Sri Lanka: Market Profile
- Sri Lanka’s GDP growth eased to 4.3% in 2016 with the economy projected to stabilise somewhat with a GDP growth of 4.5% in 2017.
- The government is adhering to conditionality measures associated with the IMF loan of US$1.5 billion, a three-year bailout package agreed in April 2016 to avert a balance of payment crisis.
- Consumer price inflation increased marginally to 3.7% in 2016 from 0.9% in 2015. Sri Lanka is facing considerable inflation pressure in 2017 under rising energy prices, severe drought and persistent credit growth. The jobless rate moderated to 4.2% in Q4 2016 from 4.4% in 2015.
- Sri Lanka’s exports decreased by 2.2% in 2016, while imports recorded an increase of 2.5%, resulting in a trade deficit of US$9.1 billion. In the first five months of 2017, both exports and imports recorded year-on-year increases of 4.3% and 12.6% respectively.
- In the first six months of 2017, Hong Kong's exports to Sri Lanka dropped 6.4% YoY to US$233 million, as imports rose 13% YoY to US$66 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 moderating to 4.3% in 2016 amid heightened balance of payment concerns. The economy is expected to stabilise somewhat in 2017 while maintaining moderate growth of 4.5%. Inflation remained moderate at 3.7% in 2016, with considerable price pressures expected in 2017 in light of rising energy prices, severe drought and persistent credit growth.
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 due to government bonds redemption and external debt payments. The IMF loan of US$1.5 billion was approved in June 2016 on the conditionality that Sri Lanka implement reforms, particularly cutting its budget deficits. Sri Lanka's previous IMF programme ended in 2012.
Besides austerity measures, the government is also trying to broaden its revenue. In November 2016, the Value Added Tax (VAT) rate was raised from 11% to 15%. The Ports and Airport Development Levy (PAL) was also raised to 7.5% from 5%. In the 2017 Budget, the government proposed to increase the corporate income tax rate for certain sectors (including exports, agriculture, SMEs and unit trusts) to 14% from 10-12%. Capital gains tax on gains from sale of immovable properties is also proposed.
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.
The services sector contributes to about 60% of the Sri Lankan economy. Information technology, financial services, tourism and telecommunications are the main growth drivers. 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. Export manufacturing of the Sri Lanka is relatively lagging behind compared with other South Asian and Southeast Asian countries. 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 Western Region Megapolis project to boost development in this region, with a view to bringing Colombo on a par with other major Asian cities. Finance, logistics, science and technology are the key industries under this initiative.
In 2016, the services sector reported a growth of 4.2%, thanks to the robust performance of the IT, finance and telecom sectors. Industry expanded 6.7% while the agriculture sector contracted by 4.2% due to severe drought at the end of the year.
Sri Lankan exports decreased by 2.2% to US$10.3 billion in 2016. Two major export items, textiles and garments (45% share) and tea (12.3%) increased by 8.5% and 1.5% respectively. Major export markets included the US, UK, EU, India and the UAE.
In 2016, Sri Lankan imports increased by 2.5% to US$19.4 billion. Major import items fuels, textiles and machinery and equipment. While fuel imports dropped by 1.2%, textile imports increased by 26.3%. Major import sources were India, China, Japan, the UAE, and Singapore. The trade deficit reached US$9.1 billion in 2016.
In the first five months of 2017, both exports and imports recorded year-on-year (YOY) increase of 4.3% and 12.6% respectively. The export outlook of Sri Lanka is improving thanks to the re-instatement of Generalised Scheme of Preference-Plus (GSP-Plus) status by the EU in May 2017.
In order to promote FDI, the Sri Lankan government has set up the Board of Investment (BOI), which currently manages 14 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 with special incentives given to foreign-invested enterprises (FIEs) in these sectors, namely, tourism and leisure, infrastructure, knowledge service, utilities, apparel, export manufacturing, export services, agriculture and education. The BOI plans to introduce new methods including public-private partnerships for spurring investment. In the 2017 Budget, new incentive packages for landmark projects with investment between US$100-500 million and those more than US$500 million will be designed. Exchange control reform is also proposed to ease foreign exchange remittance to facilitate foreign investment.
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, the country’s largest FDI project which costs about 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. However, FDI outlook of Sri Lanka was adversely affected by the tension between India and China and nationalist sentiments towards Chinese investments.
According to the UNCTAD World Investment Report, FDI inflow to Sri Lanka amounted to US$898 million in 2016, up US$218 million from 2015. Sri Lanka’s FDI stock amounted to US$9.4 billion as of 2016. China is a major investor on ports and railways in Sri Lanka.
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 30% under a four-band tariff structure with rates being 0%, 7.5%, 15% and 30%. 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, duties and taxes that any importer is liable to pay upon importation include the Import Cess, Excise Duty, Nation Building Tax (NBT), Special Commodity Levy (SCL), PAL and 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 November 2016, with exemptions granted to mobile phones, construction equipment, computers and accessories, pharmaceutical, real estate, water, electricity, health and education.
In 2010, Sri Lanka lost its GSP-Plus status and thereby duty-free access to the EU due to non compliance with certain human rights conventions. In May 2017, the GSP-Plus status was re instated on the conditions that the Sri Lankan government is committed to human rights, environmental protection and governance reforms. Sri Lanka also enjoys GSP benefits from Japan, the US, Canada, Norway and New Zealand.
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). To further strengthen economic cooperation between Sri Lanka and India, the Indo–Sri Lanka Economic and Technology Cooperation Agreement (ETCA) and Comprehensive Economic Partnership Agreement (CEPA) are under negotiations. Meanwhile, Sri Lanka and China have entered into FTA negotiations. In the China visit of Sri Lankan President Maithripala Sirisena in March 2015, the two sides agreed to speed up FTA talks.
Hong Kong's Trade with Sri Lanka
Hong Kong's exports to Sri Lanka dropped by 6.4% YoY to US$233 million in the first six months of 2017. Major export items included telecom equipment & parts (18.9% share), knitted or crocheted fabrics (16.9%), tulles, lace, embroidery, ribbons, trimmings and other small wares (16.6%), cotton fabrics, woven (6.4%) and miscellaneous manufactured articles (4.4%).
On the other hand, Hong Kong's imports from Sri Lanka rose 13% YoY to US$66 million in the first five months of 2017. Major imports included tea and mate (16.2%), other articles of apparel, of textile fabrics (10.5%), pearls, precious & semi-precious stones (7.1%), men’s or boys’ wear of textile fabrics, not knitted (5.8%), and women or girls’ wear of textile fabrics, not kitted (5.3%).
In the first six months of 2017, a total of 3,247 Sri Lankan visitors came to Hong Kong. As at end-May 2017, there were 2,469 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.