Sri Lanka Development Update, October 2024

Investment Rating - The report does not explicitly provide an investment rating for the industry Core Insights - The economy of Sri Lanka has stabilized, recording four quarters of growth after critical structural and policy reforms, but the recovery remains fragile and dependent on continued macroeconomic stability and successful debt restructuring [15][21] - GDP growth was robust at 5 percent year-on-year in the first half of 2024, driven by a rebound in the industrial sector and strong performance in tourism-related services [16][37] - The current account strengthened, driven by increased tourism receipts and remittances, contributing to an estimated balance of payments surplus [16][20] - Poverty remains high, with food insecurity widespread and labor force participation declining [17][21] Summary by Sections A. Macroeconomic Developments - The economy grew by 5 percent year-on-year in H1 2024, with external balances improving and inflation remaining in low single digits [16][18] - Fiscal balances strengthened with tax revenue increasing by 42.6 percent year-on-year in the first half of 2024, primarily due to higher VAT collection [17] - Despite economic growth, households face pressure from elevated poverty levels and declining health outcomes [17][18] B. Opening Up to the Future - Reviving exports is crucial for sustainable growth, with Sri Lanka's untapped export potential estimated at about US$10 billion annually [24][27] - The share of goods and services exports to GDP has been declining, reaching its lowest point of 15 percent in 2020, indicating a lack of diversification [25][27] - Structural reforms are necessary to enhance competitiveness and export orientation, including reducing tariffs and simplifying trade procedures [29][32] - Sri Lanka has opportunities to capitalize on shifts in global value chains due to geopolitical changes and supply chain disruptions [30][31]