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Country Report

Sri Lanka

Generated on September 13th 2016

Economist Intelligence Unit
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 Sri Lanka 1

Sri Lanka

Forecast
Highlights

Outlook for 2016-20

3 Political stability
4 Election watch
4 International relations
5 Policy trends
5 Fiscal policy
6 Monetary policy
6 International assumptions
7 Economic growth
7 Inflation
8 Exchange rates
8 External sector
8 Forecast summary

Data and charts

9 Annual data and forecast
10 Quarterly data
11 Monthly data
12 Annual trends charts
13 Monthly trends charts
14 Comparative economic indicators

Summary
14 Basic data
16 Political structure

Recent analysis
Politics
19 Forecast updates
22 Analysis

Economy
24 Forecast updates
Analysis

Country Report September 2016 www.eiu.com © Economist Intelligence Unit Limited 2016

 Sri Lanka 2

Highlights
Editor: Firat Unlu
Forecast Closing Date: September 1, 2016

Outlook for 2016-20

The Economist Intelligence Unit expects the coalition government to pass
major political reforms. This will include a new constitution and probably
trigger an early parliamentary poll.
Owing to high intra-party tensions a split is likely within the Sri Lanka
Freedom Party (SLFP, a member of the governing coalition). This would lead
to the emergence of a party that should be a credible opposition force.
The implementation of structural reforms under a 36-month IMF programme,
due to last 2016-19, will improve the business environment and result in the
gradual privatisation of some state-owned enterprises.
We forecast that the economy will expand at an average annual rate of 5.2%
in 2016-20. Robust activity in the services and export-oriented industrial
sectors will support growth.
A steadily weakening currency and rebounding global commodity prices will
push the rate of consumer price inflation up from an average of 0.9% in 2015
to average 4% a year in 2016-20.
The current-account deficit will average the equivalent of 1.9% of GDP a
year in 2016-20 and reflects a persistent shortfall in the trade account.
A growing trade deficit will exert downward pressure on the local currency.
We forecast the Sri Lanka rupee to depreciate from an average of
SLRs146.7:US$1 in 2016 to SLRs164.6:US$1 by 2020.

Review
Divisions within the SLFP came to the fore in mid-August after the party
leader and president, Maithripala Sirisena, appointed politicians close to him
to important party positions. The move came after Mr Sirisena ousted
politicians loyal to his main rival within the party, Mahinda Rajapaksa.
On August 11th parliament passed a bill to establish an Office for Missing
Persons. The bill will help partly to address the grievances of the Tamil
community, serving to ease communal tensions.
On August 14th the government signed an agreement with a Chinese
company, CHEC Port City Colombo, for the reclamation of land near the
capital, Colombo, to build a new commercial centre.
On August 30th the Central Bank of Sri Lanka (CBSL) held its key interest
rates, the standing deposit facility rate and the standing lending facility rate,
steady at 7% and 8.5% respectively.
On August 5th the CBSL released detailed data on provincial GDP for 2015,
showing that Western province accounted for 41.2% of total national
output.

Country Report September 2016 www.eiu.com © Economist Intelligence Unit Limited 2016

 Sri Lanka 3

Outlook for 2016-20

Political stability
The Economist Intelligence Unit expects the "national unity" government to have
partial success in implementing reform-oriented political and economic policies
during its term. The administration—a grand coalition between the two largest
parties (and traditional rivals), the United National Party (UNP) and the Sri Lanka
Freedom Party (SLFP)—is pursuing a new constitution and will also make progress
on strengthening demo cratic institutions, solidifying the rule of law and reducing
the powers vested in the president. The next parliamentary election is scheduled to
be held in 2020 but would probably be brought forward in the event that a new
constitution is adopted through a referendum.
The coalition is led by the president, Maithripala Sirisena, and the prime minister,
Ranil Wickremesinghe. Although they hail from different parties, both campaigned
on a platform of good governance (yahapalanaya) at separate presidential and
parliamentary elections in 2015. Together, the coalition holds a large majority in
parliament, comfortably above the two-thirds threshold required to amend the
constitution. However, the coalition's large presence in parliament masks deep,
underlying obstacles to effective governance and the reform process.
Rifts within the SLFP pose the biggest risk to political stability and will make it
difficult for Mr Sirisena (who heads the party) to exert his authority over lawmakers.
The president only commands the loyalty of roughly half the SLFP's
parliamentarians, as a rival camp within the party still sides with Mr Sirisena's main
political rival, a former president, Mahinda Rajapaksa.
Nevertheless, averting a split within the SLFP is a political priority for Mr Sirisena,
as this could cost the administration its two-thirds majority, which is necessary to
amend the constitution. Efforts to keep the party factions onside have resulted in a
bloated cabinet. This has brought the rival camp into the government's fold for now,
but has also tarnished government attempts at establishing a reputation for good
governance. Indeed, growing parts of Sri Lanka's civil society are concerned that
the administration is delaying corruption cases against members of the former
government.
We expect Mr Sirisena to remain successful in securing the support of the sufficient
parliamentarians required to pass a new constitution. A split within the SLFP could
take place at any time over the forecast period but is most likely after the new
constitution is passed. The resulting new party will move quickly to establish itself
as a credible opposition force, probably campaigning on a platform of Sinhalese
nationalism and economic populism.
The government will struggle to reconcile the needs and demands of the Tamil
minority with those of the Sinhalese majority. However, some positive steps to
address Tamil grievances have been taken since Mr Sirisena came into office; this
includes the passage of a bill in August to establish an Office for Missing Persons
to investigate human rights abuses in past decades. Progress on ensuring
meaningful devolution—a key element for long­term reconciliation—will be
complicated by the government's aversion to stoking Sinhalese nationalist
sentiment. It will be even harder to achieve if the new opposition champions the
cause of Sinhalese and Buddhist chauvinism, stoking ethnic and sectarian tensions.
A domestically led inquiry into possible human rights violations by government
forces during the final stages of the country's civil war against Tamil insurgents
could result in communal tensions if it is not managed adroitly. We expect the
outcome of the inquiry to disappoint the Tamil community, as the government will
be keen to maintain support among the Sinhalese and limit the influence of foreign
participants in the process.

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 Sri Lanka 4

Election watch
The next parliamentary and presidential elections are scheduled to be held in 2020.
However, we believe that the parliamentary poll will be brought forward once a new
constitution is passed. Local government polls have been delayed several times
owing to administrative and political challenges. According to a statement made by
Mr Sirisena in April, these are now scheduled to be held in early 2017. However,
Mr Sirisena is aware that support within the SLFP for Mr Rajapaksa seems
particularly strong at local level, further fuelling the risk of another delay to local
elections.

