Country Report Sri Lanka March 2010

Outlook for 2010-11

• The incumbent, Mahinda Rajapakse, was re-elected as president in January 2010, but the arrest of the defeated candidate, General Sarath Fonseka, raises the prospect of rising authoritarianism and associated political instability.
• The ruling United People's Freedom Alliance (UPFA) is set to make big gains in the parliamentary election that is due to be held in April 2010. It may obtain the two-thirds majority that would allow it to change the constitution.
• Although the island's civil war ended in May 2009, Tamil separatism will remain a threat and isolated incidents of violence could occur.
• The ending of the war has seen the return of consumer and business confidence, and also tourists. This, along with post-conflict reconstruction, should help real GDP to grow by an average of 6.2% a year in 2010-11.
• An assistance package from the IMF has underpinned a surge in international investment inflows. If these continue, Sri Lanka should be able to fund a current-account deficit that will average 3.7% of GDP in 2010-11.
• The Economist Intelligence Unit believes is it likely that Sri Lanka and the IMF will clash over the country's failure to meet fiscal deficit reduction targets. We expect the deficit to narrow, but only to 8.6% of GDP in 2010 and 7.7% in 2011.

Monthly review

• Parliamentary elections will be held on April 8th. The chances that the government will win a two-thirds majority have been boosted after a decision by two main opposition parties to campaign separately.
• The IMF has announced it will hold off releasing new funds to Sri Lanka until after the election.
• Textile and garment exports dropped by 5.6% year on year to US$3.3bn in 2009, a respectable performance amid the global economic downturn.
• Garment exports to the US performed less impressively than those to the EU. Given this, the EU's decision to withdraw privileged access to its markets for Sri Lankan products from April 15th 2010 will have negative repercussions.
• The government announced plans to invest SLRs295bn (US$2.6bn) in Northern province under a programme known as Vadakkin Vasantham. A further SLRs3bn in credit will be provided to small businesses in the region.
• Sri Lanka's tea production fell by 9% in 2009 to 289.8m kg, owing largely to poor weather conditions. Tea exports also dropped by 9%, but earnings from tea exports decreased by just 1% to SLRs137bn.

This report covers the following industry codes:
SIC Code: 70;15;22
NAICS Code: 72;23;1;313

• Highlights
• Outlook for 2010-11: Domestic politics
• Outlook for 2010-11: International relations
• Outlook for 2010-11: Policy trends
• Outlook for 2010-11: Fiscal policy
• Outlook for 2010-11: Monetary policy
• Outlook for 2010-11: International assumptions
• Outlook for 2010-11: Economic growth
• Outlook for 2010-11: Inflation
• Outlook for 2010-11: Exchange rates
• Outlook for 2010-11: External sector
• Outlook for 2010-11: Forecast summary
• The political scene: Record numbers will contest the parliamentary election
• The political scene: The opposition cannot hold together
• The political scene: General Fonseka's arrest stirs up trouble
• Economic policy: Access to GSP trade privileges is formally suspended
• Economic policy: The government allocates funds for rebuilding the north
• Economic policy: The IMF holds off on new funding
• Economic performance: The tea industry had a poor 2009
• Economic performance: Banks are expanding steadily into the north and east
• Economic performance: Apparel exporters have mixed fortunes in the EU and the US
• Data and charts: Annual data and forecast
• Data and charts: Quarterly data
• Data and charts: Monthly data
• Data and charts: Annual trends charts
• Data and charts: Monthly trends charts
• Data and charts: Comparative economic indicators
• Basic data
• Political structure