Country Report Sri Lanka May 2009

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 mid-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.
• Speculation about an early parliamentary election has risen following the early dissolution of a number of provincial councils. The ruling United Peoples Freedom Alliance (UPFA) will make gains if elections are held soon.
• Real GDP growth will slow to 2.5% in 2009, before accelerating again, to 5.7%, in 2010. Shrinking external demand will be partly offset by the positive impact that improving security will have 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 6.3% in 2009 and 7% in 2010.
• Imports will fall in 2009, owing to falling investment spending, a drop in imports of raw materials for export processing and the lower cost of imported commodities. The current-account deficit will narrow to 2% of GDP this year.
• We believe that Sri Lankas economic outlook is subject to downside risks. The exchange rate remains an area of particular concern.

Monthly review

• Tens of thousands of civilians fled the tiny strip of land still held by the LTTE in April when the government breached the Tigers' defences.
• A UN document claimed that over 6,400 civilians had been killed since the end of January in the conflict in the north of the island.
• Foreign concerns over the plight of civilians may be holding up an IMF support facility for Sri Lanka. The Sri Lankan rupee slid in April due to worries about the package's prospects.
• The UPFA won a convincing victory in a local election in Western province, defeating the main opposition United National Party in one of its strongholds.
• Inflation dropped to 2.9% in April, from 5.3% in March, prompting the Central Bank of Sri Lanka to loosen monetary policy.
• The merchandise trade deficit shrank to US$262m in January-February, from US$937m in the year-earlier period.

This report covers the following industry codes:
SIC Code: 48;10;15
NAICS Code: 517;212;23