International relations
Sri Lanka's reliance on financial support from multilateral lending institutions such
as the IMF and other countries means that foreign policy will be shaped by
economic pressures throughout the forecast period. The admini stration will be keen
to avoid antagonising Western partners or India, as a rupture in ties could
undermine market confidence. Ensuring that markets continue to see Sri Lanka as a
stable country for investment will remain a priority in 2016-20.
These efforts may, however, be complicated by the island's close ties with China,
which is an important source of financial support and foreign direct investment. Sri
Lanka's previous government found it difficult to strike the right balance between
China and the West, but we expect the current administration to fare better, as the
UNP has historically emphasised relations with Western partners. It is pursuing
liberal-oriented reform plans, displaying more concern about ethnic reconciliation
and is keen to expand the share of Sri Lanka's exports in global markets. This will be
rewarded with greater trade concessions from the EU and the US over time.
We expect the government to sign a free-trade deal with China and complete an
economic and technology co-operation agreement with India, as the two countries
will be keen to solidify their influence in Sri Lanka. We expect these agreements to
support the administration's goals of leveraging the island's strategic location and
turning it into an international logistics and trade hub.

Country Report September 2016 www.eiu.com © Economist Intelligence Unit Limited 2016

 Sri Lanka 5

Policy trends
The implementation of a 36–month economic programme (expected to last from 2016­
19) under the IMF's Extended Fund Facility will result in moves to liberalise the
domestic business environment. In addition, under the IMF programme the tax net
will almost certainly be cast wider to include more companies and individuals. Some
taxes, including the value-added tax (VAT), will be raised in incremental steps, while
many tax exemptions will be phased out. Even as it raises taxes, we expect the
governing coalition to maintain a pro-business stance. Nevertheless, uncertainty
over the tax regime is set to weigh on investment sentiment in the business
community in 2016.
The administration is going ahead with the implementation of IMF-mandated
reforms but the need to avoid antagonising the electorate and ensure sufficient
support within the coalition to pass legislation will make it difficult to build a
consensus on economic reforms outside the scope of the IMF programme. There is
a risk that public sentiment could be undermined if unpopular policies, such as
reducing employment at state-owned enterprises (SOEs), are not carefully managed
and adequately communicated. This, combined with heavy resistance within SOEs,
will make the privatisation process challenging.
Outside the ambit of the IMF programme, we expect the government to focus on
raising living standards, including through a number of increases to the national
minimum wage throughout 2016­20. This is in line with the govern ment's five
medium-term targets: generating 1m jobs; enhancing income levels; developing rural
economies; widening land ownership among the population; and creating a strong
middle class. We expect the government to have partial success in meeting these
targets. Employment growth could be dampened if minimum wages were to be
increased at an excessive pace.

Fiscal policy
The large fiscal deficit will command the administration's attention throughout 2016-
20, as it represents a key macroeconomic risk. We anticipate that the effort to
increase government tax revenue as a proportion of nominal GDP will see some
success over the forecast period. Efforts to cut the budget deficit will primarily
focus on the revenue side, as the tax-to-GDP ratio in Sri Lanka is among the lowest
in the world.
However, the expenditure side will also come under pressure, with infrastructure
investments facing the highest risk of being stalled or cut. In other areas of
spending, we expect the government to face difficulties in building a consensus
among lawmakers on where additional spending cuts should fall. Political pressure
from the opposition will also weigh on fiscal consolidation efforts. This means that
expenditure will remain much higher than revenue for the foreseeable future. We
forecast that the budget deficit will average the equivalent of 4.8% of GDP in 2016-
20.

Country Report September 2016 www.eiu.com © Economist Intelligence Unit Limited 2016

 Sri Lanka 6

Monetary policy
The Central Bank of Sri Lanka (CBSL) kept its benchmark interest rates on hold in
late August and will keep a close eye on domestic credit growth to the private
sector. As at June credit was still expanding at levels that the central bank considers
excessively high. Such rapid credit growth has fuelled consumer price inflation and
led to large inflows of imports, which have put pressure on the country's balance of
payments.
CBSL policy will also be driven by exchange-rate considerations, as a depreciating
currency would make it more costly for Sri Lanka to service its sizeable external
obligations. Foreign-exchange reserve levels are expected to stand at a relatively
low level (around 4 months of imports) in 2016-20. As a result, the ability of the
CBSL to intervene in foreign-exchange markets to stabilise the value of the Sri Lanka
rupee will be limited. This will make it even more of an imperative to maintain an
attractive interest-rate differential with the US to attract capital inflows.
As the CBSL has increased the two benchmark interest rates by 100 basis points
each since February, we expect no further interest-rate rises during the remainder of
2016. However, we expect the CBSL to continue raising interest rates in 2017-20,
with a view to supporting the Sri Lanka rupee. The CBSL will raise interest rates in a
phased manner, as a sudden spike would cause financial and macroeconomic
volatility.

International assumptions
2015 2016 2017 2018 2019 2020
Economic growth (%)
US GDP 2.4 1.6 2.3 2.3 1.1 2.1
OECD GDP 2.0 1.6 1.6 1.9 1.3 1.8
World GDP 2.4 2.1 2.4 2.6 2.1 2.5
World trade 2.7 2.2 3.0 3.3 2.4 3.1
Inflation indicators (% unless otherwise indicated)
US CPI 0.1 1.3 2.2 2.3 1.3 1.7
OECD CPI 0.5 1.0 1.8 1.9 1.6 1.8
Manufactures (measured in US$) -4.6 -2.2 1.7 4.4 3.4 3.9
Oil (Brent; US$/b) 52.4 43.3 52.5 65.0 62.4 61.4
Non-oil commodities (measured in US$) -17.3 -4.7 4.4 4.2 -2.7 -1.0
Financial variables
US$ 3-month commercial paper rate (av; %) 0.2 0.5 0.8 1.4 1.5 1.0
¥ 3­month money market rate (av; %) 0.3 0.1 0.1 0.1 0.1 0.1
¥:US$ (av) 121.0 107.1 103.9 107.0 109.1 108.7
SLRs:US$ (av) 135.9 146.7 152.8 159.2 161.1 164.6

Country Report September 2016 www.eiu.com © Economist Intelligence Unit Limited 2016

