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- GDP (PPP):
- $217.4 billion
- 7.4% growth
- 7.5% 5-year compound annual growth
- $10,372 per capita
- Inflation (CPI):
- FDI Inflow:
Sri Lanka has advanced structural reforms that include privatization and the overhaul of its tax, tariff, and foreign investment regimes. Economic expansion, driven by a services sector that accounts for over 60 percent of GDP, has been robust over the past five years. Reducing fiscal deficits and revitalizing efforts to enhance the efficiency of business and labor regulations are pressing needs.
Economic Freedom Snapshot
- 2016 Economic Freedom Score: 59.9 (up 1.3 points)
- Economic Freedom Status: Mostly Unfree
- Global Ranking: 93rd
- Regional Ranking: 17th in the Asia–Pacific Region
- Notable Successes: Trade Freedom and Fiscal Freedom
- Concerns: Rule of Law and Control of Government Spending
- Overall Score Change Since 2012: +1.6
Substantial institutional shortcomings, particularly in the regulatory bureaucracy and the judiciary, still hold back long-term economic development. Despite some progress, the rule of law remains weak.
President Mahinda Rajapakse was voted out of office in January 2015. Prime Minister Maithripala Sirisena, who ran against him on pledges to restore parliamentary democracy and rein in corruption, formed a coalition government with the opposition United National Party and reinstated presidential term limits. Parliamentary elections in August 2015 brought UNP leader Ranil Wickremesinghe to power as the new prime minister. Sirisena and Wickremesinghe have pledged to work together for ethnic reconciliation and in September 2015 co-sponsored a U.N. Human Rights Council resolution acknowledging that war crimes were committed by both the government and the Liberation Tigers of Tamil Eelam during the civil war that ended in 2009. Agriculture, apparel, and tourism are the main economic sectors. Sri Lanka depends heavily on foreign assistance and remittances from workers abroad, primarily in the Middle East.
Corruption remains significant, and the current legal and administrative framework is inadequate to stop it. In April 2015, the prime minister alleged corruption running into billions of dollars at the state-owned airline under the government of former President Mahinda Rajapaksa. Secured interests in property are generally recognized, but many investors claim that protection can be flimsy. Concerns about politicization of the judiciary are growing.
The top personal income tax rate is 24 percent, and the top corporate tax rate is 28 percent. Other taxes include a value-added tax. Indirect taxes are the main source of revenue. The overall tax burden equals 11.6 percent of total domestic income. Government spending amounts to 18.3 percent of GDP. The budget deficit is over 5 percent of GDP, and public debt equals about 75 percent of total domestic output.
With no minimum capital required, launching a business takes five procedures, but obtaining necessary licenses is costly and takes more than 200 days. Inefficiency in the labor market causes an imbalance between labor supply and demand. The government maintains an extensive system of price controls and subsidies that distort most sectors of the economy. Agricultural export subsidies, in particular, have been increased.
Sri Lanka’s average tariff rate is 6.3 percent. The government’s import substitution policy interferes with trade and investment. Agricultural imports face significant trade barriers. Foreign investment in some sectors of the economy is restricted. Non-performing loans in the banking system remain a problem, and the state continues to influence the allocation of credit.