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) was $84.5 billion and per capita GDP was $3,815 in 2021. Sri Lanka is currently facing its worst economic crisis since achieving independence in 1948. Due to severely low foreign exchange reserve levels, the country is experiencing critical shortages of fuel, cooking gas, medicine, fertilizer, and imported food items. In April 2022, the government announced the first sovereign default in Sri Lanka’s history. The government is in talks with the International Monetary Fund (IMF) for an Extended Fund Facility in what would be the country’s 17th IMF program, achieving a Staff Level Agreement in September. While negotiations are ongoing, the government has approached its bilateral partners for bridge financing to help secure critically needed imports. As of August, India provided over $3.5 billion in financial assistance to Sri Lanka to support imports of fuel and essential supplies.
According to the Central Bank of Sri Lanka (CBSL), the Sri Lankan economy grew by 3.7 percent in 2021 as the country’s economy recovered from the COVID-19 pandemic, but is expected to contract by 7.8 percent in 2022 due to the current economic crisis. The performance of the external sector remained subdued in 2021. Earnings from merchandise exports reached $12.50 billion, compared to $10.05 billion recorded in 2020. Despite achieving an export growth of over 20 percent, a higher increase in merchandise imports outpaced the growth in exports and served to widen the trade deficit from $6 billion in 2020 to $8.1 billion in 2021.
Remittances from migrant workers, traditionally a significant source of foreign exchange for the country totaling approximately $7.1 billion in 2020, reached a 10-year low of $5.5 billion after experiencing a sharp decline in 2021. Tourism, another key source of foreign exchange, was a $4.4 billion industry at its peak of 2.3 million tourist arrivals in 2018, but only recorded revenues of about $500 million in 2021.
Foreign direct investment (FDI) into Sri Lanka increased to $784 million in 2021, in comparison to $670 million in 2020, after decreasing from $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 economic recovery plan.
The government’s economic goals include: positioning Sri Lanka as an export-oriented economic hub at the center of the Indian Ocean; improving trade logistics; attracting export-oriented FDI; and boosting firms’ abilities to compete in global markets.
In the wake of Sri Lanka’s first-ever sovereign default, the three major credit rating agencies downgraded the country’s debt rating: Standard & Poor’s credit rating for Sri Lanka stands at Selective Default (SD), Moody’s credit rating for Sri Lanka stands at Ca (the agency’s second to lowest rating) with the outlook stable, and Fitch’s credit rating for Sri Lanka was last reported at Restricted Default (RD). The government is currently in negotiations with the IMF and creditors for debt relief, talks which could go well into 2023. Sri Lanka’s default status and credit rating situation limits the government’s ability to issue sovereign guarantees for major projects and prevents it from accessing international markets. The Central Bank of Sri Lanka floated the rupee in March, before implementing a “managed float” in May, and the currency has depreciated about 80 percent since, driving rising inflation that is increasing poverty levels and poses an additional threat to Sri Lanka’s external position.
The United States is the largest single market for Sri Lankan exports, totaling $2.5 billion, while U.S. exports to Sri Lanka were $389 million in 2021. As a result, the U.S. goods trade deficit with Sri Lanka was $2.5 billion in 2021.
Political & Economic Environment: State Department’s website for background on the country’s political environment.