 Sri Lanka 7

Economic growth
Real GDP growth will average 5.2% a year in 2016-20, as structural constraints to
growth will weigh on economic activity. These include a shortage of skilled labour,
poor infrastructure and one of the world's lowest female labour force participation
rates.
Private consumption will remain the main driver of economic growth for the
foreseeable future. Inflows of remittances will provide further support for domestic
demand. This, in conjunction with a closer integration into global markets and value
chains, will spur the private sector to invest in new capacity throughout the forecast
period. As the administration aims to contain the budget deficit, government
consumption will only provide a minor lift to economic expansion. Owing to high
imports of consumer and capital goods, the external sector will act as a drag on
headline GDP growth. Our forecast of a business-cycle recession in the US in 2019,
Sri Lanka's main export market, means that economic growth will slow in that year.
Economic growth
% 2015a 2016b 2017b 2018b 2019b 2020b
GDP 4.8 5.0 5.1 5.4 5.0 5.6
Private consumption 6.5 6.3 6.2 5.9 5.8 6.1
Government consumption 10.3 3.8 3.5 3.3 4.0 4.1
Gross fixed investment 1.4 4.1 7.2 4.3 4.9 4.7
Exports of goods & services 4.7 4.8 6.0 6.0 3.9 8.3
Imports of goods & services 10.6 5.4 6.8 4.2 5.7 7.4
Domestic demand 6.3 5.1 5.4 5.0 5.4 5.6
Agriculture 5.5 3.3 3.2 3.1 4.2 4.4
Industry 3.0 5.6 4.9 5.1 5.0 7.2
Services 5.3 5.0 5.5 5.8 5.1 5.0
a Actual. b Economist Intelligence Unit forecasts.

Inflation
We expect the average rate of inflation (as measured by the Colombo consumer
price index) to accelerate from an average of 0.9% in 2015 to 4% a year in 2016-20.
The increase in VAT (de facto effective from May) will add to inflationary pressures
over the coming 12 months. In addition, global commodity prices will rebound,
particularly oil, driving up consumer prices in the early part of the forecast period. A
weakening of the local currency will make the cost of imported consumer goods
more expensive throughout 2016 20. Domestic demand will also add to consumer
price inflation pressure even as the CBSL shifts towards an inflation-targeting
regime.
There are upside risks to our forecasts; adverse weather conditions, which could
cause a fall in food production and therefore a rise in prices, could lead to stronger
inflation than we currently anticipate in some years. A further increase in the VAT is
conceivable and would also lead to a temporary spike in consumer price inflation.

Country Report September 2016 www.eiu.com © Economist Intelligence Unit Limited 2016

 Sri Lanka 8

Exchange rates
We expect the Sri Lanka rupee to depreciate against the US dollar throughout 2016-
20. The successful implementation of the IMF programme will probably raise foreign
investor confidence in Sri Lanka, but this will be outweighed by the country's weak
external position, a sizeable trade deficit and increases in US interest rates in 2017-
19. The CBSL appears to be managing the exchange rate heavily, but its ability to
intervene to offset depreciation pressure on the Sri Lanka rupee for any length of
time is limited—and will remain so throughout 2016­20—by relatively low levels of
foreign-exchange reserves. An attempt to stabilise the currency in 2015 was
ultimately dropped in September, as the intervention drained foreign-exchange
reserves significantly. Should the currency come under strong depreciation
pressure (such as through a shift in investor sentiment regarding emerging markets)
the CBSL would probably increase interest rates at a pace that could weaken overall
economic growth.

External sector
We expect the current-account deficit to average the equivalent of 1.9% of GDP in
2016-20. This will be significantly lower than the ratios recorded in previous years;
between 2011 and 2015 it averaged 4.2% of GDP. Higher services exports and the
development of export-oriented industrial and services sectors will drive this
positive trend. In addition, the secondary income balance will continue to record
surpluses on account of sustained inflows of workers' remittances. This will help to
offset pressure on the country's external accounts from a rising merchandise trade
deficit.
However, the country's external position could come under stronger pressure than
we currently anticipate in the event that global commodity prices were to rise or
remittances growth to slow. We expect the import cover provided by foreign-
exchange reserves to be low, averaging the equivalent of just 4 months in 2016 20,
only slightly above the three-month threshold that is generally regarded by the IMF
as the minimum to mitigate balance-of-payments risks.

Forecast summary
Forecast summary
(% unless otherwise indicated)
2015a 2016b 2017b 2018b 2019b 2020b
Real GDP growth 4.8 5.0 5.1 5.4 5.0 5.6
Gross industrial growth 3.0 5.6 4.9 5.1 5.0 7.2
Gross agricultural production growth 5.5 3.3 3.2 3.1 4.2 4.4
Unemployment rate (av) 4.7c 4.5 4.5 4.4 4.5 4.4
Consumer price inflation (av) 0.9 4.3 4.2 3.9 3.8 3.9
Consumer price inflation (end-period) 2.8 5.0 4.1 3.9 3.2 3.2
Lending interest rate (av;%) 8.1 9.8 10.9 11.0 9.9 10.9
Government balance (% of GDP) -7.4 -5.4 -4.7 -4.3 -4.7 -4.6
Government balance, excl grants & privatisation (% of GDP ) -7.5 -5.5 -4.8 -4.4 -4.8 -4.7
Exports of goods fob (US$ bn) 10.5 10.1 10.9 11.9 12.1 13.3
Imports of goods fob (US$ bn) 18.9 18.8 19.4 21.6 22.9 24.8
Current-account balance (US$ bn) -2.0 -1.5 -1.3 -1.8 -2.1 -2.1
Current-account balance (% of GDP) -2.4 -1.8 -1.5 -1.9 -2.1 -2.0
External debt (end-period; US$ bn) 45.5c 47.9 50.0 52.6 54.6 55.3
Exchange rate SLRs:US$ (av) 135.9 146.7 152.8 159.2 161.1 164.6
Exchange rate SLRs:US$ (end-period) 144.1 149.7 156.0 160.1 162.8 164.3
Exchange rate SLRs:¥100 (av) 112.3 137.0 147.0 148.8 147.6 151.4
Exchange rate SLRs:€ (av) 150.8 162.9 166.2 176.9 182.5 188.4
a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.

