Country Economic Forecasts > Sri Lanka

Sri Lanka continues to face twin headwinds; first, sluggish global activity dampening export demand; second, adherence to fiscal consolidation constraining domestic demand. As a result, we see another year of sub-5% growth in 2016. In June, Moody's reduced Sri Lanka's credit rating outlook to negative, highlighting concern about the fiscal position. But progress is being made. A 3-year Extended Fund Facility (EFF) of US$1.5bn from the IMF (agreed in June) will give Sri Lanka some financial flexibility. Moreover, the government has already demonstrated its commitment to fiscal reform, raising VAT from 11% to 15% in May.The current account position was little changed in 2015 as the expected benefits from a reduced oil bill and continued strong growth in tourism were offset by falling goods exports and lower workers' remittances. But remittances have picked up this year, while tourism has maintained strong momentum. For 2016 as a whole we expect a deficit of 1.8% of GDP, down from 2.4% last year. However, the current account improvement of recent years could be dented if Brexit caused a marked slowdown in the UK and EU economies as these markets are key sources of tourists and export demand.