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Economic Overview

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

Sri Lanka has experienced strong and sustained growth in recent years since the end of the conflict between the government and the Tamil Tigers in 2009. After growing 2.3% in 2019, the country’s GDP contracted by an estimated 3.6% in 2020 due to the global COVID-19-induced crisis (IMF and the Department of Census and Statistics), which prompted a decline in both external and internal demand, as well as in tourism activities (the sector accounts for one-tenth of GDP and had already suffered after the Easter 2019 terrorist attacks). As the situation stabilized in 2021, the IMF forecast of a rebound of 3.6% verified itself. Growth should reach 3.3% in 2022 and 3.9% in 2023 subject to the post-pandemic global economic recovery.

With a wide deficit, Sri Lanka’s public finances should remain weak and, thus, face tighter external financing conditions. Public debt is sky high and weighs on the budget: over 70% of government revenues were spent on interest payments in the first half of 2021 (Coface, 2022). The adverse situation caused public finances to further deteriorate in 2020, bringing the budget deficit to an estimated 8.8% (from 6.9% one year earlier), despite a USD 800 million (1% of GDP) grant received from the IMF under the Rapid Credit Facility. The reforms implemented by the government in recent years to improve public accounts are expected to be postponed temporarily because of the ongoing crisis. Presenting Sri Lanka's 2022 budget in November 2021, the country's Finance minister announced that the government would cut its budget deficit to around 8.8% of gross domestic product in 2022. The deficit target for 2021 was revised to 11.1% (Reuters, 2021).

Debt-to-GDP ratio increased to 100.1% in 2020, from 86.8% in 2019. Half of it is denominated in foreign currencies and therefore exposes the country to the risk of depreciation, with the IMF forecasting an increase to 107.7% by 2022. Inflation – at 4.6% in 2020 - reached 5.1% in 2021 and is expected to remain high (6.3% in 2022 and 6.5% in 2023) due to rising demand and import controls, which reduce competition in the domestic market (IMF, 2022). The political situation is still very unstable: nationalist Gotabaya Rajapaksa won the November 2019 presidential elections, and his party also obtained the majority in the parliamentary elections of August 2020. In October, the parliament approved a reform strengthening most of the constitutional powers of the president, which caused concerns among ethnic minorities.

The country has been classified as a middle-income economy by the IMF since 2010. The COVID-19 crisis caused a spike in unemployment, with the rate going up to 8.4% in 2020 from 4.8% one year earlier. Unemployment remained high in 2021 and weighted on household consumption (70% of GDP). Youth Unemployment rate in Sri Lanka increased to 30% in the second quarter of 2021 from 28.10% in the first quarter of 2021 (Department of Census and Statistics - Sri Lanka, 2022). In recent years, Sri Lanka’s record of poverty reduction has been encouraging. The poverty headcount rate fell from about 22.7% in 2002 to 4.1% in 2016 (Asia Development Bank, latest data available). The country’s poverty - at $3.20 per day poverty line - was projected to reach 10.9% in 2021, which was still significantly above the 2019 level of 9.2 percent (World Bank, 2021). However, living standards remain low and pockets of severe poverty persist. Additionally, poverty rates are disproportionately high for vulnerable groups such as youth and ethnic minorities; and unemployment is high for youth and women. Still, the country’s 21.9 million inhabitants have achieved some of the best human development results in South Asia. The literacy rate in 2019 was close to 100% and the country’s life expectancy is the highest in the region. Low mortality rates and the steadily declining population growth, reflect the country’s progress in the sphere of social development. However, the social and economic situation of the Tamil community remains largely unequal to that of the Sinhalese, and ethnic tensions have been on the rise in recent years.

 
Main Indicators 201920202021 (e)2022 (e)2023 (e)
GDP (billions USD) 83.98e80.7080.7983.3288.91
GDP (Constant Prices, Annual % Change) 2.3-3.6e3.63.33.9
GDP per Capita (USD) 3,852e3,682e3,6663,7603,991
General Government Gross Debt (in % of GDP) 86.8101.2e109.3111.4111.9
Inflation Rate (%) 4.34.65.16.36.5
Unemployment Rate (% of the Labour Force) 4.85.5e5.35.15.0
Current Account (billions USD) -1.85-1.08e-2.56-2.43-2.19
Current Account (in % of GDP) -2.2-1.3e-3.2-2.9-2.5

Source: IMF – World Economic Outlook Database , October 2021

Note: (e) Estimated Data

Country Risk

See the country risk analysis provided by La Coface.

 

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Main Sectors of Industry

Breakdown of Economic Activity By Sector Agriculture Industry Services
Employment By Sector (in % of Total Employment) 25.0 27.9 47.2
Value Added (in % of GDP) 8.4 26.2 59.7
Value Added (Annual % Change) -2.4 -6.9 -1.5

Source: World Bank - Latest available data.

 
Monetary Indicators 20162017201820192020
Sri Lanka Rupee (LKR) - Average Annual Exchange Rate For 1 USD 145.58152.45162.46178.70185.52

Source: World Bank - Latest available data.

