Country Report Sri Lanka April 2009

Outlook for 2009-10

• The government is expected to regain control of all territory held by the rebel Liberation Tigers of Tamil Eelam (LTTE, Tamil Tigers) by mid-2009. The ethnic conflict will decrease in intensity in 2010.
• Unrest will continue in the Tamil community, and the LTTE will carry out further attacks on civilian and military targets. Government plans to devolve power to Tamil regions will produce results only in the long term, if at all.
• Speculation about an early parliamentary election has risen following the early dissolution of a number of provincial councils. The ruling United Peoples Freedom Alliance (UPFA) will make gains if early elections are held.
• Real GDP growth will slow to 2.6% in 2009, before accelerating again, to 5.7%, in 2010. Shrinking external demand will be partly offset by the positive impact that improving security will have on domestic demand.
• The rate of consumer price inflation is expected to remain fairly high, despite weakening global food and oil price pressures. The Economist Intelligence Unit forecasts that inflation will average 6.5% in 2009 and 7% in 2010.
• Imports will fall in 2009, owing to weaker investment spending, a drop in inputs of raw materials for export processing and the lower cost of imported commodities. The current-account deficit will fall to 2.3% of GDP this year.
• We believe that Sri Lankas economic outlook is subject to downside risks. The exchange rate remains an area of particular concern.

Monthly review

• The military claims to have confined the LTTE to the safe zone? near Mullaittivu in the north-east. There are concerns for the safety of civilians in the zone as the army prepares for a final blow against the rebels.
• The leader of the opposition United National Party, Ranil Wickremasinghe, appeared to have successfully fought off a challenge for his partys leadership in March.
• The Central Bank of Sri Lanka cut the penal rate of interest on reverse repurchase (repo) transactions by an additional 175 basis points to 14.75% in a further effort to persuade banks to increase lending.
• A Sri Lanka Development Bond issue by the government in March fell short of its target of raising US$200m, selling just US$184.3m in two-year bonds.
• New car registrations dropped by 7% to 20,935 in 2008, as high import duties and tightening credit conditions on car financing hit sales.
• The economy expanded by 6% in real terms in 2008, with strong agricultural growth offsetting a deceleration in export trade and manufacturing.

This report covers the following industry codes:
SIC Code: 60;37
NAICS Code: 52;336