Country Report Sri Lanka Sri Lanka at a glance: 2004-05 OVERVIEW In the general election that took place in early April, the United Peoples! Freedom Alliance (UPFA) coalition, which is led by the president, Chandrika Kumaratunga, won the largest block of seats, but failed to gain a majority. The UPFA, which comprises the People!s Alliance (PA) and the Janata Vimukthi Peramuna (JVP, People!s Liberation Front), won a total of 105 seats, and thus remains eight seats short of a majority. As a result, the political scene is expected to remain unstable. The prospects for a resumption of peace negotiations between the government and the Liberation Tigers of Tamil Eelam (LTTE, Tamil Tigers), which have remained stalled since April 2003, have improved with efforts being made to restart the talks. The economy is expected to grow by 5.7% in 2004, as a continued improvement in external demand will be partly offset by weak domestic demand in the first half of the year. A broader recovery in 2005 will raise growth to 6.4% in that year. Consumer price inflation will moderate. The Sri Lanka rupee will depreciate in 2004-05, although at a below-trend rate. After widening to 3.6% of GDP in 2004 on the back of a larger trade deficit, the current-account deficit will narrow to 3.2% of GDP in 2005. Key changes from last month Political outlook • Envoys from Norway and Japan have met the LTTE in an effort to restart the peace process. Despite election promises to the contrary, the government has now stated that it will engage the LTTE in peace talks. Economic policy outlook • The UPFA government has announced that it will adhere to fiscal targets outlined by the previous government in its 2004 budget, despite the fact that it has promised a host of subsidies and a slowdown in the privatisation process. Economic forecast • The government has revised its fiscal deficit estimate for 2004 upwards to 7.3% of GDP (from 6.8%). The Economist Intelligence Unit had already factored a rise into its fiscal deficit forecast. As a result, our forecast for the deficit in 2004 remains unchanged at 7.9%. May 2004 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. 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Sri Lanka 1 Contents Sri Lanka 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators 7 Outlook for 2004-05 7 Political outlook 9 Economic policy outlook 10 Economic forecast 13 The political scene 15 Economic policy 17 The domestic economy 17 Economic trends 20 Manufacturing 23 Agriculture 25 Infrastructure 26 Financial and other services 29 Foreign trade and payments List of tables 10 International assumptions summary 12 Forecast summary 23 Tea produ ction 29 Trade balance 30 Composition of exports 31 Composition of imports List of figures 12 Gross domestic product 12 Consumer price inflation 27 Stockmarket performance Country Report May 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 Sri Lanka 3 Sri Lanka May 2004 Summary Outlook for 2004-05 In the general election that took place in early April the United Peoples! Freedom Alliance (UPFA), led by the president, Chandrika Kumaratunga, won the largest number of seats, but failed to gain a majority. As a result, the political scene is expected to remain unstable. The prospect for a resumption of peace talks between the government and the Liberation Tigers of Tamil Eelam (LTTE, Tamil Tigers), which have remained stalled since April 2003, have improved with efforts being made to restart the talks. The economy is expected to grow by 5.7% in 2004, as a continued improvement in external demand will be partly offset by weak domestic demand in the first half of the year. A broader recovery in 2005 will raise growth to 6.4% in that year. Consumer price inflation will moderate. The Sri Lanka rupee will depreciate in 2004-05. After widening to 3.6% of GDP in 2004 on the back of a larger trade deficit, the current-account deficit will narrow to 3.2% of GDP in 2005. The political scene The UFPA has formed a minority government, which remains unstable. Tamil and Buddhist parties also made gains in the elections. The UFPA government has pledged to resume talks with the LTTE and to undertake constitutional reform. Norway has been asked to resume its peace initiative. The LTTE faced a short-lived mutiny. Economic policy The new government has stated that, while continuing to pursue liberal economic policies, it will focus on the agricultural sector and develop rural infrastructure. The government has also backtracked on privatisation. Tax and trade policies will remain largely unchanged. The estimate for the 2004 fiscal deficit has been revised upwards. The Central Bank of Sri Lanka has continued to maintain its loose monetary policy. The World Bank has approved a US$51m grant to support the government!s efforts to reduce poverty in rural areas. The domestic economy The economy grew by 5.9% in 2003, faster that expected. The service sector led the growth, whereas agriculture remained depressed. Efforts to increase exports to India are being stepped up. Tourist arrivals grew by 17% year on year in the first two months of 2004. Two leading Indian airlines have commenced flights to the Sri Lankan capital, Colombo. Tea production rose, but the stagnation in the agricultural sector is having a political impact. Foreign trade and payments The external sector improved in 2003, and the current-account deficit has narrowed. The merchandise trade deficit expanded by 9.6% year on year; exports of industrial goods and tea have been rising. Editors: Ravi Bhatia (editor); Caroline Bain (consulting editor) Editorial closing date: May 21st 2004 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule Country Report May 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 4 Sri Lanka Political structure Official name Democratic Socialist Republic of Sri Lanka Form of state Executive presidency based on the French model The executive The president is the head of state and exercises all executive powers. Elected for a period of six years by universal adult suffrage, the president may dissolve parliament National legislature Unicameral legislature; 225 members directly elected for five years by a system of modified proportional representation Local government Under the 13th amendment to the constitution, passed in November 1987, extensive powers have been devolved to nine directly elected provincial councils, primarily with a view to meeting Tamil demands for greater autonomy. Elections scheduled for 1998 were postponed, but were held in seven provinces between January and June 1999. The next elections in these provinces were scheduled to take place in March 2004, but were postponed to allow the parliamentary election to take place in April. As a result of the ethnic conflict, elections in the remaining two provinces remain unscheduled National elections Presidential and parliamentary elections are held at six- and five-year intervals respectively; the next elections were originally due in October 2006 (parliamentary) and December 2005 (presidential). However, the parliamentary election took place in April 2004, and it is possible that the president, Chandrika Kumaratunga, will succeed in extending her term to 2006 National government Mrs Kumaratunga won a second term in office as president in December 1999, and although her People!s Alliance (PA) lost the December 5th 2001 parliamentary election, it regained power at the April 2004 election.