Previous Quarterly Editions
Expropriation Risk: 58 58 58 61 Political Violence Risk: 48 48 48 48 Terrorism Risk: 55 55 55 55 Exchange Transfer and Trade Sanction Risk: 55 55 55 55 Sovereign Default Risk: 57 57 57 57
TREND ►
Sri Lanka has seen COVID-19 lockdowns of differing extents nationally.After reporting a decreasing trend in infections from February to early April 2021, has recorded a spike with 1,914 new cases on May 7 2021 as compared with 220 a month earlier. However, the vaccination rollout has been slow, as at the time (on May 7 2021) 4.3% of the population had been administered at least one dose but just 0.8% had been fully vaccinated.
The falling case count had encouraged the government to relax restrictions and reopen the economy, with focused virus containment measures where needed. This is important as the government’s response to COVID-19 resulted in GDP contracting year-on-year by 1.8% in the first quarter of 2020 and 16.4% in the second. GDP contracted by about 4% in 2020 overall (or 3.6% according to official figures or 4.6% according to the International Monetary Fund (IMF)). There are signs the government fears that a third wave may require the reimposition of some restrictions.
The slowdown, which affected government revenues, resulted in the budget deficit rising from 6.9% in 2019 to 8.8% in 2020, after accounting for a USD800mn grant from the IMF’s Rapid Credit Facility (which works out to about 1% of GDP). The country’s debt-to-GDP ratio rose from 86.8% to 98.3% in 2020.
Externally, Sri Lanka was vulnerable. Export earnings (mainly from textiles and garments, rubber products and food) fell 19.9% during 2020, because of COVID-19’s effects. Travel and tourism account for around 12.5% of Sri Lanka’s GDP and revenues from tourism provide over 25% of export revenues. These were sectors hit severely by COVID-19, even prior to which the Sri Lankan economy was slowing.
Moreover, much of Sri Lanka’s debt is external. Foreign debt rose from 30% of GDP in 2014 to 42.6% in 2019. International debt rose by USD28.4bn over the decade ending 2019, during which time public and publicly guaranteed external debt rose by close to USD21bn. Finally, with external debt stock accumulating, debt service requirements had been rising sharply, from 12% of exports of goods and services in 2010 to 32% in 2019.
Any setback to Sri Lanka’s foreign exchange earning capacity could trigger default. The COVID-19 shock, that curtailed remittance flows and reduced foreign exchange earnings from tourism, tea and textiles, threatens to do just that. The government has responded with import restrictions, but that has not helped enough. In recent years, Sri Lanka has been borrowing abroad against issues of international sovereign bonds, to repay past debt.
TREND ▲
There are clear signs of a tilt towards China under the current Rajapaksa administration, leading to fears of discrimination on part of the US administration. In April 2019, the board of the US aid agency, the Millennium Challenge Corporation, approved a five-year USD480mn compact with Sri Lanka. Supported by Sri Lanka’s pre-November 2019 President (President Gotabaya Rajapaksa, elected in November 2019), the compact, which was clearly aimed at countering Chinese influence, ran into a roadblock under the current government. Subsequently, the Corporation’s board cancelled the grant, citing lack of Sri Lankan engagement, influenced by the government’s close ties with China.
The Rajapaksa government has also gone back on a promise to allow India and Japan to develop the East Container Terminal of the Colombo Port. In May 2019, the Sri Lankan government signed a memorandum of understanding with India and Japan to develop the terminal. Sri Lanka was to have held a 51% stake in the facility, but in February 2021 the Sri Lankan cabinet decided that the terminal would be wholly owned by the Sri Lanka Ports Authority, withdrawing from the agreement. Subsequently, India and Japan have been offered an opportunity to develop a West Container Terminal.
As the Sinhala and Buddhist majority consolidates power under the Rajapaksa administration, fears of suppression of minorities, especially Tamils and Muslims, increase. In a controversial turn, the government decided to require the bodies of Muslims dead from COVID-19 to be cremated, as opposed to being buried according to Muslim custom. The move is seen as a sign of an increasingly divisive stance.
Meanwhile, the United Nations Human Rights Council, based on a report on human rights abuses inflicted on Tamils during the civil war, has passed a resolution calling for the Office of the Human Rights Commissioner “to advocate for victims and survivors, and to support relevant judicial and other proceedings”. This development too is likely to exacerbate divisions that can trigger violence, and there are fears that the state would adopt a partisan role.
Ever since the 2019 Easter Sunday suicide bombings across churches and luxury hotels by nine terrorists belonging to the radical Islamist group National Thawheed Jamaat, the prospect of further terrorist attacks has loomed large. That attack killed 270 people and injured around 500. Security has been increased, with special arrangements on Easter Sunday 2021 in churches even two years after the incident.
With export and tourism earnings adversely affected, Sri Lanka has resorted to import controls to rein in the import bill and trade deficit. As far back as March 2020, the government declared a ban on many non-essential imports, including cars, floor tiles and machinery parts. Not only is this extended through 2021, but in January 2021 the government tightened foreign exchange controls. The government also sees these trade controls as a way of promoting local production, to counter the economic contraction.
Almost all credit rating agencies have downgraded Sri Lanka’s sovereign credit rating repeatedly. The government, however, rejects these assessments and hopes to tide over its COVID-19 crisis with support from China and India, which are jockeying for closer ties with a strategically well-placed Sri Lanka and are willing to use financial support to advance their cause.
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