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Economic Overview

Sri Lanka has experienced strong and sustained growth since the end of the conflict between the government and the Tamil Tigers in 2009. Nevertheless, in recent years, a catastrophic economic and humanitarian crisis has struck the country, with the economy grappling with significant challenges: a severe recession amid high inflation, depleted reserves, and an unsustainable public debt, exacerbated by a series of external shocks. The crisis can be traced back to pre-existing vulnerabilities and policy missteps that occurred prior to its onset. Following the loss of access to international financial markets in 2020, official reserves sharply declined, leading to a forex liquidity constraint and severe shortages of essential goods. In April 2022, the country declared an external debt service suspension pending debt restructuring. The economy experienced a total contraction of 9.5% during 2022 and 2023, while public and publicly guaranteed debt surged to 119.2% of GDP in 2022 amidst high inflation (46.4% annual average in 2022) and a steep currency depreciation (81.2% year-on-year, 2022). In 2023, the economy shrank by 2.3%, despite growth in the third and fourth quarters at 1.6% and 4.5% year-on-year respectively, marking the end of six consecutive quarters of contraction. This decline was primarily due to reductions in construction, mining, financial and IT services, and textile manufacturing, driven by weak demand, limited private credit availability, and input shortages. However, growth was observed in transportation, accommodation, food, and beverage services, fueled by a resurgence in tourism. Future growth hinges on progress in debt restructuring and ongoing structural reforms. Fiscal adjustments, mainly reliant on revenue, may further reduce disposable incomes, dampen demand, and hinder short-term growth. Despite a modest recovery, it is unlikely to offset welfare losses from the crisis, and poverty rates are expected to remain above 22% until 2026.

Recent structural reforms, such as implementing cost-reflective utility pricing and introducing new revenue measures, contributed to macroeconomic stability but put pressure on household budgets. Domestic debt restructuring concluded in September 2023, and negotiations with external creditors are ongoing. In March 2024, a Staff Level Agreement was reached between authorities and International Monetary Fund staff for the second review of the Extended Fund Facility program, for a total amount of about USD 3 billion. Key reforms targeting debt, fiscal management, trade, investment, and State-Owned Enterprises (SOEs) are making progress. In 2023, the current account posted its first surplus since 1977, fueled by a sharp rebound in remittances and tourism, coupled with restrained imports. Despite a positive primary balance resulting from increased revenue and SOE repayments, a significant surge in interest payments led to a considerable fiscal deficit. Interest payments accounted for roughly three-quarters of total revenue collected. Additionally, the continued external debt service suspension, inflows from development partners, significant foreign exchange purchases, and deferred repayments on existing credit lines bolstered usable official reserves to around two months of imports. While the primary deficit is anticipated to decrease further, the overall fiscal balance is forecasted to remain elevated in 2024, primarily due to the substantial interest payments. Debt restructuring efforts and ongoing fiscal consolidation are expected to gradually reduce the overall fiscal balance in the medium term. Inflation remained mild, stabilizing at single-digit levels by July 2023, buoyed by currency appreciation and enhanced supply. However, it is expected to increase moderately in the short term, driven by new revenue measures and diminishing favorable base effects, yet maintaining a benign outlook in the medium term due to subdued demand.

The country has been classified as a middle-income economy by the IMF since 2010. According to the latest figures from the World Bank, labor force participation dropped from 49.8% to 48.8% between 2022 and the third quarter of 2023, notably in urban regions. Facing reduced incomes and price pressures, households resorted to risky coping methods, such as dipping into savings, increasing debt, and cutting back on food consumption. Food insecurity escalated in the latter half of 2023, affecting 24% of households. In recent years, food insecurity and malnutrition have surged, with poverty doubling and inequality widening. Around 60% of households saw income declines as a result of reduced work hours or job losses, and poverty is estimated to remain above 22% until 2026. In 2023, the unemployment rate increased to 6.6% (from 6.2% one year earlier), whereas the GDP per capita (PPP) stood at USD 14,410 (data World Bank).

