Sri Lanka is a lower middle-income country in South Asia off the southern coast of India in the main east-west Indian Ocean shipping lanes. Its nominal gross domestic product (GDP) was $74.9 billion with a GDP per capita of $3,400 in 2022. The country faces the challenge of navigating its way out of an unprecedented economic crisis in 2022, precipitated by unsustainable external debt load and budget deficits resulting from poor fiscal management. Stemming from the crisis, the economy recorded its worst performance since independence as a result, contracting by 7.8 percent in 2022 compared to a 3.5 percent growth in 2021. The current economic outlook remains sluggish, albeit with a positive momentum toward recovery. Sri Lanka’s GDP is expected to contract by 3 percent in 2023 before returning to positive growth beginning in 2024, according to IMF estimates.
Since the country’s current president, Ranil Wickremesinghe, assumed office in July 2022, the Sri Lankan government has introduced a variety of sweeping financial reforms, including tax hikes and ongoing privatization of money-losing state-owned enterprises (SOEs). After prolonged negotiations, the IMF approved an Extended Fund Facility (EFF) in March 2023 – valued at roughly $3 billion over four years – to support Sri Lanka’s efforts to shore up financing. The disbursements began in March 2023 with the first tranche of $330 million, while future disbursements are conditioned on further improvements in areas including fiscal health and transparency. Long-term, the IMF’s EFF seeks to restore the country’s fiscal sustainability through a revenue-based fiscal consolidation plan. Sri Lanka’s current government has shown commitment to implementing growth-enhancing structural reforms.
The external sector is showing signs of stability supported by improved foreign exchange inflows and an improved balance of payments position. Sri Lanka’s exports totaled approximately $13 billion in 2022 compared to $12.5 in 2021. Apparel and cash-crops are the country’s leading exports, with apparel accounting for $5.6 billion out of the $13 billion in 2022. The United States has been Sri Lanka’s largest export market for many years, with more than $3.3 billion exported in 2022 (25.3 perent of total exports). The tourism industry was expanding rapidly with peak annual earnings of $4.4 billion 2018 before suffering a severe blow from the COVID-19 pandemic and subseuqent economic crisis. Earnings have since been recovering steadily, reaching $1.46 billion during January-September 2023. Remittances from migrant workers also represent a significant forex source for the country, with $3.79 billion reported in 2022 compared to $5.49 billion in 2021.
Foreign Direct Investment (FDI) inflows recorded an improvement in 2022 compared to the previous year, albeit remaining well below the country’s potential and FDI flows to regional peers. FDI including foreign loans amounted to $1.18 billion in 2022 compared to $779 million in 2021. Recent FDI was concentrated in the real estate, mixed development projects, ports, and telecommunications sectors. Investment in tourism remains relatively subdued, albeit with future growth potential given Sri Lanka’s cultural and natural attractions. The business process outsourcing sector is also growing and has strong involvement from U.S. firms. With Sri Lanka’s growing middle class, investors also see opportunities in franchising, retail, and services, as well as light manufacturing.
As of June 2023, the country’s total debt stood at $96.5 billion. The government is in the process of restructuring its debt to recover long-term fiscal sustainability. The country has begun to implement its domestic debt restructuring program, while negotiations continue on its external debt. Total outstanding central government debt as a percentage of GDP stood at 113.8 percent at the end of 2022.
Political Environment
Visit State Department’s website for background on the country’s political and economic environment.