 

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Foreign Trade

Sri Lanka is relatively open to international trade, which accounted for 40% of GDP in 2020 (World Bank, 2022). Nonetheless, its share in GDP has declined almost continuously in the last 20 years after peaking at 88.6% in 2000. The country mainly exports textiles and garments (over 40% of total exports in 2020), tea (11.3%), rubber products (over 7%), and refined petroleum (2.1%). Its main imports include refined petroleum (7.9%), textile and textile articles (over 14%), ande crude petroleum with 2.4% (OEC, 2022). In 2020, the COVID-19-led global crisis took its toll on the Sri Lankan international trade too, with exports falling an estimated 19.9% and imports dropping by 13.2% (IMF). As the conjuncture is expected to gradually improve during 2021, both exports and imports should rebound (+33% and +24.1%, respectively).

Sri Lankan exports are directed towards the U.S. (23% of all exports), the United Kingdom (8.1%), India (6.5%), Germany (6%) and Italy (4.1%); whereas imports come chiefly from China (24.7% of all imports), India (20.5%), the U.A.E. (5.7%), Malaysia (4.2%) and Singapore (4%). The country’s trade policy aims to strengthen access for Sri Lankan products on the international market. As such, the Government has signed several bilateral and multilateral trade agreements, especially at the regional level. China and Sri Lanka have been negotiating a free trade agreement. However, while China has been pushing to reach a deal, Sri Lanka stated that they want more time to negotiate the agreement, as the Government is concerned about the economic impact of a rushed deal on its economy (Sri Lanka had demand for a review of the deal after 10 years, to which China did not agree). Therefore, negotiations are currently in a stalemate. Sri Lankan exports have been traditionally less competitive than those of other countries in the region such as Bangladesh and Vietnam due to higher minimum wage rates. Nevertheless, a rapid fall in the value of the Sri Lankan rupee and a minimum wage hike for the workers of the garment industry in Bangladesh and Vietnam helped to level the playing field.

Sri Lanka has a structural trade deficit. In 2020, merchandise imports reached 16.2 billion USD, while exports totalled 11.3 billion USD (OEC, 2022) resulting in a deficit of 4.9 billion USD.

More recently, Sri Lanka’s trade deficit widened to USD 1089 million in January of 2022 from USD 562 million a year ago. Imports surged 46.8% from a year earlier to a record high of USD 2241 million, on higher purchases of intermediate goods (58.2%), namely fuel (88.2%), textiles and textile articles (27%) and base metals (457%). Also, shipments rose for consumer goods (28%), in particular medical and pharmaceutical products (133.7%) and investment goods (36.1%), namely machinery and equipment (45.7%). Meanwhile, exports rose by a softer 20 percent to USD 1156 million, boosted by sales of industrial products (21.3%), mainly textiles and garments (18%), agricultural products (14.3%) and minerals with 8.8% (Central Bank of Sri Lanka, 2022).

 
Foreign Trade Values 20162017201820192020
Imports of Goods (million USD) 19,19020,98022,23319,93716,055
Exports of Goods (million USD) 10,34011,36011,89011,94010,047
Imports of Services (million USD) 6,1996,4516,7566,5423,914
Exports of Services (million USD) 7,1387,7268,3407,4533,009

Source: World Trade Organisation (WTO) ; Latest available data

Foreign Trade Indicators 20162017201820192020
Foreign Trade (in % of GDP) 49.650.953.552.439.5
Trade Balance (million USD) -8,873-9,619-10,343-7,997n/a
Trade Balance (Including Service) (million USD) -5,994-6,317-6,577-5,148n/a
Imports of Goods and Services (Annual % Change) 7.97.11.8-5.8-11.4
Exports of Goods and Services (Annual % Change) -0.77.60.57.2-9.6
Imports of Goods and Services (in % of GDP) 28.529.130.529.322.9
Exports of Goods and Services (in % of GDP) 21.221.823.023.116.6

Source: World Bank ; Latest available data

Foreign Trade Forecasts 20212022 (e)2023 (e)2024 (e)2025 (e)
Volume of exports of goods and services (Annual % change) 9.022.010.76.94.6
Volume of imports of goods and services (Annual % change) 3.115.28.25.64.5

Source: IMF, World Economic Outlook ; Latest available data

Note: (e) Estimated Data

 
International Economic Cooperation
Member of South Asian Association for Regional Cooperation (SAARC). The country have signed a trade agreement with 21 other countries in the São Paulo Round of the Global System of Trade Preferences among Developing Countries (GSTP).
 

Main Partner Countries

Main Customers
(% of Exports)
2020
United States 24.8%
United Kingdom 8.9%
India 6.1%
Germany 5.7%
Italy 4.5%
See More Countries 50.0%
Main Suppliers
(% of Imports)
2020
China 22.9%
India 19.3%
United Arab Emirates 5.7%
Malaysia 4.1%
Singapore 4.0%
See More Countries 44.1%

Source: Comtrade, Latest Available Data

 

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