Sri Lanka

In-depth country-focused analysis on Sri Lanka's economic, political and operational risk environment, complemented by detailed sector insight

Sri Lanka

Our comprehensive assessment of Sri Lanka's operating environment and the outlook for its leading sectors are formed by bringing together a wealth of data on global markets that affect Sri Lanka, as well as the latest industry developments that could impact Sri Lanka's industries. This unique integrated approach has given us an impeccable track-record for predicting important shifts in the markets, ensuring you’re aware of the latest market opportunities and risks in Sri Lanka before your competitors.

Country Risk

Sri Lanka Country Risk

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Core Views

  • Given that the Sri Lankan economy is relatively small and open, the administration's balanced and pragmatic approach towards ethnic reconciliation on the island and foreign relations will be positive for growth over the medium-to-long term. However, we believe that there will be several key challenges which will inhibit progress over the near-term.

  • The Central Bank of Sri Lanka (CBSL) will likely keep its policy rates on hold over the coming months with a tightening bias in order to manage the cost of refinancing for public debt, ensure price stability, and down play the risk of a balance of payment crisis.

Major Forecast Changes

  • Despite a likely recovery in the industrial sector over the coming quarters, we expect the Sri Lankan economy to face mounting headwinds...

Sri Lanka Operational Risk Coverage (9)

Sri Lanka Operational Risk

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BMI View: Strong economic growth, driven by the expansion of manufacturing, real estate, tourism and infrastructure, is attracting a range of investors to Sri Lanka who also stand to benefit from relatively low taxes, though the tax system itself is burdensome. There are substantial risks, however, including pervasive corruption in public institutions and a weak legal system which undermines the enforcement of contracts and creates a weak investment environment. Overall, Sri Lanka scores 52.6 out of 100 on the BMI Trade and Investment Risk Index, which places the country a relatively...

Sri Lanka Crime & Security

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BMI View: Investors face a high degree of threat from Sri Lanka's internal crime environment, which reflects elevated crime rates, limited police force capability and the after-effects of the 25-year long civil conflict which ended in 2009. A pertinent security threat stems from the political tensions and domestic terrorism emanating from Tamil groups, such as the Liberation Tigers of Tamil Eelam and other minorities that feel marginalised, which have the potential to spark violent clashes and protests throughout the country and disrupt business operations, discourage tourism and hinder infrastructural development. However, these threats are moderated by the low likelihood of interstate conflict and attacks from international...

Sri Lanka Labour Market

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Success in developing an increasingly productive and healthy workforce with good basic skills has played a key role in helping Sri Lanka to approach middle-income status. However, there are a number of human capital issues the country needs to address before it can offer a labour market competitive with leading Asian nations.

At 4.1%, unemployment is good by regional standards, with increasing investment creating better-paid opportunities in manufacturing and the service sector. Nonetheless, close to 50% of workers remain in agriculture, typically earning close to the low minimum wage of USD39 a month. Low numbers of people actively seeking work also belie poor rates of workforce participation, with only 35% of the potential female labour force in employment. Other issues include disappointing rates of secondary and university level education and generous legal protections for workers in some areas. We award Sri Lanka a score of 49.5 in our...

Sri Lanka Logistics

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Supply chains in Sri Lanka must traverse an uneven transport network in terms of quality. There are solid growth prospects, and cheap but unreliable utilities availability. On the other hand, the export-driven manufacturing sector is boosted by relatively efficient trade procedures, which reduce costs and the risk of delays. Sri Lanka receives an overall score of 61.5 out of 100 in the  BMI Logistics Risk Index. This places the country in 12th position out of 29 Asian states, in between Vietnam and Brunei, and two places ahead of its neighbour India.

The relatively poor availability of key utilities such as electricity, water and internet, which together threaten to grind businesses to a halt and overshadow the competitive utilities costs, is a key threat to investors. In particular, the quality and reliability of internet connectivity in Sri Lanka pose risks to investors in the services and communications sectors....

Sri Lanka Trade & Investment

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Sri Lanka's economy has grown strongly in recent years, averaging annual increases of 6.4% between 2003 and 2012. Prospects for the future look similarly good, with a rate of 7.2% recorded for 2013 and heavy investment by China set to sustain growth. Areas of the economy particularly attractive to the foreign investor include the country's manufacturing, real estate and infrastructure sectors, with the latter two set to grow strongly as the country continues to rebuild following its 25-year civil war. Investment in Sri Lanka is by no means risk-free, however, and against these opportunities stand a number of risks. These include poorly managed public finances, pervasive corruption and extensive weaknesses in the country's legal system, all of which contribute to the significant difficulties associated with investing. We have awarded Sri Lanka a score of 50.1 in our Trade and Investment Risk Index, putting the country 12th among 29 Asian nations, just above China....

Sri Lanka Industry Coverage (8)

Autos

Sri Lanka Autos

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Key Views

We believe a combination of new import restrictions and higher car taxes will lead to a slowing in growth within Sri Lanka's new vehicle sales market over 2016 from the elevated levels seen in 2015. However, given strong domestic demand and the likelihood of further interest rate cuts, we believe the market can still show good growth of 31.7%, with passenger cars outperforming commercial vehicles.