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 Sri Lanka 9

Data and charts

Annual data and forecast
2011a 2012a 2013a 2014a 2015a 2016b 2017b
GDP
Nominal GDP (US$ m) 65,292.8 68,434.4 74,317.8 80,024.6 82,316.2 83,520.1 87,812.3
Nominal GDP (SLRs bn) 7,219.1 8,732.5 9,592.1 10,448.5 11,183.2 12,251.7 13,418.1
Real GDP growth (%) 8.4 9.1 3.4 4.9 4.8 5.0 5.1
Expenditure on GDP (% real change)
Private consumption 9.9 2.3 7.8 5.7 6.5 6.3 6.2
Government consumption -2.1 6.0 0.1 6.1 10.3 3.8 3.5
Gross fixed investment 16.6 16.1 5.5 -2.1 1.4 4.1 7.2
Exports of goods & services 10.2 -0.2 6.6 4.3 4.7 4.8 6.0
Imports of goods & services 23.6 0.5 -1.5 9.6 10.6 5.4 6.8
Origin of GDP (% real change)
Agriculture 4.6 3.9 3.2 4.9 5.5 3.3 3.2
Industry 9.3 9.0 4.1 3.5 3.0 5.6 4.9
Services 8.9 11.2 3.8 5.2 5.3 5.0 5.5
Population and income
Population (m) 20.9 21.1 21.3 21.5 21.6c 21.8 22.0
GDP per head (US$ at PPP) 8,924 9,840 10,256 10,841 11,381c 12,078 12,818
Recorded unemployment (av; %) 4.2 4.0 4.4 4.3 4.7c 4.5 4.5
Fiscal indicators (% of GDP)
Central government revenue 13.6 12.2 12.0 11.5 13.1 13.1 13.8
Central government expenditure 20.3 18.1 17.5 17.3 20.6 18.6 18.5
Central government balance -6.2 -5.6 -5.4 -5.7 -7.4 -5.4 -4.7
Public debt 71.1 68.7 70.8 70.7 76.0c 77.1 78.1
Prices and financial indicators
Exchange rate SLRs:US$ (end-period) 113.90 127.16 130.75 131.05 144.06 149.75 155.99
Exchange rate ¥:SLRs (end­period) 0.68 0.68 0.80 0.91 0.83 0.69 0.68
Consumer prices (end-period; % change) 4.9 9.2 4.7 2.1 2.8 5.0 4.1
Stock of money M1 (% change) 7.7 2.6 7.7 26.3 16.8 15.6 14.1
Stock of money M2 (% change) 20.9 18.3 18.0 13.1 17.2 17.5 10.3
Lending interest rate (av; %) 8.6 9.8 10.5 8.7 8.1 9.8 10.9
Current account (US$ m)
Trade balance -7,683 -9,417 -7,609 -8,287 -8,430 -8,646 -8,569
Goods: exports fob 10,559 9,774 10,394 11,130 10,505 10,117 10,880
Goods: imports fob -18,242 -19,190 -18,003 -19,417 -18,935 -18,764 -19,448
Services balance -928 1,262 1,180 1,880 2,325 2,825 3,037
Primary income balance -647 -1,246 -1,752 -1,808 -2,097 -2,188 -2,257
Secondary income balance 4,583 5,392 5,639 6,227 6,193 6,485 6,479
Current-account balance -4,675 -4,009 -2,541 -1,988 -2,009 -1,525 -1,310
External debt (US$ m)
Debt stock 25,887 35,792 40,257 43,609 45,468c 47,944 49,959
Debt service paid 1,302 2,000 2,020 2,490 2,971c 2,928 2,919
Principal repayments 817 1,421 1,366 1,775 1,956c 1,992 1,907
Interest 485 578 654 716 1,015c 936 1,012
International reserves (US$ m)
Total international reserves 6,748 7,105 7,495 8,209 7,303 7,091 7,972
a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.
Source: IMF, International Financial Statistics.

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 Sri Lanka 10

Quarterly data
2014 2015 2016
3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr
2 Qtr 1 Qtr
Central government finance (SLRs m)
Revenue 293,320367,717285,650320,184353,719501,339345,613 n/a
Expenditure 411,305469,171493,431514,076525,037757,850526,320 n/a
- - - - - - -
Balance n/a
117,985 101,454 207,781 193,892 171,318 256,511 180,707
Output
GDP at constant 2010 prices (SLRs bn) 2065.0 2328.6 1978.6 2075.8 2181.3 2387.1 2088.0 n/a
Wages and prices
Wages, agricultural (Dec 1978=100)a 4,570.8 4,734.3 4,734.3 4,734.3 4,734.3 4,734.3 4,734.5 n/a
Wages, central government employees
5,939.0 6,653.0 7,446.3 8,001.7 8,319.2 8,319.2 n/a n/a
(Dec 1978=100)b
Consumer prices (2005=100) 182.5 179.5 180.1 180.0 182.0 184.0 183.5 188.4
Consumer prices (% change, year on year) 3.5 1.8 1.3 0.1 -0.2 2.5 1.9 4.7
Financial indicators
Exchange rate SLRs:US$ (av) 130.23 130.85 132.39 133.43 135.48 142.12 143.94 144.94
Exchange rate SLRs:US$ (end-period) 130.37 131.05 132.90 133.70 141.23 144.06 143.90 145.25
Repurchase rate (end-period; %) 6.5 6.5 6.5 6.0 6.0 6.0 6.5 6.5
Reverse repurchase rate (end-period; %) 8.0 8.0 8.0 7.5 7.5 7.5 8.0 8.0
Average weighted prime lending rate
7.1 6.4 6.9 7.0 6.9 7.4 8.8 10.4
(end period; %)
3-month Treasury bill rate (end-period; %) 6.2 5.7 6.6 6.1 6.8 6.4 8.9 n/a
M1 (end-period; SLRs bn)c 540.0 612.2 633.3 629.4 660.4 715.0 729.6 n/a
M1 (% change, year on year) 17.4 26.3 23.8 21.2 22.3 16.8 15.2 n/a
M2 (end-period; SLRs bn)c 3,316.8 3,460.6 3,553.6 3,677.5 3,821.8 4,057.2 4,206.4 n/a
M2 (% change, year on year) 12.9 13.1 12.3 14.4 15.2 17.2 18.4 n/a
Colombo Stock Exchange All Share Price
6,924.7 7,297.5 7,229.2 7,115.8 7,214.9 6,974.7 6,270.46,467.9
Index (average; 1985=100)
Sectoral trends
Exports, tea ('000 tonnes) 83.9 86.0 73.2 78.3 74.5 80.7 74.5 n/a
Exports, rubber ('000 tonnes) 2.9 2.6 2.8 3.1 2.1 2.3 4.1 n/a
Tourist arrivals (‘000) 379.8 420.0 478.8 351.2 485.8 482.5 584.8 n/a
Foreign trade (SLRs bn)
Exports fob 371.5 370.1 382.0 338.9 349.7 355.3 392.7 n/a
Tea 54.7 53.9 44.4 46.4 44.0 47.3 45.1 n/a
Imports cif 682.1 679.7 634.4 634.4 628.6 674.8 661.3 n/a
Trade balance -310.5 -309.7 -252.5 -295.5 -279.0 -319.5 -268.7 n/a
Foreign payments (US$ m)
Merchandise trade balance -2,385 -2,366 -1,908 -2,215 -2,059 -2,248 -1,867 n/a
Services balance 523 458 630 429 662 604 765 n/a
Primary income balance -511 -456 -546 -379 -495 -677 -537 n/a
Net transfer payments 1,531 1,726 1,461 1,574 1,556 1,602 1,556 n/a
Current-account balance -842 -639 -363 -590 -336 -720 -83 n/a
Reserves excl gold (end-period) 7,918 7,316 5,971 6,686 5,985 6,543 5,335 n/a
a Nominal rates. b Nominal rates, excluding government schoolteachers. c Central Bank of Sri Lanka.
Sources: Central Bank of Sri Lanka, Bulletin; IMF, International Financial Statistics.

