Crisis in Sri Lanka is bad news for the economy

The current political crisis in Sri Lanka, which has seen the country’s president, Maithripala Sirisena, replace Prime Minister Ranil Wickremesinghe with former President Mahinda Rajapaksa, comes at a bad time for the economy. Growth has been very weak over the past couple of quarters, and there is a risk that political uncertainty will drag on business and consumer sentiment, causing the economy to slow further. The political turmoil is putting downward pressure on the rupee. If the currency continues to weaken, the central bank may be forced to hike interest rates, which would further weigh on growth prospects. Sri Lanka’s very high level of foreign currency debt, which is equivalent to around 50% of GDP, makes the country vulnerable to sudden falls in the currency. The crisis is also likely to undermine reform efforts. The new prime minister will struggle to achieve a majority in parliament, making it hard to pass legislation. For the time being we are keeping our below-consensus growth forecasts unchanged at 3.8% for this year and 3.3% in 2019. However, the risks are now firmly to the downside.