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Country Commercial Guides for FY 2000: Sri Lanka Report prepared by U.S. Embassy Colombo, Sri Lanka, released July 1999   Note*

Chapter I

EXECUTIVE SUMMARY

This Country Commercial Guide (CCG) presents a comprehensive look at Sri Lanka's commercial environment, using economic, political and market analysis. The CCGs were established by recommendation of the Trade Promotion Coordinating Committee (TPCC), a multi-agency task force, to consolidate various reporting documents prepared for the U.S. business community. Country Commercial Guides are prepared annually at U.S. Embassies through the combined efforts of several U.S. Government Agencies.

In 1998, Sri Lanka's economy slowed significantly: the GDP growth rate was 4.7 percent, compared to 6.4 percent in 1997. Although the agricultural sector remained strong, the industrial and services sectors weakened, and export earnings slowed substantially. The economy was particularly hard hit by sharply declining world prices for tea and rubber. The government fiscal deficit also soared during 1998 to 9.2 percent of GDP, compared to a projected figure of 6.5 percent. The armed conflict between government forces and Liberation Tigers of Tamil Eelam (LTTE) insurgents continued, and the October 1997 LTTE bombing of Colombo's World Trade Center and adjacent major hotels dealt another blow to investor confidence and tourism throughout 1998.

The Asian financial crisis has not taken a particularly heavy toll on the economy of Sri Lanka, due in part to continued exchange controls on the capital account and relatively low exposure to short-term foreign debt. However, the longer-term impact of the crisis has already slowed investment in Sri Lanka from affected countries, particularly South Korea, Japan, Hong Kong and Malaysia. Nuclear detonations by neighboring India and Pakistan in May 1998 have had a prolonged chilling effect on foreign commercial and investor interest in Sri Lanka, particularly in the stock market.

Real GDP growth in 1999 is expected to be about 4.0 percent. Continued weakness in world prices for tea and rubber will depress export earnings in these sectors, and garment exports, a mainstay of the Sri Lankan economy, are also expected to experience negligible growth during 1999. On the positive side, increased private sector participation in the telecommunications service industry has yielded strong growth and development in this sector. More thermal power generating capacity is slowly being added, and with adequate rainfall for existing hydropower installations, the short-term power outlook is positive.

Longer term prospects are unclear. Resolution of the continuing armed conflict is not expected in the near future. As the slow pace of infrastructure development, the myriad disputes over public tendering, and the largely unrenovated (after more than three years) bomb-ravaged financial district demonstrate, government decision-making and policy implementation are extremely slow. In the long run, the government's inability to move quickly and decisively on major tendering and investment decisions and implementation could inhibit growth and keep Sri Lanka from reaching its potential.

Country Commercial Guides are available for U.S. exporters from the National Trade Data Bank's CD-ROM or via the Internet. Please contact STAT-USA at 1-800-STAT-USA for more information. Country Commercial Guides can be accessed via the World Wide Web at http://www.stat-usa.gov and http://1997-2001.state.gov/; and http://www.mac.doc.gov. They can also be ordered in hard copy or on diskette from the National Technical Information Service (NTIS) at 1-800-553-NTIS. U.S. exporters seeking general export information/assistance and country-specific commercial information should contact the U.S. Department of Commerce, Trade Information Center by phone at 1-800-USA-TRADE or by fax at (202) 482-4443.