Country Forecast Sri Lanka August 2017 Updater

Country Forecast Sri Lanka August 2017 Updater

  • August 2017 •
  • Report ID: 1698177 •
  • Format: PDF


  • The Economist Intelligence Unit expects the government-a coalition between the two largest parties (and traditional rivals), the United National Party and the Sri Lanka Freedom Party (SLFP)-to implement political and economic reforms despite significant ideological differences.
  • Despite major political obstacles, we expect the coalition to be successful in drafting a new constitution that will be adopted via a national referendum in 2018. We believe that this will trigger an early parliamentary election in that year, which will be fiercely contested.
  • The president and de facto head of the SLFP, Maithripala Sirisena, will be unable to exert full authority over his party because of internal rifts. We expect a new party, the Sri Lanka Podujana Peramuna (Sri Lanka People's Front), operating on a platform of economic populism and Sinhalese nationalism, to pose a significant challenge to the SLFP at the next local election.
  • Despite some improvements, ties between the Sinhalese-Buddhist majority and the Tamil, Muslim and Christian minorities will remain strained. Efforts to strengthen minority groups' rights could lead to temporary social tensions.
  • Even as it faces major political challenges, the administration will make progress on implementing IMF-mandated economic reforms in the early part of the forecast period. However, resistance from vested interest groups within state-owned enterprises will limit the prospects for privatisation initiatives.
  • Real GDP will rise by 4.9% a year in 2017-21. Droughts and landslides will weigh on economic activity in 2017, and weak global growth will hurt Sri Lanka's economic prospects in 2018-19. Growth will start to accelerate from 2020 as the external outlook brightens and exports pick up noticeably.
  • In early 2017 the Central Bank of Sri Lanka announced that it would adopt a new exchange-rate and inflation-targeting framework. We believe that this policy change is credible and will result in the currency depreciating from a forecast average of SLRs154.1:US$1 in 2017 to SLRs177:US$1 by 2021. We expect consumer price inflation to average 5.1% a year in 2017-21.
  • Despite the implementation of an IMF programme, the country will face major macroeconomic risks resulting from twin deficits on the fiscal and current accounts, as well as relatively low international reserves. Surpluses on the secondary and services account (related to the rapidly expanding tourism sector) will be insufficient to cover a widening merchandise trade deficit over 2017-21.


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