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 Sri Lanka 11

Monthly data
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Exchange rate SLRs:US$ (av)
2014 130.73 130.82 130.63 130.62 130.46 130.29 130.24 130.19 130.26 130.60 130.94 131.02
2015 131.55 132.73 132.90 132.90 133.50 133.90 133.69 133.88 138.88 140.89 142.02 143.45
2016 143.94 143.93 143.96 143.90 145.65 145.28 145.41 n/a n/a n/a n/a n/a
Exchange rate SLRs:US$ (end-period)
2014 130.70 131.00 130.69 130.60 130.46 130.30 130.21 130.20 130.37 130.84 131.01 131.05
2015 132.20 132.90 132.90 132.90 133.90 133.70 133.60 134.30 141.23 140.85 143.21 144.06
2016 143.92 144.35 143.90 143.90 145.75 145.25 145.75 n/a n/a n/a n/a n/a
M1 (% change, year on year)
2014 9.1 9.9 9.9 12.0 13.9 16.9 17.4 19.3 17.4 13.5 25.1 26.3
2015 24.2 21.4 23.8 24.2 25.2 21.2 22.9 20.2 22.3 21.7 17.8 16.8
2016 15.9 17.4 15.2 13.5 11.2 n/a n/a n/a n/a n/a n/a n/a
M2 (% change, year on year)
2014 17.8 16.1 15.1 13.9 13.6 13.0 12.3 13.1 12.9 11.6 13.4 13.1
2015 12.1 11.9 12.3 13.2 14.5 14.4 15.5 16.1 15.2 15.7 16.1 17.2
2016 18.3 19.1 18.4 18.0 16.5 n/a n/a n/a n/a n/a n/a n/a
Average weighted deposit rate (end-period; %)
2014 9.1 8.8 8.5 8.1 7.7 7.4 7.2 7.0 6.8 6.7 6.4 6.2
2015 5.9 5.9 5.8 5.8 6.0 6.0 6.0 6.0 6.0 6.1 6.1 6.2
2016 6.3 6.3 6.4 6.6 6.7 6.9 7.1 n/a n/a n/a n/a n/a
Average weighted prime lending rate (end-period; %)
2014 9.7 9.4 8.8 8.7 8.4 8.0 7.6 7.4 7.1 6.4 6.5 6.4
2015 6.3 6.5 6.9 7.2 7.1 7.0 6.9 6.8 6.9 7.2 7.3 7.4
2016 7.8 8.3 8.8 9.6 10.1 10.4 10.8 n/a n/a n/a n/a n/a
Reverse repurchase rate (end-period; %)
2014 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0
2015 8.0 8.0 8.0 7.7 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5
2016 7.5 7.7 8.0 8.0 8.0 8.0 8.0 n/a n/a n/a n/a n/a
Colombo Stock Exchange All Share Price Index (average; 1985=100)
2014 6,134 6,034 5,938 6,117 6,281 6,313 6,667 6,945 7,174 7,272 7,377 7,252
2015 7,402 7,264 7,053 7,038 7,246 7,068 7,110 7,387 7,148 7,069 7,003 6,855
2016 6,499 6,294 6,032 6,323 6,615 6,453 6,375 n/a n/a n/a n/a n/a
Consumer prices (av; % change, year on year)
2014 4.4 4.2 4.2 4.9 3.2 2.8 3.6 3.5 3.5 1.6 1.5 2.1
2015 3.2 0.6 0.1 0.1 0.2 0.1 -0.2 -0.2 -0.3 1.7 3.1 2.8
2016 0.9 2.7 2.0 3.1 4.8 6.0 5.5 n/a n/a n/a n/a n/a
Wholesale prices (av; % change, year on year)
2014 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
2015 6.4 2.1 1.4 0.6 5.6 5.4 6.2 0.8 4.5 1.2 4.2 5.0
2016 -3.4 2.5 -0.5 -0.3 -0.9 1.5 n/a n/a n/a n/a n/a n/a
Foreign-exchange reserves excl gold (US$ m)
2014 7,127 7,360 7,162 8,013 7,875 8,224 8,053 8,226 7,918 7,924 7,446 7,316
2015 6,349 6,554 5,971 6,605 5,994 6,686 6,037 5,650 5,985 5,664 6,525 6,543
2016 5,497 5,692 5,335 n/a n/a n/a n/a n/a n/a n/a n/a n/a
Sources: IMF, International Financial Statistics; Haver Analytics.

Country Report September 2016 www.eiu.com © Economist Intelligence Unit Limited 2016

 Sri Lanka 12

Annual trends charts

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 Sri Lanka 13

Monthly trends charts

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 Sri Lanka 14

Comparative economic indicators

Basic data
Land area
65,610 sq km

Population
21.6m (2015; UN)

Main towns
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 Sri Lanka 15

Population in ’000 (2010)
Colombo (capital): 2,553
Gampaha: 2,177
Kurunegala: 1,563
Kandy: 1,431
Kalutara: 1,135
Ratnapura: 1,125

Climate
Tropical

Weather in Colombo
Hottest month, May, 26­31°C (average daily minimum and maximum); coldest month,
December, 22­29°C; driest month, February, 69 mm average rainfall; wettest month,
May, 371 mm average rainfall

Languages
Sinhalese, Tamil, English

Measures
The metric system is now predominant

Currency
Sri Lanka rupee (SLRs); SLRs1 = 100 cents. Average exchange rate in 2015:
SLRs135.9:US$1

Time
5 hours 30 minutes ahead of GMT

Fiscal year
January-December

Public holidays
January 15th (Tamil Thai Pongal Day); January 23rd (Duruthu Poya Day, Milad Un
Nabi); February 4th (National Day); February 22nd (Navam Poya Day); March 7th
(Mahasivarathri Day); March 22nd (Madin Poya Day); March 25th (Good Friday);
April 13th-14th (Sinhala and Tamil New Year); April 21st Bak Poya Day; May 1st
(May Day); May 21st22nd (Vesak Poya celebration); June 19th (Poson Poya Day);
July 7th (Eid al­Fitr); July 19th (Adhi Esala Poya Day); August 17th (Nikini Poya
Day); September 12th (Eid al-Adha); September 16th (Binara Poya Day); October
15th (Vap Poya Day); October 29th (Deepawali); November 14th (Il Poya Day);
December 13th (Unduvap Poya Day); December 25th (Christmas Day)

