Country Report Sri Lanka June 2008

Outlook for 2008-09

• Conflict will remain intense as the government pursues a military campaign against the rebel Liberation Tigers of Tamil Eelam (LTTE, Tamil Tigers). The frequency of LTTE attacks, including those on civilian targets, will rise.
• Peace negotiations will make little headway despite the professed support of the opposition United National Party for the government's plans to devolve more authority to provincial councils.
• The president, Mahinda Rajapakse, and his brothers will continue to dominate the government. The United People's Freedom Alliance administration is expected to remain in power in 2008-09.
• As both domestic and external demand are cooling, real economic growth will slow to 4% in 2008 from 6.8% in 2007, before recovering to 4.5% in 2009.
• Consumer price inflation is expected to remain rapid, averaging 21.1% in 2008 before easing to 12.2% in 2009 as global oil and food price pressures recede.
• High oil prices will force the current-account deficit up, reaching the equivalent of 5.7% of GDP in 2008 and 4.9% in 2009.
• Partly owing to the strength of remittances, and partly to government policy, the Economist Intelligence Unit now expects the local currency to appreciate by an average of 2.1% in 2008.
• We believe that Sri Lanka's economic outlook faces strong downside risks—the exchange rate and investment growth are areas of particular concern.

Monthly review

• Year-on-year consumer price inflation reached 26.3% in May, the fastest in Asia.
• A former insurgent, Sivanesathurai Chandrakanthan (known as Pillayan), has been sworn in as chief minister of the Eastern province, following his party's success in recent provincial elections.
• Attacks by the LTTE on civilian targets, particularly buses and trains, have continued in May and June, leaving many dead.
• From June 2nd commercial banks have been allowed to raise deposits from foreign investors.
• High global oil prices helped to push the trade deficit for the first quarter of 2008 to US$1.4bn.
• Tourist arrivals in the first four months of 2008 contracted by 1.4% year on year, owing to the poor security situation.

Source: Country Report