Vital Statistics
| Population (2012) | : 20.3 Million |
| Land Area | : 65,610 Sq km |
| Languages | : Sinhala, Tamil and English |
| Per C_apita GDP (2013) | : US$ 3,280 |
| Maximum Corporate Tax Rate (2013) | : 28% |
| Currency (2013) | : Sri Lankan Rupee (LKR 131: 1 US $) |
Background
Sri Lanka lies in a strategic position at the Southern tip of the Indian subcontinent, at a mid-point along key shipping routes between east and west. After three decades of Civil War Sri Lanka achieved peace in May 2009. This has paved the way for a paradigm shift in the country’s development path characterised by faster economic growth, higher investment, infrastructure development and political and economic policy stability. Sri Lanka has traditionally been a country which relied on the Plantation sector and in labour intensive industries such as apparel manufacture. In more recent years the Services sector has taken on greater importance with trade, finance, transport, construction, telecommunication and leisure dominating the economy. In 2013 per capita income reached US$ 3,280 and is projected to reach US$ 4000 by 2015.
Political Climate
Sri Lanka is a multi-ethnic, multi-religious democratic republic with an elected National Parliament and President along with provincial and local governments which are responsible for certain subjects at sub-national levels. The prevailing political stability and policy certainty has created a positive investment climate both for Sri Lankan firms and potential foreign investors. In 2011 Foreign Direct Investment breached the US$ one billion level for the first time and is projected to reach US$ 2.5 billion in 2014. The stable political environment has also enabled the Government to embark on an ambitious programme of infrastructure development and economic policy reform.
Policy Directions
During the Civil War investment in Sri Lanka’s infrastructure was neglected. The incumbent government has embarked on an aggressive investment drive in the country’s infrastructure, focusing on national highways and railways, ports, airports and energy. Since 2011 Sri Lanka has built two expressways, connecting Colombo to the Southern city of Matara and to the Airport in Katunayaka. New expressways are being planned to connect the hill capital Kandy and extending to the North and the East. The national railway network is being modernised to enable faster rail and new routes are also being created. The Colombo Port was expanded as the new Colombo South Harbour, with a depth of 18 metres, has the capacity to accommodate the world’s largest vessels. The Commercial Hub Act of 2013 will further enhance Sri Lanka’s position as a regional maritime hub as 6 locations were designated as free ports. The primary airport in Katunayake is also undergoing expansion and a second international airport has been completed in Mattala in the South. Several new power projects are in progress ranging from coal power to hydro and wind power. Sri Lanka also began oil exploration off its North-West coast, and thus far two drill sites have indicated presence of hydrocarbons. At present the commercial viability of these sites is being examined. The investments over the next 5 years will result in Sri Lanka enjoying a modern infrastructure network which will support economic growth in the long term.
In addition to investment in physical infrastructure, emphasis is being placed on development of social infrastructure. Sri Lanka has always attached great importance to social development and had a policy of free health and education up to tertiary level since the pre-independence era. This has resulted in a literacy rate of over 90%, life expectancy of 74 years and birth and death rates comparable to developed nations (17.4 and 5.9 per 1000 persons). In order to further enhance the quality of education, the Government has indicated a desire to encourage foreign universities to establish off-shore campuses in Sri Lanka, catering to both domestic and regional markets. Simultaneouly measures are being taken to enhance existing education institutions at primary, secondary and tertiary levels. In addition to public sector education, Sri Lanka has developed substantial professional qualifications institutions, resulting in the country now having the world’s second highest pool of CIMA trained students outside the UK, making Sri Lanka an attractive source for financial outsourcing.
Along with investments in infrastructure the Government has outlined a medium term economic policy framework which emphasises private sector led growth, with reduced taxes on corporate (maximum 35% reduced to 28%) and personal incomes (maximum 35% reduced to 24%), international trade and a simplified tax structure. Rationalisation of expenditure would also lead to better fiscal management, eventually resulting in consolidation of fiscal deficits closer to 5% of GDP in the medium term, as envisaged in the Fiscal Management Responsibility Act. This would help entrench lower inflation and interest rates and lead to longer term macroeconomic stability. The Central Bank has also outlined a plan to gradually liberalise the capital account, making it easier for Sri Lankan corporates to access global capital markets and to develop the domestic corporate bond market. Accordingly the financial market has developed rapidly, with a number of banks following the sovereign in tapping the global bond market, and the domestic corporate debt and equity markets have grown significantly in recent years.
The overall policy thrust of the Government can be summarized as a 5 hub strategy, where the Government hopes to position Sri Lanka as a regional hub in the following areas;
- Shipping and naval hub
- Aviation hub
- Energy hub
- Knowledge hub
- Commercial and finance hub
Economic Climate
As is the trend in emerging economies, Sri Lanka’s economy is dominated by the Services sector (59% of GDP) with industry (30% of GDP) and agriculture (11% of GDP) making up smaller shares. Recent economic growth has been broad based with all three sectors growing significantly since 2009. Whilst Sri Lanka has found itself in an uncertain global economic environment, the domestic economy has enjoyed a peace dividend that has resulted in high growth (over 8% in 2010 and 2011), low unemployment (4.1% in 2013), historically benign inflation (within single digits for over 50 consecutive months), and an improving fiscal position on the back of structural reforms and an IMF Stand By Arrangement (budget deficit of 5.9% of GDP for 2013 and a projected deficit of 5.2% for 2014).
Sri Lanka’s economy has always been characterised by resilience. Even during the war economic growth was maintained at an average of around 5%. With the recent policy reforms, developments in infrastructure and increased investment, the economy is well on target to securing a long-term growth path well above past trends.
Sri Lanka is ideally located at a central point amongst the emerging global economic powerhouses. India is immediately north of Sri Lanka and the two countries have a 14 year old Free Trade Agreement. Sri Lanka has developed close political and economic ties with China, with a Free Trade Agreement under negotiation and strong aviation and shipping links already in place. Therefore the strategic objectives of Sri Lanka’s 5 hub vision are in line with emerging global realities and trends. Greater economic and political integration with these emerging giants places Sri Lanka in an ideal position to play a pivotal role amongst the drivers of global economic growth in the medium to long term.