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 Sri Lanka 16

Political structure
Official name
Democratic Socialist Republic of Sri Lanka

Form of state
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 Sri Lanka 17
Executive presidency based on the French model

The executive
The president is head of state, with executive powers. According to the
19th amendment to the constitution, passed in April 2015, the president is elected
for a five-year term by universal suffrage, and may dissolve parliament only after
four and a half years have passed since the start of the first session of the current
parliament. The president may serve a maximum of two terms

National legislature
Unicameral legislature; the 225 members are directly elected for five years (changed
from six years following approval of the 19th amendment) using a system of
modified proportional representation

Local government
Under the 13th amendment to the constitution, passed in 1987, extensive powers are
required to be devolved to nine directly elected provincial councils with a view to
meeting Tamil demands for greater autonomy; however, the amendment has not yet
been fully implemented. The United People’s Freedom Alliance (UPFA) has
majorities in all the provincial councils except the Northern Provincial Council

National elections
A presidential election was held in January 2015 and a parliamentary election in
August of that year. The next presidential and parliamentary elections are scheduled
to be held in 2020. Presidential elections may be called early, provided that certain
constitutional conditions are met

National government
Maithripala Sirisena was elected president in January 2015, defeating Mahinda
Rajapaksa of the Sri Lanka Freedom Party (SLFP, the main component of the UPFA),
who had ruled since 2005. The United National Party (UNP) formed a so-called
national unity government with the UPFA following the August 2015 parliamentary
election

Main political organisations

UNP, with 106 seats in parliament; UPFA (including the SLFP), 95 seats; Tamil
National Alliance (TNA), 16 seats; Janatha Vimukthi Peramuna (JVP), 16 seats; Sri
Lanka Muslim Congress (SLMC), one seat; Eelam People's Democratic Party
(EPDC), one seat

Main members of the government

President, minister of defence: Maithripala Sirisena (SLFP)
Prime minister, minister of policy planning, economic affairs & child, youth &
cultural affairs: Ranil Wickremesinghe (UNP)

Key ministers
Education: Akila Viraj Kariyawasam (UNP)
Finance: Ravi Karunanayake (UNP)
Foreign affairs: Mangala Samaraweera (UNP)
Industry & commerce: Rishad Bathiudeen (UNP)
Irrigation & agriculture: Vijith Vijayamuni Zoysa (SLFP)
Justice: Wijayadasa Rajapakshe (UNP)

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 Sri Lanka 18
Ports & shipping: Arjuna Ranatunga (UNP)
Power & renewable energy: Ranjith Siyambalapitiya (SLFP)
Disaster management: Anura Priyadharshana Yapa (SLFP)

Central bank governor

Indrajith Coomaraswamy

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 Sri Lanka 19

Recent analysis
Generated on September 13th 2016

The following articles were published on our website in the period between our previous forecast and this one, and serve here as
a review of the developments that shaped our outlook.

Politics
Forecast updates
August 2, 2016: Political stability
Opposition lawmakers organise protest march
Event
On August 1st a 112-km protest march organised by opposition lawmakers ended in
the capital, Colombo. The previous president, Mahinda Rajapaksa, announced at a
rally that anti-government demonstrations would continue.

Analysis
The five-day march was not the first of its kind in modern Sri Lanka's history. What
distinguishes this particular demonstration is that it has happened so early in the
government's tenure. Maithripala Sirisena was elected president in January 2015 and
Ranil Wickremesinghe led his United National Party (UNP) to victory at the
August 2015 parliamentary election to become prime minister.
Mr Sirisena heads the Sri Lanka Freedom Party (SLFP) but faces strong opposition
from within his own party. Indeed, the so-called joint opposition that organised the
march is an alliance of roughly 50 lawmakers who are members of the SLFP but
remain aligned with Mr Rajapaksa. Cohabitation between the SLFP and UNP has not
been easy. It remains more a marriage of convenience than a coalition forged on
similar policy ideals. The two parties are the country's largest and have historically
been rivals, operating on different political platforms.
Even though working relations between Mr Sirisena and Mr Wickremesinghe are
robust, political differences between the two parties have come to the fore over the
government's budget and have been exacerbated by controversy over economic
policies and the UNP's pro-Western foreign policy stance. This has strengthened
the joint opposition. Currently, relations between the two parties have been strained
by the government's decision to raise the value-added tax (VAT). However, the
Supreme Court halted the move. The decision was deemed a violation of the
constitution, as the VAT change had not been approved by parliament. The
resulting policy confusion has added to voter concern over the rising cost of living
and was one of the key themes of the recent protest march.
Mr Sirisena faces a difficult challenge in keeping his party together, considering that
many lawmakers are aligned with the pro-Rajapaksa camp. Party leaders have
threatened to sack SLFP parliamentarians who joined the march, but such threats
have been made before without any real consequences. With elections to local
bodies scheduled to take place in 2017, Mr Sirisena's main task will be to avoid a
split within the SLFP.

Impact on the forecast

The Economist Intelligence Unit expects the opposition to put further pressure on
the governing coalition. We forecast that a split within the SLFP will occur, albeit
not before a new constitution is passed.

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 Sri Lanka 20

August 12, 2016: Political stability

Parliament approves Office of Missing Persons Act
Event
On August 11th parliament passed a bill to establish an Office for Missing
Persons (OMP).

Analysis
The new law intends to establish an official body to investigate the thousands of
complaints received by the government since 1994 with regard to persons who have
gone missing during the 1987–89 Marxist insurrection and the near three­decade­
long conflict with Tamil separatists. How the new office functions and whether
foreign nationals will participate in some form will be watched carefully.
The passage of the bill has sparked some anxieties among Sri Lanka's armed forces
and members of the previous government. They are concerned that information
found during investigations could be used to prosecute military officers or senior
politicians (including retired ones) at a war crimes tribunal, which is expected to be
set up by the current administration. The previous president, Mahinda Rajapaksa,
still commands the loyalty of many citizens, especially in the south, and stated that
those supporting the bill were betraying the country and armed forces.
Despite these apprehensions, the passage of the bill marks a major victory for the
government, which has set out to improve the human rights situation in the country
and investigate past misdoings. The US government also welcomed the bill, seeing
it as a big step towards "advancing truth and reconciliation". The US reaction was
expected, as it led the charge against Sri Lanka in a resolution at the UN Human
Rights Council (UNHRC), calling for an independent inquiry into possible war
crimes and other violations of international law during the final stages of the
country's civil war in 2009.
The government appears highly unwilling to let foreign judges participate in any
judicial mechanism set up under the UNHRC even as it faces strong pressure from
Western countries to do so. However, by allowing foreigners to participate through
the OMP it may indirectly assuage some concerns within the international
community. For example, a section of the bill seemingly allows the OMP to enter into
agreements with foreign persons and organisations for tasks related to its work.