 
Main Indicators 20222023 (E)2024 (E)2025 (E)2026 (E)
GDP (billions USD) 74.850.000.000.000.00
GDP (Constant Prices, Annual % Change) -7.80.00.00.00.0
GDP per Capita (USD) 3,3420000
General Government Gross Debt (in % of GDP) 115.50.00.00.00.0
Inflation Rate (%) n/a0.00.00.00.0
Unemployment Rate (% of the Labour Force) 5.30.00.00.00.0
Current Account (billions USD) -0.740.000.000.000.00
Current Account (in % of GDP) -1.00.00.00.00.0

Source: IMF – World Economic Outlook Database , October 2021

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) 25.7 27.9 46.4
Value Added (in % of GDP) 8.7 30.3 56.1
Value Added (Annual % Change) -4.6 -16.0 -2.0

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 accounts for 47% of GDP (World Bank, latest data available). 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 tea (9.6%), women's or girls' slips, petticoats, briefs (5.2%), brassieres, girdles, corsets, braces, suspenders (4.8%), t-shirts, singlets, and other vests, knitted (4.8%), and women's or girls' suits, ensembles, jackets (3.9%), with textiles as a whole being the main commodity group. Its main imports include petroleum oils and oils obtained from bituminous (19.2%), fabrics, knitted or crocheted (5.7%), medicaments (2.1%), and coal (1.8% - data Comtrade 2022).

Sri Lankan exports are directed mainly towards the United States (25.5%), the United Kingdom (7.4%), India (6.7%), Germany (5.8%), and Italy (5.0%); whereas imports come chiefly from India (26.4%), China (20.0%), United Arab Emirates (5.5%), Malaysia (5.2%), and Singapore (4.2% - data Comtrade 2022). The country’s trade policy aims to strengthen access to 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 demanded a review of the deal after 10 years, to which China did not agree). Therefore, negotiations are currently at a stalemate. For a list of FTAs signed by Sri Lanka, click here. 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 2022, merchandise imports reached USD 18.3 billion (-11.3% y-o-y), while exports totaled USD 13.1 billion, marking an increase of 4.8% (WTO). With the recovery of the tourism industry, the country became a net service exporter: in 2022, it imported USD 2.8 billion worth of services, against USD 3 billion in exports. According to the World Bank, in the same year, the country’s trade deficit shrank to 3.6% of its GDP, from 7.4% one year earlier. According to figures from the national Export Development Board, in 2023, Sri Lanka's total exports amounted to USD 14.94 billion, comprising merchandise exports (USD 11.85 billion) and estimated service exports (USD 3.08 billion). This represented a marginal decline of 0.39% compared to the previous year's value of USD 14.99 billion. The estimated increase in service exports was approximately 63%. Merchandise exports for the period of January to December 2023 declined by 9.54%, amounting to USD 11,856.3 million compared to the same period in 2022.

 
Foreign Trade Values 20192020202120222023
Imports of Goods (million USD) 19,93716,05520,63718,29116,811
Exports of Goods (million USD) 11,94010,04712,49913,10711,911
Imports of Services (million USD) 6,6193,8212,9522,7823,333
Exports of Services (million USD) 7,4743,0352,4753,0624,981

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

Foreign Trade Indicators 20182019202020212022
Foreign Trade (in % of GDP) 49.849.437.041.346.5
Trade Balance (million USD) -10,343-7,997-6,008-8,139-5,185
Trade Balance (Including Service) (million USD) -6,577-5,148-5,189-6,552-3,075
Imports of Goods and Services (Annual % Change) 3.3-3.5-20.14.1-19.9
Exports of Goods and Services (Annual % Change) 5.41.7-29.610.110.2
Imports of Goods and Services (in % of GDP) 28.427.621.624.325.0
Exports of Goods and Services (in % of GDP) 21.421.815.416.921.5

Source: World Bank ; Latest available data

Foreign Trade Forecasts 20232024 (e)2025 (e)2026 (e)2027 (e)
Volume of exports of goods and services (Annual % change) 0.00.00.00.00.0
Volume of imports of goods and services (Annual % change) 0.00.00.00.00.0

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)
2023
United States 23.2%
United Kingdom 7.1%
India 7.1%
Germany 5.0%
United Arab Emirates 3.2%
See More Countries 54.3%
Main Suppliers
(% of Imports)
2023
India 19.5%
China 18.9%
United Arab Emirates 9.5%
Singapore 5.3%
Malaysia 4.5%
See More Countries 42.2%

Source: Comtrade, Latest Available Data

 

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