Sri Lanka’s economy has slowed in recent times. External and internal imbalances have caused balance of payments difficulties and forced the country into an IMF program. The accompanying necessary structural reforms include tighter lending conditions to curb domestic credit expansion and fiscal consolidation to address the significant budget deficit and growing public debt burden. But whilst these reforms have weighed on domestic demand, they are critical to ensure a more sustainable growth profile in the future. The IMF expect growth will be above 4% p.a. over the coming years.
The deteriorating relationship between President Sirisena’s Sri Lanka Freedom Party and Prime Minister Wickremesinghe's United National Party raises political uncertainty and the risk of policy paralysis. This poses significant risks to the near-term growth outlook. Presidential elections are set to be held late this year.
Recent terror attacks also weigh on the short-term economic outlook. Although the attacks were largely unexpected, relations between different religious and ethnic groups have since grown more tense. The attacks dealt a blow to confidence and sentiment, and may have a particularly negative impact on the country’s important tourism sector.