Impact on the forecast

The Economist Intelligence Unit maintains its view that the government will pursue
some policies that will partly address the grievances of the Tamil community,
helping to ease communal tensions.

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 Sri Lanka 21

August 24, 2016: Political stability

Tensions within SLFP grow
Event
The president, Maithripala Sirisena, appointed the state minister of finance,
Lakshman Yapa Abeywardena, as new district leader in Matara for the Sri Lanka
Freedom Party (SLFP), which is part of the ruling "national unity" coalition.

Analysis
The fault lines that run through the SLFP have come to the fore, as evidenced by Mr
Abeywardena's appointment. He is replacing Dullas Alahapperuma, who was
ousted by Mr Sirisena. Although Mr Sirisena is head of the SLFP, many members
are still loyal to a former president, Mahinda Rajapaksa. They became political rivals
after Mr Sirisena defeated Mr Rajapaksa at the presidential election in January 2015.
The intra-party dispute has affected political stability, as the SLFP formed a
coalition government with its main rival, the United National Party, after a
parliamentary poll in August 2015. It could also complicate the government's efforts
to pass a new constitution, which needs to be approved by two-thirds of parliament
and a referendum.
Mr Sirisena has been trying to wrest full control of the SLFP since the election. He
has had partial success, such as by including some in his cabinet, but a large part
still sides with Mr Rajapaksa, urging him to form a new party. The pro-Rajapaksa
camp is for now holding off on this, as it hopes to oust Mr Sirisena and take over
the entire party eventually. The Economist Intelligence Unit believes that this is an
unlikely prospect, as Mr Sirisena is the president. We believe that the formation of a
new party by the Rajapaksa camp is most likely to occur after a new constitution has
been passed, which we think will probably happen by 2018. However, the exact
timing of a fracture within the SLFP will depend on deliberations by Mr Rajapaksa
and his supporters.
Mr Sirisena will attempt to expand his influence by taking control of the party
structures and appointing politicians loyal to him to influential positions. In early
August Mr Sirisena ousted about 40 party organisers deemed loyal to
Mr Rajapaksa. Subsequently, politicians aligned with the pro-Rajapaksa camp
resigned. On August 21st a member of parliament, Bandula Gunawardane, stepped
down from the position of organiser of the Homagama electorate for the SLFP. Intra-
party tensions are expected to rise as the SLFP's annual gathering is due in early
September.

Impact on the forecast

This development is in line with our view that tensions within the SLFP will weigh
on political stability.

Country Report September 2016 www.eiu.com © Economist Intelligence Unit Limited 2016

 Sri Lanka 22

Economy
Forecast updates
August 8, 2016: Economic growth
Western province retains economic dominance
Event
On August 5th the Central Bank of Sri Lanka (CBSL) released detailed data on
provincial GDP for 2015.

Analysis
The data highlight the continued importance of Western province to the Sri Lankan
economy, as it accounted for 41.2% of total national output. Western province
forms the country's political, financial and cultural hub, but grew at a slower pace
than the national average in 2015, as its services sector struggled. However, in the
medium term the region will benefit from increased capital expenditure and
international agreements that will facilitate the development of large infrastructure
projects, particularly towards the latter half of the forecast period.
The pace of economic expansion in Southern province was also well below the
national average last year. This was expected, as the region had benefited from
heavy infrastructure spending under the previous government led by Mahinda
Rajapaksa (whose family has strong ties to the province). Such expenditure slowed
with the formation of a new government in 2015. Southern, Central and North-
western provinces each accounted for slightly more than 10% of national output in
2015. This means that the leading four provinces generated close to three-quarters
of Sri Lanka's GDP.
As The Economist Intelligence Unit had anticipated, the economic performance of
Northern province was particularly strong in 2015. Eastern province also witnessed
rapid growth thanks to a robust services sector. Improved connectivity with
economic centres across the country should help to bolster growth in the Tamil
heartlands in the north and east.
As economic expansion was fastest in smaller provinces with below-average income
per head, this helped to reduce regional inequality. CBSL figures show that income
per head in Western province was two times higher than in Northern province last
year. This was down from 2.5 times higher in 2014.

Impact on the forecast

We expect Western province to maintain its leading role in Sri Lanka's economy
throughout the next five years, but some smaller and less developed provinces are
likely to post higher growth rates.

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 Sri Lanka 23

August 16, 2016: Policy trends

Capital to see further commercial development
Event
On August 14th the government signed an agreement with a Chinese company,
CHEC Port City Colombo, for the reclamation of land near the capital, Colombo, to
build a new commercial centre.

Analysis
The agreement will end months of uncertainty surrounding the controversial
Colombo International Financial City (CIFC), which had been initiated under the
previous government. On the campaign trail members of the now-ruling parties
heavily opposed the project, as they believed that it would have severe adverse
environmental implications along the coastal belt, and affect the livelihoods of
fishing communities. However, given the high­profile nature of the project—it was
inaugurated by the Chinese president, Xi Jinping, during a state visit in 2014—the
administration subsequently changed its view.
The new agreement appears to be aimed at achieving three objectives. First, to
repackage the project to give it a fresh look in the eyes of a sceptical Sri Lankan
public. Second, to position the scheme internationally in the eyes of financial market
investors and broaden the project's commercial appeal. Finally, the new deal should
help to address a legal dispute between the Sri Lankan government and CHEC Port
City Colombo, which had planned to file for damages accrued. Upon coming into
power in January 2015, the government unilaterally suspended the project,
contributing to a rift in ties with China.
Through the project the government hopes to create a financial centre for South
Asia, generating jobs and economic growth in the process. Developing a credible
regulatory system will be crucial for the project's success. Similar to the Dubai
International Financial Centre, the CIFC is to be governed by a unique set of laws
and autonomous regulatory institutions in order to appeal to foreign investors. The
government has already appointed advisers to lead the preparation of a new legal
and regulatory framework for the centre. New laws being looked at include
introducing a Financial City Act; special financial, corporate and employment laws;
and distinct arbitration mechanisms.

Impact on the forecast

The announcement of this agreement is in line with The Economist Intelligence
Unit's view that the government will look to shift from an economic strategy reliant
on public infrastructure investment, to one driven more by foreign direct investment
and greater openness to international business.

Country Report September 2016 www.eiu.com © Economist Intelligence Unit Limited 2016

 Sri Lanka 24

August 31, 2016: Monetary policy outlook

CBSL keeps interest rates steady
Event
On August 30th the Central Bank of Sri Lanka (CBSL) held its key interest rates, the
standing deposit facility rate and the standing lending facility rate, steady at 7% and
8.5% respectively.

