Sri Lanka economy snapshot

2020

Updated March 2021

Growth

Sri Lanka's economic growth fell to a 18-year low in 2019

Sri Lanka’s real GDP growth rate stood at 3.2% in 2019, down from 3.3% in 2018, with growth now having fallen for four consecutive years to an 18-year low. The country’s low growth rate is due to a stalling of its manufacturing engine, which has itself seen markedly low growth over the past two decades. While construction booms helped boost economic growth from 2002 to 2012, long-term growth prospects warrant little optimism in absence of a revival in the manufacturing sector.

Low growth has seen GDP per capita fall for the first time in decades

Living standards fell in Sri Lanka for the first time since 2001 as measured by GDP per capita data, which showed a decline from $4,081 in 2018 to $3,853 in 2019. The drop comes in the context of weak economic growth over the past 5 years, and contrasts GDP per capita trends in other developing countries.

Equities

Sri Lankan equities have underperformed compared to equities in the rest of the world

Sri Lankan equities gained a mere 0.5% in $ terms in 2019. Equities are still down 40% from where they were 5 years ago, while emerging markets and frontier markets have fared much better over the same period. The sharpest contrast is perhaps with Vietnam, which has had one of the best performing equity markets over the past 3 years.

Balance of payments

A persistent trade deficit has crippled Sri Lanka's current account for decades

Continuous deficits on the trade account over the past two decades have dragged down the current account balance in spite of high transfers and a recent surge in tourist earnings. With the latter now in doubt, and weak capital inflows, pressure is building on Sri Lanka’s foreign exchange reserves. It comes as no surprise that the government has once again turned to import controls to stem the outflow of foreign currency as it did in the 1970s, but the underlying problems remain.

Low-value added production has led to weak export growth

At the heart of Sri Lanka’s trade- and current account weaknesses is the country’s weak export growth. Sri Lanka’s export dynamism has deteriorated steadily after initial attempts to industrialise in the 1980s and 90s, which is the reason why the economy still has something of a manufacturing base. The problem is, that it is almost entirely for the production of goods related to textiles and garments, which are low value-added goods. Together with the country’s reliance on agricultural exports, the lack of value added in production and absence of diversification means Sri Lanka cannot hope to see a significant improvement of its trade balance in the near-term.

Current account weakness plagues those who export low value-added products

Sri Lanka is not alone with its current account issues. Other countries that have chosen to export low value-added goods have experienced the same type of weakness, in stark contrast with those exporting higher value-added goods. Most notable in the latter category is of course China, but also the East Asian success stories that came before China such as South Korea, Singapore and Malaysia. A more recent success story is that of Vietnam, where a shift to higher value-added goods around 2010 pulled the country’s perpetual trade- and current account deficits to steady surpluses of around 3-5% of GDP.

Sri Lanka's foreign debt servicing burden is higher than that of most of its Asian peers

To compensate for outflows on the trade account and avoid a foreign exchange crisis, Sri Lanka has increasingly turned to international markets to borrow. As a consequence, debt servicing has become a substantial burden on foreign exchange reserves.

Inflation