16 May 2016
Sri Lanka: Market Profile
- Sri Lanka’s GDP growth eased to 4.8% in 2015, continuing the trend of moderation since 2013, which contrasted sharply with very rapid growth seen shortly after the civil war ended in 2009.
- In April 2016, Sri Lanka reached an agreement with the IMF on a three-year bailout package to avert a balance of payment crisis.
- Consumer price inflation increased marginally to 2.8% in 2015 from 2.1% in 2014, while the jobless rate increased to 4.6% in 2015 from 4.3% in 2014.
- Sri Lanka has drawn in massive Chinese investment and loans in infrastructure projects in recent years, including the Sri Lankan port in Hambantota and Colombo International Container Terminals and the Colombo Port City project. Yet, China’s cumulative FDI in Sri Lanka hit only US$355 million as at end-2013.
- Sri Lanka’s exports increased 4.5% in 2015, while imports recorded decreased by 1.5%. The trade deficit was US$8.5 billion in 2015.
- In 2015, Hong Kong's exports to Sri Lanka rose 4.8% to US$513 million, as imports fell 6.2% to US$131 million during the same period.
Current Economic Situation
Sri Lanka is a mid-sized country in South Asia in terms of GDP and population. After witnessing rapid GDP growth in the initial years after the civil war ended in 2009, the Sri Lankan economy has lost momentum since 2013, with GDP growth moderated to 4.8% amid lower exports and big capital outflows. Inflation remained moderate at 2.8% in 2015, with price pressure expected to be subdued amid low global commodity price.
In April 2016, Sri Lanka reached an agreement with the IMF on a three-year bailout package to avert a balance of payment crisis, as the debt-laden country suffered from heavy capital outflows from government bonds and high external debt payments. The IMF loan of US$1.5 billion is expected to be approved in June 2016, subject to Sri Lanka implementing reforms, particularly cutting its budget deficit. Sri Lanka's previous IMF programme ended in 2012. With the IMF programme, GDP projections for Sri Lanka will likely be revised downward given the adjustment that will negatively affect its economic performance in the short term.
In February 2016, Sri Lanka received a sovereign downgrade by Fitch, citing higher foreign debt, weaker public finances and dwindling foreign exchange reserves. In March 2016, Standard & Poor’s also downgraded the outlook for the country.
Services is the largest sector of the Sri Lankan economy, contributing to about 60% of GDP. Information technology, financial services and telecommunications are the main growth sectors, with double-digit growth reported in 2015. The industry sector accounts for about 26% of GDP. While sectors such as machinery and electricity have experienced decent growth in recent years, other sectors are facing challenges. Textiles and apparel, an important economic pillar, is stagnating. Besides, mining and construction sectors are suffering from delays in infrastructure projects. Agriculture contributes to only 8% of GDP, yet it employs about one-third of the country’s workforce.
Colombo along with the Western Province is Sri Lanka’s economic core, accounting for about 40% of GDP. In early 2016, the government announced the “Megapolis” project to boost development in this region, with a view to bringing Colombo on par with other major Asian cities. Finance, logistics, science and technology are the key industries under this initiative.
In 2015, the services sector reported a YoY growth of 5.5%, thanks to the robust performance of the IT, finance and telecom sectors. Agriculture and industry sectors expanded 5.5% and 3% in the same period respectively.
Sri Lankan exports increased by 4.5% in 2015. Two major export items, textiles and garments (46% share) and tea (13%) dropped by 2.2% and 17.7% respectively. Major export markets included the US, UK, EU, India and Russia.
In 2015, Sri Lankan imports dropped by 1.5% to US$19.1 billion. Major import items fuels, textiles and machinery and equipment. While fuel imports dropped by 41.2%, textile imports dropped marginally by 1.3%. Major import sources were India, China, Singapore, the UAE, and Iran. The trade deficit reached US$8.5 billion in 2015.
In order to promote FDI, the Sri Lankan government has set up the Board of Investment (BOI), which currently manages 12 industrial parks and export processing zones (EPZs) in the country. Tax incentives and duty-free facilitation are given to qualified foreign investors. There are nine key investment sectors identified by the government and special incentives are given to foreign-invested enterprises in these sectors, namely, tourism and leisure, infrastructure, knowledge service, utilities, apparel, export manufacturing, export services, agriculture and education. The BOI Chairman noted that there will be a strong push for FDI in 2016, with Board of Investment (BOI) plans a host of new methods including public-private partnerships for dozens of investment.
