Country Report Sri Lanka December 2008

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 the end of 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.
• The president, Mahinda Rajapakse, and his brothers will continue to dominate the government. The United Peoples Freedom Alliance (UPFA) administration is set to secure re-election in the 2010 parliamentary election.
• Real GDP growth will slow to 4% in 2009, before accelerating again, to 5.2%, in 2010. Weak 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 rapid, despite weakening global food and oil price pressures. The Economist Intelligence Unit forecasts that inflation will average 12.9% in 2009 and 7.4% in 2010.
• Weaker apparel exports will see the current-account deficit remain high, at 4.9% of GDP in 2009 and 5% in 2010.
• We believe that Sri Lankas economic outlook is subject to strong downside risks. The exchange rate and investment growth are areas of particular concern.

Monthly review

• The army claimed to have taken control of the A32 highway and the whole of the western coast in November, opening up new supply routes to Jaffna and closing off a supply route for arms for the LTTE.
• The Tamil Makkal Viduthalai Pullikal (TMVP), the dominant party in Eastern province, has withdrawn from talks on a political settlement to the island's ethnic tensions in protest at a spate of violent incidents in the east.
• The TMVP has itself been accused of human rights abuses by a US-based advocacy group, Human Rights Watch.
• The EU has delayed until mid-2009 a decision on whether to withdraw Sri Lanka's access to preferential trade advantages in reaction to human rights abuses.
• Year-on-year consumer price inflation fell to 16.3% in November, down from 20.2% in October, owing to falling commodity prices.
• Tourist arrivals were down by 9.1% year on year in January-October, at 352,649.

This report covers the following industry codes:
SIC Code: 49;65;60;70
NAICS Code: 22;53;52;72