Country Report Sri Lanka July 2009

Summary

All the remaining territory held by the Liberation Tigers of Tamil Eelam (Tamil Tigers) was retaken by the Sri Lankan armed forces in May 2009, spelling the end of the insurgency. Security risks will thus decrease sharply in 2010.
Isolated attacks and ethnic tensions will remain a problem. 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 People's Freedom Alliance is set to make big gains.
Real GDP growth is forecast to slow to 2.9% in 2009, before accelerating again, to 5.9%, in 2010. Shrinking external demand will be partly offset by the positive impact on the domestic economy of an improvement in security.
Imports will fall in 2009, owing to plunging investment spending, a decline in imports of raw materials for export processing and the lower cost of imported commodities. The current-account deficit will narrow to 2.7% of GDP this year.
The drop in imports will negatively affect fiscal inflows. Combined with the government's reluctance to rein in spending, this will see the budget deficit widen to 9% of GDP in 2009 and narrow only moderately, to 7.8%, in 2010.

The fiscal deficit reached SLRs153.9bn in January-March 2009, up from SLRs75.8bn in the same period of 2008.
A government minister has proposed abolishing the next presidential election and extending the term of the incumbent, Mahinda Rajapakse, to save money, but his comments do not appear to have official government backing.
The Central Bank of Sri Lanka (CBSL) has cut the repurchase (repo) rate by 50 basis points, to 8.5%, and has reduced the reverse repo rate by the same amount, to 11%. The bank's move came as inflation fell to just 0.9% in June.
The CBSL has accepted bids worth US$115.8m for an issue of two-year Sri Lanka Development Bonds. The move has been seen as a sign of improving investor confidence in Sri Lanka, but the interest rate paid will be high.
In January-April imports contracted by a massive 36.9% year on year, to US$2.9bn. Exports also dropped, falling by 16.2% to US$2.1bn, taking the merchandise trade deficit for the first four months of 2009 to US$806m.
There was a US$1.2bn net inflow of remittances in January-April.

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