  • For 2016, we are anticipating a slowdown in the stellar growth seen in Sri Lankan auto sales over 2015.

  • The government is looking to slow the rate of new car sales growth via a raft of newly-introduced changes to import regulations and taxes.

  • For now, BMI is maintaining its current sales forecasts as it looks to examine the impact of these new measures over the coming...

Commercial Banking

Sri Lanka Commercial Banking

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Commercial Banking Sector Indicators
Date Total assets Client loans Bond portfolio Other Liabilities and capital Capital Client deposits

Information Technology

Sri Lanka Information Technology

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BMI View: We hold a positive outlook for the Sri Lankan IT industry as we forecast IT spending in the country to be driven by strong economic growth and government support for digitalisation. We forecast a CAGR of 14.2% for the IT market spending in 2014-2019. We believe that 2016 will witness stable growth in all sectors of the IT market, with the market growing by 14.7% in 2016. Strong income growth and low penetration of PCs, enterprise software and services will combine to boost IT spending growth in Sri Lanka over the medium term. The local IT industry is also developing, with vibrant local software and BPO industries and the development of local facilities for PC...

Infrastructure

Sri Lanka Infrastructure

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BMI View: Sri Lanka's 2016 budget will help to support growth of the construction sector, with a larger budget allocation for infrastructure and easing foreign investment restrictions. A rise in tourist arrivals as well as Chinese investment will also help to sustain construction activity. Growth remains below its full potential due to political uncertainty, a volatile currency, as well as labour constraints.

  • We forecast Sri Lanka's construction sector to register real growth of 10.9% on average between 2016 and 2020 in real terms, which represents a slight slowdown from the 12.0% registered between 2000 and 2014.

  • The 2016 budget, which was released in November 2015, shows the government's focus on infrastructure development. Based on the budget, allocation of funds for public investments has increased to 31% from 24% in 2015,...

Pharmaceuticals & Healthcare

Sri Lanka Pharmaceuticals & Healthcare

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BMI View: Sales of medicines in Sri Lanka will see reasonable growth ahead. Commercial opportunities are curtailed by the Sri Lanka's under-developed healthcare system and preference for generic drugs. Multinational drugmaker investments, which could catalyse the sector's growth, will be impaired by the dominant position of state-linked firms and the depreciation of the Sri Lankan rupee.

Headline Expenditure Projections

  • Pharmaceuticals: LKR75.1bn (USD575mn) in 2014 to LKR82bn (USD771mn) in 2015. Forecasts remain flat compared with the previous quarter with a downgrade in US dollar terms.

  • Healthcare: LKR282.5bn (USD2.2bn) in 2014 to LKR424.0bn (USD2.9bn) in 2015. Forecasts are slightly up compared with the previous quarter with a downgrade in...

Power

Sri Lanka Power

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BMI View: Sri Lanka will look to coal and renewables to meet its energy needs for the next three to five years, as alternatives offered by gas-fired power generation remain too costly and the necessary pipeline links, LNG facilities and distribution system are still lacking. More urgently, plans for coal and renewable generation, as well as the cross-border energy trade with India have yet to be...

Telecommunications

Sri Lanka Telecommunications

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BMI View: Prepaid subscribers dominate the mobile market and ARPU has been trending lower as operators engage in price competition to retain their subscriber market share. Although 4G LTE and LTE Advanced technology is now present in the market, we believes that take-up of data services is still limited in the medium termdue to the price-sensitive nature of the consumer market. As the high telecoms tax continues to squeeze operator margins, smaller operators have been expressing interests in divesting their local operations; which could lead to consolidation in the sector. SLT's new fibre-optic network, which is still being rolled out, will bring fixed broadband to the next stage.

Market Saturation Provides Opportunity For Non-Voice Revenue Growth
Sri...

Tourism

Sri Lanka Tourism

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BMI View: Sri Lanka's tourism industry is growing rapidly, bolstered by an expanding range of regional and global air travel connections and growing awareness of its many attractions, as well as improved safety perceptions since the end of the civil war. With international visitor numbers increasing steadily, Sri Lanka's hotel and accommodation sector is attracting substantial foreign investment. The luxury hotel sector in particular is growing rapidly, though development is hampered by an insecure investment environment and high levels of corruption.

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Key Forecasts (Sri Lanka 2012-2019)
2012 2013e

Latest Sri Lanka Articles

  • We have revised down our CME milk price forecast for 2016 and now see price...

  • We believe that there is currently disconnect between oil prices and fundam...

  • Price-elastic consumption growth and more limited growth in supply will mai...

Latest Sri Lanka Blogs

  • India will seek to expand its geopolitical reach over the coming decade and...

  • Former Sri Lankan President Mahinda Rajapaksa's defeat in the January 8 pre...

  • The outcome of Sri Lanka's presidential election on January 8 is too uncert...

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