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

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

  • We have upgraded our 2014 real GDP growth forecast to 7.1%, from our previous estimate of 6.8%, as we expect the country's manufacturing and services sectors to maintain their strong performances in 2014.

  • We believe that the successful passage of the United Nations Human Rights Council's (UNHRC) third resolution will neither hurt the political stability in Sri Lanka nor derail its economy. We therefore maintain our short-term political risk rating for the country at 77.1 out of 100 and our 2014 real GDP forecast of 7.1%.

  • We maintain that the Central Bank of Sri Lanka (CBSL) will keep its standing lending facility rate and standing deposit facility rate unchanged at 8.00% and 6.50% respectively over the course of 2014, as inflation will remain relatively subdued and the strong economic growth momentum seen in 2013 will likely...

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Sri Lanka Operational Risk Coverage (9)

Sri Lanka Operational Risk

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Particular risks related to investing in Sri Lanka include the security situation, a consequence of the country's recent civil war, which came to an end in 2009. Sri Lanka's exposure to international trade is also a factor that adds to the difficulties of investing in the country, as shown by disappointing levels of exports and foreign direct investment. That said, there are certainly benefits to investing in Sri Lanka. Chief among these are good-quality airports and seaports, the latter of which is receiving further heavy investment from the Chinese government. Another strength is a cheap workforce with a high literacy rate by South Asian standards, of 91%. Sri Lanka achieves an overall score of 51.6 in our Operational Risk Index, ranking 14 th in the region, reflecting its status as a medium-risk place to do business.

The internal security situation in Sri Lanka should be carefully considered by potential investors. A decisive...

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Sri Lanka Crime & Security

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Any assessment of the crime and security situation in Sri Lanka must take into full account the resolution of the recent civil war, with the conflict continuing to have a profound impact on the country's internal security, its foreign relations and the effectiveness of its security services. Since the end of the civil war in 2009 there have been no terrorist attacks, with the government victory over Tamil forces bringing a seemingly lasting and durable peace. Foreigners face risks of petty theft rather than major threats to personal safety. Overall, the country scores 45.4 out of 100 in BMI's Crime and Security Risk Index, ranking 19 th out of 29 Asian states, in between Laos and Indonesia.

A relatively weak military puts Sri Lanka in a precarious international position, as it is much weaker than its bigger Asian neighbours. Nonetheless, the country's success at developing diplomatic links in the region,...

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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...

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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....

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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...

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Sri Lanka Industry Coverage (6)

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

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Information Technology

Sri Lanka Information Technology

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BMI View:   We forecast a CAGR of 15.5% for IT market spending 2014-2018, with the market expected to increase to a value of LRK163.8bn in 2018. We believe Sri Lanka will outperform the majority of IT markets in the APAC region due to a convergence of factors. 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. We expect it to embark on a period of catch-up growth 2014-2018, closing the gap to comparable markets in terms of the penetration of IT products and solutions after a long period of conflict. The local IT industry is also developing, with a vibrant local software and BPO industry and the development of local facilities for PC manufacture and assembly to service the local market and wider region.

Headline Expenditure Projections

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Pharmaceuticals & Healthcare

Sri Lanka Pharmaceuticals & Healthcare

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BMI View:   Sri Lanka's pharmaceutical sector has received investment from domestic and foreign - notably Indian - investors in recent years, as economic growth has picked up and the government focuse d on improving the domestic pharmaceutical secto r . W e therefore expect th at pharmaceutical and healthcare sector growth will outpace economic growth over the five-year forecast period...

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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, p lans for coal and renewable generation...

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Telecommunications

Sri Lanka Telecommunications

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BMI View : There is huge growth potential in Sri Lanka's telecoms market despite it having an above 100% mobile penetration rate in end-2013. The mobile subscription figure in Sri Lanka is inflated by multi-SIM rates, as consumers often buy SIMs to take advantage of promotions, or own one from all operators in order to receive lower on-net calling . That said, the key to unlock mobile subscriptions growth is by expanding into under-penetrated areas. BMI believes there is tremendous upside for 3G as well, as the proportion of mobile subscriptions on 3G services are estimated to be less than 10% at the end of 2013. In February 2014, Lanka Bell joined the 4G fray after a commercial launch in Colombo. As more telecoms operators look to introduce 4G LTE services, 3G/4G penetration should improve over the medium term from 6.8% to...

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Tourism

Sri Lanka Tourism

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BMI View: We believe that the recent weakness in the Sri Lanka rupee is both a blessing and a curse for Sri Lanka's booming tourism industry. With the rupee now at the cheapest it has ever been against the euro, we expect to see an increase in arrivals from the bloc, which remains the island's top tourist market. That said, the downside of a much weaker rupee is that the cost of major tourism-related infrastructure developments is likely to face some upside pressure.

Beyond the current year, BMI believes arrivals to Sri Lanka will grow at a strong annual rate of at least 10% per annum. BMI's tourist arrival forecasts remain dependent on a peaceful security situation. Despite the ruling United People's Freedom Alliance (UPFA)'s electoral defeat in the Northern Province's recent elections, the...

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