Economic Growth

Amongst the unprecedented challenges deriving from the COVID-19 pandemic domestically and globally, the Sri Lankan economy recorded a negative growth of -3.6% in 2020 compared to the 2.3 % in 2019 whereas 3.3% growth was recorded in 2018. Consistent with the swift fiscal and monetary policy measures implemented by the government to mitigate the impact of the pandemic and the recent developments of the high-frequency economic indicators, it is expected that the economy would return to the growth path in 2021.

External Trade

The external sector acquired a mixed performance in 2020 under the COVID 19 situation. The exports dropped from UDS 11,940 mn to 10,047 mn by 1,893 mn (16%) in 2020 whilst the imports dropped from USD 19,937 mn to 16,055 mn by 3,882 mn (19%) resulting in trade deficit narrowing to USD -6,008 mn by -1,989 mn (25%) significantly to its lowest level since 2010. The restrictions imposed on imports and the comparatively low global oil prices helped this remarkable performance.

In 2020 import expenditure on consumer goods, which contributed to 21.2% of the total imports, declined by 14%, mainly due to the restriction imposed on vehicle imports (USD 816 mn to 283 mn (65%)). Import expenditure on intermediate goods, which constitutes 56.5% of total imports, was contracted by 20%, mainly due to the global fuel price reduction and demand for fuel dropped due to travel restrictions imposed during the covid period (USD 3,892 mn to 2,543 mn by (35%)). Expenditure on investment goods also declined by 22.6%, driven by the drop in imports of machinery and equipment, building material, and transport equipment.

The export income was reduced in 2020 mainly due to the subdued demand in key export destinations combined with the supply side interruptions with the covid pandemic.

Official Reserves

Foreign reserves are assets or claims that a country holds in a foreign soil. The gross official reserves decreased from USD 7,642 mn to 5,664 mn by 1,978 mn (-26%) in the year 2020 resulting in the reserve adequacy decreasing from 4.6 months of import cover to 4.2 months by -8%.

Foreign Direct Investments (FDI)

In the year 2020 foreign direct investments dropped from USD 743 mn to 434 mn by 309 mn (-42%). The covid pandemic in Sri Lanka and the impact of covid 19 on the global financial markets were affected by this receded investment inflow.

Government Revenue & Expenditure

The government revenue decreased from Rs. 1,891 bn to 1,368 bn by 523 bn(28%) in the year 2020. Out of the total revenue, the tax revenue dramatically decreased from Rs. 1735 bn to 1217 bn by 518 bn (30%) at the same time as Non-tax revenue decreased from Rs.156 bn to 151 bn by Rs. 5 bn (3%). However, this did not occur merely due to the impact of the COVID-19 pandemic and Tax concessions granted to battle against COVID-19, The policy reforms to the tax system such as removal of certain taxes like NBT, Economic Service Charge (ESC), and reduction of VAT rates from 15% to 8%, and the comprehensive tax policy package introduced with the Budget 2021 directly affected to the government revenue reduction in 2020.

Government expenditure and net lending in 2020 were reduced from Rs. 3,338 bn to 3,041 bn by 297bn (-9%) ,The recurrent expenditure incurred in 2020, has increased from Rs 2,425 bn to 2,548 bn by 123 bn (5%). The increase in recurrent expenditure in 2020 was mainly due to the rise in expenditure on subsidies and transfers, salaries, and wages. Capital expenditure and net lending declined from Rs. 913 bn to 493 bn by 420 bn (-46%). This decline reflects the impact of the limited fiscal space due to the notable decline in government revenue and the rise in recurrent expenditure of 2020.

The budget deficit has increased from Rs 1,447 bn to 1,673 bn by 226 bn (16%) in 2020. When it is calculated as a percentage to GDP it increased from 10% to 11% by 1% of GDP at the end of 2020. To financed the budget deficit government has focused more on domestic sources rather than going for foreign financing.

Public Debt

The total outstanding central government debt increased from Rs. 13,031 bn to 15,117 by 2,086 bn (16%) in the year 2020. The depreciation of the exchange rate primarily led to this increase with an increase of the rupee value of foreign debt (by Rs. 355.7 bn at the end of 2020). The debt stock increased up to 101% of GDP at the end of 2020, compared to 87% at the end of 2019.

The foreign debt declined from Rs 6,201 bn to 6,052 bn by 149 bn (-2%) at the end of 2020, whereas domestic debt increased from Rs 6,830 bn to 9,065 bn by 2,235 bn (33%) at the end of 2020. This marks an increase in the share of domestic debt in the total debt stock 60% from 52%, at the end of 2020, along with the decrease of the share of foreign debt to 40% of the total debt stock at the end of 2020 from 48% at the end of 2019.

At the end of 2020, the debt to GDP ratio was recorded above 100% for the first time in Sri Lanka as 101% of GDP. Domestic debt was 61% of GDP compared to 46% at the end of 2019. In contrast, foreign debt as a percentage of GDP declined to 40% at the end of 2020, compared to 41% at the end of 2019. The decline of the portion of the foreign debt was a result of the Government’s preference for domestic debt over foreign debt as well as net repayments of foreign debt owing to limited access to foreign financing due to current debt statistics of Sri Lanka.

Debt Service Payments

The total debt service payments decreased from Rs 2,007 bn to 1,925 bn by 82 bn (-4%). Total domestic debt repayments declined from Rs. 1,208 bn to 1,158bn by 49 bn (-4%). Repayment on foreign debt declined from Rs 800 bn to 767 bn by 33 bn (-4%) in the year 2020.

Total interest payment has increased from Rs. 878 bn to 957 bn by 79 bn (9%) while Interest payments on foreign debt increased from Rs. 210 bn to 243 bn by 33 bn (15%) and Interest payments on domestic debt

Increased from Rs. 667 bn to 714 bn by 46 bn (7%).

As a percentage of GDP the total debt service payments increased to 13% in 2020 from 13.5% in 2019. Total debt service payments as a percentage of government revenue increased to 141% from 106% in 2019 whilst the total debt service as a percentage of export earnings increased to 103% from 94% in 2019.

The cost of debt remaining at 13% of GDP, whereas increased to 70% from 46% when considering as a percentage of government revenue.