Prior to COVID-19 and the subsequent closure of the airport, the tourism industry was expanding rapidly. Severe contractions to that industry have occurred due to the present crisis, with possible follow-on effects in other sectors of the service economy as well as manufacturing.
According to the Central Bank of Sri Lanka (CBSL), the Sri Lankan economy contracted 3.6 percent in 2020 mainly on account of the economic fallout from the COVID-19 pandemic and subsequent island-wide lockdowns imposed by the government. The Sri Lankan economy grew 4.3 percent in the first quarter of 2021, comprehensively exceeding CBSL projections of only 3.5 percent growth in the same period. The Asian Development Bank (ADB) projects 4.1 percent growth in Sri Lanka for 2021 but expects a decline of 3.6 percent in 2022 given high foreign debt obligations. CBSL currently projects inflation will reach 5 to 6 percent by the end of 2021. Remittances from migrant workers are a significant source of foreign exchange for the country and totaled approximately $7.1 billion in 2020 (a 5.8 percent increase from 2019). However, the inflow of labor remittances stagnated in the first five months of 2021 to $2.8 billion. Tourism was a $4.4 billion industry at its peak of 2.3 million tourist arrivals in 2018. Sri Lanka only recorded 16,908 arrivals during first and second quarter 2021 – earning $22.7 million.
Foreign direct investment (FDI) into Sri Lanka decreased to $548 million in 2020, compared to $793 million in 2019 and $1.6 billion in 2018. Recent FDI was concentrated in real estate, mixed development projects, ports, and telecommunications sectors. The tourism sector, with around two million tourist arrivals per year (before the global COVID-19 pandemic) and a variety of cultural, wildlife, and outdoor offerings, is a priority sector for the government’s post-pandemic economic recovery plan. The business process outsourcing sector is also growing and has strong involvement from U.S. firms. With a growing middle class, investors also see opportunities in franchising, retail, and services, as well as light manufacturing. The uncertainty surrounding the COVID-19 pandemic will likely continue to curtail tourism and foreign direct investment. The government has vaccinated 51 percent of the population as of September 2021.
President Gotabaya Rajapaksa and his administration’s economic goals include: positioning Sri Lanka as an export-oriented economic hub at the center of the Indian Ocean (with government control of strategic assets such as Sri Lankan Airlines); improving trade logistics; attracting export-oriented FDI; and boosting firms’ abilities to compete in global markets.
Looming debt service payments present a significant challenge for the Sri Lankan government, as cited in the decisions of three major credit rating agencies to downgrade the country’s sovereign debt rating in 2020 and Moody’s announcement of a possible further downgrade in 2021. The government’s foreign debt payments amount to $3.7 billion in 2021. Standard & Poor’s credit rating for Sri Lanka stands at CCC+/C with a stable outlook. Moody’s credit rating for Sri Lanka stands at Caa1 with the outlook stable. Fitch’s credit rating for Sri Lanka was last reported at CCC. Despite the country’s challenging debt situation, the current government has publicly stated it would not seek assistance from the IMF. Sri Lanka’s debt situation has limited the government’s ability to issue sovereign guarantees for major projects. CBSL expects around $1 billion in foreign exchange inflows through currency swaps with Bangladesh and through the IMFs Special Drawing Rights facility in 2021. International economic analysts expect Sri Lanka to avoid a sovereign default until at least 2022. However, in the absence of significant improvements to its economic position in 2022, Sri Lanka will likely face balance of payments issues given that foreign debt repayments alone amount to over $4.5 billion per year through 2025 – absorbing approximately 40 percent of the annual export receipts of goods. Rising oil prices pose an additional threat to Sri Lanka’s external position given oil imports represented 36.7 percent of the total export receipts of goods from January-May 2021.
The United States is the largest single market for Sri Lankan exports, totaling $2.5 billion, while U.S. exports to Sri Lanka were $495 million in 2020. As a result, the U.S. goods trade deficit with Sri Lanka was $2 billion in 2020.