Analysis
The Economist Intelligence Unit had expected the CBSL to keep interest rates
unchanged, as it has already increased both rates by a cumulative 100 basis points
each since February. The latest rate increase, at the central bank's last monetary
policy review in July, was primarily intended to restrict credit growth, which
expanded by 28.2% in June. Although private lending remains higher than the
CBSL's target, we expect the effect of increased interest rates to transmit into the
credit market in the medium term in the form of higher borrowing costs, which will
help to restrict credit demand during the remainder of 2016.
A slight deceleration in the rate of inflation, measured by the Colombo consumer
price index, also helped the CBSL to keep interest rates on hold this month.
Consumer prices increased by 5.5% year on year in July, down from a 32–month
high of 6% recorded in June. The fall was probably facilitated in part by the price
ceiling imposed by the government on certain "essential" goods in mid-July.
Nevertheless, an increase in the value-added tax (VAT) in May means that inflation
will continue to trend relatively high until mid-2017 (the VAT has yet to be approved
by parliament, however).
We expect the CBSL to hold off from increasing interest rates further until at least
2017. The CBSL will continue to monitor domestic credit growth with a keen eye and
take exchange-rate dynamics into account while making future monetary policy
decisions. Owing to Sri Lanka's heavy debt burden in foreign-denominated
currencies, it will attempt to stave off depreciation pressure on the Sri Lanka rupee
against the US dollar

Impact on the forecast

This development is consistent with our view. We maintain our forecast that the
central bank will hold interest rates steady in the remainder of 2016.

Analysis
August 1, 2016: External sector
Uncertain times for remittances
Remittances from overseas workers are an important boost for household incomes
in South Asia, lending support to private consumption, as well as foreign reserves.
Over the years South Asian labour migration has ebbed and flowed between
destination countries as both sectorial demand and immigration barriers have
fluctuated. Increasing flows from the Gulf region have been among the most
significant recent trends, mainly owing to construction booms in these countries.
Since the fall in oil prices in 2014-15, Gulf real-estate development has slowed
significantly, affecting the prospects for remittances growth in the medium term.
According to the World Bank, in 2015 total remittance inflows were worth
US$581.6bn. Of these, 20.2% went to Bangladesh, India, Nepal, Pakistan and Sri
Lanka combined. However, remittances to these countries grew by only 1.9% in
2015, down from 4.1% in 2014. Moreover, this included a one-off spike in transfers

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 Sri Lanka 25
to Nepal owing to the earthquake in April 2015. A similar overall picture of
stagnating growth in personal transfers can be observed in the first half of 2016.
Domestic restrictions offer some limited explanation of the trend—for instance, in Sri
Lanka the raising of the minimum required age and qualifications of female workers
migrating to the Middle East in 2013 has slowed the outward flow of this
demographic—but, for the most part, the explanation lies in the destination
countries.

A changing landscape
The Gulf countries have been a key destination for South Asian migrants for
decades, with the UAE, Saudi Arabia, Oman and Qatar proving among the most
popular recipients of workers from Bangladesh, Pakistan and Sri Lanka in the past
decade. Kuwait is also becoming a significant host country for all South Asian
countries. Bahrain has a large established Indian expatriate population, which
constitutes almost one-third of the 1.3m population, and is still accepting large
numbers of South Asian workers. However, the downturn in global oil prices has
resulted in dramatic shifts in the economic environments of Gulf states, where public
and private investment spending is, to a large extent, determined by oil revenue.
This has rapidly taken a toll on migrant labour demand, not least via a downturn in
the construction sectors, which started in late 2015. The Economist Intelligence Unit
does not expect a marked recovery in oil prices before 2017 and, even after prices
pick up, investor confidence is likely to lag, limiting real-estate investment spending
in the medium term.
At the same time, other migrant destinations, such as Malaysia for Bangladeshi and
Pakistani workers, are hesitant to leave their doors open. Political pressure from the
domestic population has inclined governments to shut off access sporadically,
despite protests from some industries over labour shortages. Security concerns,
primarily associated with the perceived spread of terrorist activity in South Asia,
also present a moderate risk to current entry restrictions—the case of eight
Bangladeshi workers detained in Singapore in April 2016 on suspicion of terrorist-
related activities sparked calls for tighter regulation by an opposition political party,
the Singapore Democratic Party.
A way for South Asian governments to address these obstacles to ensure ongoing
growth in remittances in the medium to long term would be to reconfigure target
sectors for overseas labour. Most prominently, demand for domestic workers will
probably remain more stable than that for construction labour. This is well indicated
by the relative resilience of remittance flows to the Philippines in recent months
amid decelerating flows to South Asia. However, success in reorienting labour
supply toward this sector will be limited owing to the relative inflexibility of gender
employment patterns, particularly in India and Pakistan. The Philippines had a
female labour force participation rate of 53% in 2014 according to the World Bank,
and similarly around half of the total Filipino overseas workforce were women. By
contrast, India's female labour force participation rate was just 29% in 2014, and
overseas employment is likewise dominated by male workers. Similar patterns can be
observed in Pakistan. Even Bangladesh and Sri Lanka, which fair more equitably in
terms of gender participation domestically, still export a majority male workforce.
The medium-term prospects in this regard are therefore poor.

A cushion for the economy

The impact of decelerating remittance inflows on economies' external accounts will
also be a cause for concern for South Asian governments. Remittances have
traditionally supplied ample support to current accounts, providing a source of
foreign-exchange reserves to defend against volatility and depreciation of
currencies, as well as helping to ensure continually expanding access to external
finance. India is still prioritising policy aimed at mitigating the impact of any future
large short-term outflows, similar to that experienced in 2013, which could lead to
currency depreciation. The expected raising of US Federal Reserve policy interest

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rates from 2017 will also add to downward pressure on the rupee and, to a lesser
extent, on those of its smaller neighbours.
However, India is now in a stronger position compared with 2012-13, with foreign-
exchange reserves rising by 4.8% year on year in January–April (albeit at a slower
pace than the double­digit average seen in 2014–15). In the case of Bangladesh and
Pakistan, foreign­exchange reserve growth is even higher, rising during January–
May by 23.2% and 34.8% to US$28.5bn and US$18.2bn respectively. Strong growth
in merchandise exports lent considerable support to Bangladesh's reserves.
Therefore, unless the current stagnating trend in personal inward transfers develops
into a sustained decline, which we do not expect, the negative impact on
macroeconomic stability will be minimal. The most pronounced consequences will
instead be felt in the dampening effect on private consumption growth in the
medium term as the supplements provided to household incomes by remittance
flows is reduced.

Country Report September 2016 www.eiu.com © Economist Intelligence Unit Limited 2016