Economically, the only major issue appears to be the potential for overheating. Perhaps the main thing holding back the island is its business environment, which, according to our ratings, is still below the regional average. Having said that, the robust investment growth we project this year should greatly improve Sri Lanka’s infrastructure.
The country’s strengthening international relations with India bode well for the country’s economic fortunes. Recent developments suggest bilateral relations are set for further improvement. These include President Mahinda Rajapaksa’s successful state visit to India in the middle of 2010 and the signing of a Memorandum of Understanding on Passenger Transport, which reopened ferry services that have been suspended since 1983. Going forward, we expect trade and investment links to develop between the two neighbours as India attempts to counterbalance China’s growing influence with initiatives of its own. Signing and implementing the Comprehensive Economic Partnership Agreement will go a long way in boosting economic ties.
Although we remain less optimistic compared to the government with regard to 2011 growth, we expect the Sri Lankan economy to remain robust over the medium term as investment expenditure supports overall activity. We expect the Central Bank of Sri Lanka to hold interest rates through the year, after having initiated a cut in January. Furthermore, exports and remittance inflows should remain robust through the year, cushioning the impact of a higher projected import bill due to rising global commodity prices. We highlight the island’s agricultural sector as unlikely to reach its potential in 2011 following recent floods.
A fter a spectacular recovery in 2010, Sri Lanka’s booming tourism industry looks set to continue its run in 2011. Strong momentum from last year, with historic levels of tourist arrivals (more than 650,000) and tourism earnings (US$0.6bn), coupled with a boost from accommodative government policies, should see the industry through another solid year. Having said that, we note three minor hurdles that the industry will have to go through. These are the potential implementation of a new visa scheme, bureaucratic delays in land acquisition, and impending labour shortages. Sri Lanka’s business environment rating of 42.7 is still well below the regional average of 51.1, but there is potential for further gains down the line.
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