Sri Lanka — Election raises policy unity but pandemic-related economic and fiscal risks remain

The Sri Lanka Podujana Peramuna Party (SLPP), led by former President and new Prime Minister Mahinda Rajapaksa, secured a majority in parliament in the August 5 general election. This follows the election of his younger brother Gotabaya Rajapaksa as President in November 2019. These results provide the SLPP significant scope to implement their policy agenda.

SLPP economic policies may involve tax cuts, subsidies for farmers, development of affordable housing, Chinese-funded infrastructure projects and higher civil servant wages. Such policies may provide support to the economy that entered the COVID-19 shock in a weak state. But prospects for higher debt-funded spending would weigh on the government’s already challenging debt sustainability, even accounting for a likely boost to GDP growth. Prior to the COVID-19 shock, the IMF projected central government debt to reach 82% of GDP in 2020, a high level among emerging market sovereigns (Chart). Given the significant negative impact of COVID-19 on Sri Lanka’s export industries (particularly textiles), tourism sector, and remittance flows, the risk of economic and financial instability could rise.

Sri Lanka recently extended temporary import controls (for a further six months from July 2020) on certain goods to minimise the domestic economic impact of COVID-19. The temporary import controls apply to the import of vehicles, refrigerators, luxury goods, certain raw materials and fruits and vegetables. Sri Lanka is an important destination for Australian vegetables, of which exports amounted to more than $60 million in 2019 (accounting for more than 25% of all goods exports to Sri Lanka).