Country Report Sri Lanka October 2009

Outlook for 2010-11

• Despite the end of the civil war in May 2009, the risk of isolated attacks by Tamil separatists will remain and ethnic tensions will continue to simmer. Nevertheless, the threat of terrorist violence will be much reduced in 2010-11.
• The government's plans to devolve power to Tamil regions will produce positive results only in the long term, if at all. The treatment of Tamils by security forces will attract international criticism.
• The ruling United People's Freedom Alliance will make big gains in the parliamentary election that will be held within the next year. It may obtain a two-thirds majority, allowing it to change the constitution.
• The end of the war has seen the return of consumer and business confidence (along with tourists). Coupled with post-conflict reconstruction and an export recovery, this should help real GDP growth to average 6.2% 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 2.8% of GDP in 2010-11.
• The Economist Intelligence Unit believes that there is a high chance that Sri Lanka and the IMF will clash over a failure to meet fiscal deficit reduction targets. We expect the deficit will reach 8.3% in 2010 and 7% in 2011.

Monthly review

• Sri Lanka's economy grew by 2.1% year on year in the second quarter of 2009, compared with growth of 1.5% in the first three months of the year.
• Growth was led by the agricultural sector, which expanded by 4.4% year on year. Services, the usual engine of growth, saw output rise by just 1.1%, while manufacturing output grew by only 3% owing to a fall in garment production.
• The IMF completed its first review under Sri Lanka's stand-by arrangement in September, giving a positive report and raising its economic growth forecast for 2009 to 3.5%, from 3%.
• In September the Central Bank of Sri Lanka cut the main policy rates, the repurchase (repo) rate and reverse repo rate, to 8% and 10.5% respectively. Consumer prices rose by just 0.7% year on year in the same month.
• Controversy has erupted over a video that purported to show soldiers summarily executing Tamils in early 2009. The government claims that the video is a fake.
• In September a Tamil journalist, J S Tissanayagam, became the first reporter to be jailed under the Prevention of Terrorism Act.

This report covers the following industry codes:
SIC Code: 22
NAICS Code: 313