The Economy of Sri Lanka

November, 17 2011

An island nation situated at the Southern tip of India, Sri Lanka is often referred to as the Pearl of the Indian Ocean. With the end of a bitter three decade long civil conflict, the country is taking advantage of new found peace and stability and burgeoning economic prosperity to make its mark as a global logistics hub.

Since the end of the war in May 2009, the economy has embarked on an era of unprecedented growth and affluence. Aggressively promoting economic growth and prosperity as it targets a GDP growth rate above 8%, in its Ten Year Horizon Development Framework, the Government plans to invest roughly US$4.5 billion on island-wide infrastructure projects in power, roads, water supply and ports. These include the construction of five international sea ports and a second international airport, advanced road networks, the development of state-of-the-art communication networks as well as upgrading other facilities and services to international standards. The search for oil and gas is also a focal point of economic revival plans.

Relaxed macro-economic policies, including a lower tax regime, the relaxation of strict foreign exchange controls, BOI reforms, lower interest rates and overall fiscal prudence have created an investor friendly atmosphere, attracting increasing Foreign Direct Investment, contributing to roughly 5% of the country’s GDP in 2011. These and other measures targeting improved governance including reduced bureaucracy and corruption earned the country a higher global competitiveness index ranking in 2011, putting it above its powerful economic neighbour India, as well as an economic freedom and governance ranking higher than most regional counterparts.

Among proposed high-profile FDI projects are plans to set up 15 international universities, a bustling landmark 400 acre port city including hotels, apartments and malls and the entry of leading international hotel chains, aiming to cater to an increasingly wealthy demographic of consumers and an affluent tourist market. The country recently recorded its highest ever single FDI inflow of US$500 million in a tourism venture.

While in the midst of a momentous transformation to an industrialised economy, its traditional stronghold in the service industry is growing with simultaneous speed. Sri Lanka is one of the largest apparel exporters in the world, forking in more than US$ 3 billion annually Tourism is also traditionally a main contributor, with the country famously being cited the Number One Holiday Destination for 2010 by The New York Times. The Government is heavily investing in this sector, targeting estimated tourist arrivals of 2.5 million and earnings of US$ 2.75 billion in 2016. The country is also an attractive destination for the Business Process Outsourcing industry and has been identified as a strong emerging outsourcing destination for global companies.

Increased political stability is laying the way for strong growth on strong foundations, as the Government formulates long term robust development plans to drive economy-wide sustainable growth. On the cusp of significant expansion and transformation, the Sri Lankan economy is an exciting frontier market offering exciting investment opportunities as it races ahead of its South Asian counterparts.