In 2014, BOI approved a total of 194 FDI projects with a combined value of US$1.5 billion. For more information on the investment environment and incentives, please refer to the official website of the BOI.
Since the civil war ended in 2009, Sri Lanka has worked to rebuild and improve infrastructure, drawing in FDI to finance and undertake related infrastructure projects. China has been keen to participate in such projects, including the Sri Lankan port in Hambantota and the Colombo International Container Terminals, which is the country’s largest FDI project costing US$500 million. In 2016, Sri Lanka has granted China the permission to build the flagship Colombo Port City under the Megapolis initiative. Besides, Huawei has also heavily invested in Sri Lanka and teamed up with major Sri Lankan telecom operators.
According to the Central Bank of Sri Lanka, total cumulative FDI stood at US$9 billion as of December 2013, with the country’s top three FDI sources being the Netherlands, the UK, and Malaysia. At the end of 2013, respective FDI stocks of the three countries were: US$1.85 billion (21% share) for the Netherlands, US$1.13 billion (13%) for the UK and US$841 million (9%) for Malaysia. For Hong Kong and the Chinese mainland, the respective figures were US$423 million (5%) and US$355 million (4%).
Trade Policy and Development
Sri Lanka has been a World Trade Organisation (WTO) member since January 1995, adopting a liberal trade regime. Other than the strict controls over imported agricultural items that may be detrimental to certain local plants and live animals, companies are allowed to trade freely without special restrictions.
Sri Lanka’s tariffs range from zero to 25% under a four-band tariff structure with rates being 0%, 7.5%, 15% and 25%. Over 50% of the non agricultural imports were duty-free. Essential raw materials and inputs such as cotton and textiles are generally non-dutiable or subject to duties at lower rates.
Apart from tariffs, there are mainly four types of duties and taxes that any importer is liable to pay upon importation, namely Cess, Ports and Airports Development Levy (PAL), the Special Commodity Levy (SCL) and Value Added Tax (VAT). As part of the sweeping tax reforms announced by the cash-strapped government in March 2016, the VAT rate was increased from 11% to 15% on 2 May 2016, with exemptions granted to water, electricity, health and education.
In 2010, Sri Lanka lost its Generalised Scheme of Preference-Plus (GSP-Plus) status and thereby duty-free access to the EU due to non-compliance with certain human rights conventions. Nonetheless, the country still enjoys tariff reductions under GSP for its exports to the EU. In 2015, Sri Lanka government re-applies for the GSP-Plus trade concession. Discussion with the European Commission is on-going.
Sri Lanka is a member of South Asian Association for Regional Cooperation (SAARC), which formed a South Asian Free Trade Area (SAFTA) in 2006 with an aim to reduce duties for imports from member countries to between zero and 5% within 10 years, though progress has not been satisfactory.
Apart from SAFTA, the country also concluded bilateral free trade agreements (FTAs) with Pakistan and India and the Asia-Pacific Trade Agreement (APTA). More recently, Sri Lanka and China have entered into FTA negotiations. In Sri Lanka President Maithripala Sirisena’s visit to China in March 2015, the two sides agreed to speed up talks on FTA. Sri Lanka is expected to enter into an Indo–Lanka Economic and Technology Co-operation Agreement ETCA by the middle of 2016, while strengthening its FTAs with India and Pakistan.
Hong Kong's Trade with Sri Lanka
Hong Kong's exports to Sri Lanka expanded by 4.8% to US$513 million in 2015. Major export items included knitted or crocheted fabrics (23.1% share), tulles, lace, embroidery, ribbons, trimmings and other small wares (15%), telecom equipment & parts (12.9%), cotton fabrics, woven (7.3%) and miscellaneous manufactured articles (4.9%).
On the other hand, Hong Kong's imports from Sri Lanka fell 6.2% to US$131 million in 2015. Major imports included tea and mate (14.2%), other articles of apparel, of textile fabrics (10.8%), engines and motors, non-electric and parts (8.6%), men’s or boys’ wear of textile fabrics, not knitted (7.3%) and electrical machinery & apparatus (5.6%).
In the first eight months of 2015, a total of 4,999 Sri Lankan visitors came to Hong Kong. As at end-September 2015, there were 2,428 Sri Lankan nationals residing in Hong Kong.
More information on the Belt and Road countries’ economic and investment environment, tax and other subjects that are important in considering investment and doing business are available in The Belt and Road Initiative: Country Business Guides.
Related information: Sri Lanka infographics