Country Report Sri Lanka June 2009

Summary

All the territory held by the Liberation Tigers of Tamil Eelam (LTTE, or 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 party, United Peoples Freedom Alliance (UPFA), is set to make big gains.
Real GDP growth is forecast to slow to 2.7% in 2009, before accelerating again, to 5.9%, in 2010. Shrinking external demand will be partly offset by the positive impact of an improvement in security on the domestic economy.
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 6.4% in 2009 and 8.6% in 2010.
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 2.3% of GDP this year.

In the last stages of the military's campaign against the LTTE, in May, virtually the entire top leadership of the Tamil Tigers appears to have been wiped out, including their leader, Veulipllai Prabhakaran.
The UN Human Rights Council voted 29-12 for a motion supportive of the Sri Lankan government, and saw off a more hostile motion backed by many EU countries that are concerned about recent human rights abuses in Sri Lanka.
Total government revenue fell by 11.7% year on year in January-February 2009, to SLRs90.8m (US$778,728). Recurrent expenditure rose by 27.1% year on year, to SLRs163.1m.
Apparel exports were up by 8.8% year on year to US$801.3m in the first quarter of 2009. Sales to Europe rose impressively, as the threatened suspension of Sri Lanka's preferential access to EU markets failed to materialise.
Tea exports were less impressive, falling by 41% year on year to 48.4m kg, as bad weather and low levels of fertiliser application last year hurt output.
The stockmarket surged in the wake of the announcement of the end of the civil war, providing a boost to the financial sector. The declaration also led to renewed inflows of foreign investment, supporting the Sri Lanka rupee.

This report covers the following industry codes:
SIC Code: 1;60
NAICS Code: 11;52