Subchapters:
- Basic data
- Public finances and the state budget
- Banking system
- Tax system
Basic data
According to cheeroutdoor.com, Sri Lanka is the 70th largest economy in the world and 23rd in Asia. Sri Lanka’s economy shrank by 5% in 2020 as a result of the pandemic, suffering significant losses in tourism revenue, which accounts for 13% of the country’s GDP. The pandemic did not have that much of an effect on unemployment, which currently stands at 5.5%. In 2021, the Sri Lankan economy grew by 3.5%. However, the forecast for economic growth in 2022 is one of the weakest compared to other South Asian countries and is estimated at 3.3%. In 2021, the restrictive pandemic measures began to be relaxed, resulting in an increase in tourists and a partial recovery of the economy. But the year 2021 was marked by rising inflation, which rose to 14% over the last three quarters. The Sri Lankan economy is currently in deep financial distress due to high foreign debt and dwindling foreign exchange reserves.
The government responded to the country’s growing financial problems by restricting imports of selected items. The growth of the Sri Lankan economy has long supported the sale of tea, textile products, rubber products, tobacco and fruit. The Sri Lankan economy is currently focused on modernizing the power grid, building a network of renewable energy sources and strengthening the transport infrastructure. The current account has been in deficit for a long time. Last year, Sri Lanka crossed the 22 million mark with a GDP per capita of around US$14,000. In an effort to support the domestic industry, Sri Lanka adopted massive import restrictions during 2020. These measures were also criticized by the EU. Over time, the import ban appears less and less a temporary measure and more and more an economic policy incompatible with export efforts. Highly restrictive trade measures reduce much-needed government revenue from import tariffs and para-tariffs. The import ban reduces the competitiveness of Sri Lankan exports by adding barriers to importing raw materials and limiting transportation options. The legal uncertainty of the measure reduces Sri Lanka’s ability to attract the European investment that Sri Lanka is crying out for.
Table from MOP + additionally balance of payments, indebtedness/GDP.
| Pointer | 2019 | 2020 | 2021 | 2022 | 2023 |
| GDP growth (%) | 2.3 | -5 | 3.5 | 3.3 | 3.7 |
| GDP/population (USD/PPP) | 13,930.00 | 13,530.00 | 14,420.00 | 15,250.00 | 16,190.0 |
| Inflation (%) | 4.3 | 4.6 | 6 | 11 | 3.6 |
| Unemployment (%) | 4.8 | 5.5 | 5.6 | 5.5 | 5.2 |
| Export of goods (billion USD) | 11.9 | 9.7 | 12.5 | 13 | 13.4 |
| Import of goods (billion USD) | 19.9 | 15.8 | 19.2 | 20.3 | 21.7 |
| Trade Balance (Billion USD) | -8 | -6 | -6.7 | -7.2 | -8.2 |
| Industrial production (% change) | 1.3 | -8 | 11 | 5 | 6 |
| Population (millions) | 21.3 | 21.4 | 21.5 | 21.6 | 21.7 |
| Competitiveness | ON | ON | ON | ON | ON |
| OECD export risk | 06.VII | 06.VII | 06.VII | ON | ON |
Source: EIU, OECD, IMD
Public finance and state budget
| Public finance | 2021 |
| State budget balance (% of GDP) | -11.2 |
| Public debt (% of GDP) | 104.3 |
| Current account balance (billion USD) | -2.2 |
| Taxes | 2022 |
| AFTER | ON |
| F.O | ON |
| VAT | ON |
The country’s fiscal deficit expressed as a percentage of GDP fell by a record 11.2% in 2021. In absolute terms, the deficit is Rs billion. Fiscal policy was aimed at reviving the stagnant economy. The country registered a decline in government revenue and an increase in recurrent expenditure. The heavy reliance on domestic resources to finance the budget deficit in 2021 reflected the impact of extremely challenging global market conditions, which limited access to external financing. Short-term risks to the fiscal sector could remain elevated due to low revenue mobilization and large foreign currency debt service requirements. According to the government’s medium-term fiscal framework, a budget deficit of 9.4% is projected for 2022, which is expected to gradually decrease to 7.5% by 2023. The central bank stated in its 2021 annual report,
The country is burdened by high foreign debt, which has grown to 104% of GDP in 2021. Sri Lanka is expected to pay US$ 4-5 billion annually in installments in the coming years. At the same time, foreign exchange reserves amount to only around USD billion in 1Q 2022. The potential for economic recovery in 2022 depends on the elimination of the domestic political crisis, appeasement of foreign creditors and cooperation with international institutions. Revenue from tourism and increasing domestic activity will be key for Sri Lanka. Parliament approved the 2022 budget in December 2021. The total expenditure for 2022 is expected to be 5,134 billion rupees.
Banking system
The banking system in Sri Lanka is administered by the Central Bank under the key laws of the Banking Act, the Monetary Law Act and the Exchange Control Act. The Banking Act and the Financial Companies Act authorize the operation of three types of financial institutions, namely commercial banks, registered financial companies and specialized banks to which the public can entrust their finances. An up-to-date list of financial institutions of Sri Lanka can be found on the website of the Central Bank of Sri Lanka – http://www.cbsl.gov.lk /.
The commercial banking system consists of a total of 25 banks, of which 12 are domestic and 13 foreign. Major Sri Lankan Banks:
1) State: Bank of Ceylon, People`s Bank, SME Bank
2) Private Banks: Commercial Bank of Ceylon, DFCC Bank, Hatton National Bank Ltd., NDB Bank, Nations Trust Bank, Pan Asia Bank, Sampath Bank Ltd.,, Ceylan Bank Ltd., Union Bank of Colombo
3) Foreign banks: Citibank NA, Deutsche Bank AG, Habib Bank, Hongkong and Shanghai Banking Corporation, Indian Bank, Indian Overseas Bank, Mashreq Bank, Muslim Commercial Bank, Public Bank Berhad, Standard Chartered Bank, State Bank of India, Union Bank (Pakistan) Ltd.
Sri Lankan banks are likely to face continued pressure on asset quality in 2022 as rising macroeconomic stress stemming from the sovereign credit profile poses a threat to borrowers’ ability to repay. According to the IMF, modernizing the banking law to strengthen and harmonize regulatory, supervisory and resolution frameworks for deposit-taking financial institutions would help ensure financial stability. In April 2022, the American rating agency Fitch placed 13 Sri Lankan banks on a negative rating (so-called Rating Watch Negative). Banks with negative rankings include People’s Bank (Sri Lanka), Commercial Bank of Ceylon PLC, Hatton National Bank PLC, Sampath Bank PLC, National Development Bank PLC, DFCC Bank PLC, Seylan Bank PLC, Nations Trust Bank PLC, Pan Asia Banking Corporation PLC, Union Bank of Colombo PLC, Amana Bank PLC,
Tax system
Since the beginning of the 21st century, the tax system has undergone fundamental changes that support the trend of deregulation, liberalization and privatization. Details on taxes can be found at http://www.ird.gov.lk/en/sitepages/default.aspx
