Download - EIU Economic Outlook 2016
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Economic Outlook2016Global Risks | Sri Lanka Outlook | Key Forecasts
Prepared by Economic Intelligence Unit, Ceylon Chamber of Commerce
January 2016
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GLOBALECONOMY
Part 1
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Global growth forecast
3.1%2015
3.4%2016
3.6%2017 *Downward revisions by 0.2%
Source: IMF WEO Jan 2016
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Key Economies in 2016
US: 2.6%Europe: 1.7%
Japan: 1.0%
China: 6.3%
UK: 2.2% Russia: -1.0%
Asia: 6.3%
India: 7.5%
Brazil: -3.5%
Saudi: 1.2%
Africa: 4%
Source: IMF WEO Jan 2016
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UK: FTSE US: NASDAQ
China: SHCOMP Paris: DAX
Japan: NIKKEI Hong Kong: HANGSENG
Source:Bloomberg
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What are the headwinds?
Slowdown in China and associated spillovers on emerging markets(especially Asia)
Adjustment to a higher interest rate environment; high outflows fromemerging markets
Weaknesses in key EMs - Russia and Brazil both in recession
1% drop in BRICS growth = 0.9% drop in EM growth within ayear
Impact of low commodity prices mixed - exporters adverselyaffected and purchasing power falls; importers gaining from lowimport bill
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Baltic Dry Index at all-time low
Baltic Dry Index measures shipping prices & utilisation - fallen to all time low Seen as a proxy for world trade activity/volumes
Source: Bloomberg
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Emerging Markets Facing Funds Pullout
2015 was the first time
in 27 years that EMs sawnet outflows of capital
In Q3 2015 investorspulled out US$ 52 bnfrom EM equity andbonds
-50
-37.5
-25
-12.5
0
2008 GFC 2013 QE Taper 2015 Turmoil
EM equity EM bonds
Source: World Bank Global Economic Prospects Jan 2016
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Europe: 1.7%
EU region continues to see fragility
Southern Europe struggling, Northern Europe doing better
Multiple crises - banking/finance + refugee/migration + terrorism(now)
ECB has cut rates below 0% , more stimulus measures
Only Germany and few others showing resilience and growth
Youth unemployment remains v. high - will hurt long termprosperity of these countries
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USA: 2.6%
Most optimistic outlook among developed countries
Business activity has picked up, consumer spending
accelerated and overall employment up by 292,000 jobs inDecember
Inherent dynamism and innovation has helped keep the
economy agile
Biggest positive has been US shale oil, new impetus forindustries
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China: 6.3%
Growth had been driven by investment and exports ; now rebalancingtowards consumption and regional development
Questions of a hard-landing + ability of authorities to manage the transition(e.g. messy handling of stock market collapse)
China now more systemically important than ever before - commoditydemand + Asian supply chains
Chinas devaluation of the Yuan would weaken emerging market currencies
Chinas going-out strategy with Maritime Silk Route + One Belt One Road
Chinese currency (Yuan/RMB) added to IMF SDR basket
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Oil prices will remain low,inventories remain higher/increase
Down 47%in 2015
Down 18%in 2016
$41 a barrelaverage this year
US shale oil/gas supplycontinues to grow strongly
OPEC keeping high supplyhigh and low prices tomaintain market share
Iran production (post-sanctions lifting) will add tosupply glut
Oil demand slowing withgrowth slowdown - esp.China
*See separate EIU Research Note on Unfolding Dynamics of the Global Oil Market
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SRI LANKANECONOMY
Part 2
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Growth Recent growth drivers unable to sustain themselves Services have been a strong contributor but almost entirely domestic non-tradable services Construction likely to continue to drive growth, but this time driven by private spending Exports unable to take full advantage of LKR depreciation and low oil prices due to supply
constraints - i.e., lack of diversification & competitiveness; will have to be built over time
Fiscal Lack of fiscal consolidation (mainly on spending side) Ambitious revenue measures unable to deliver in the short term Budget deficit enhances vulnerability to external debt and possible ratings downgrade
External Weak export performance, key commodities unlikely to recover LKR depreciation making import bill higher (except for oil), Remittances slowing down - losing valuable import cover Risks of further foreign fund outflows and BoP difficulty
Policy Policy confusion due to multiple agencies, individuals and initiatives Aggressive FDI push is a +ve, but wont materialise in 2016 itself
Key dynamics going in to 2016
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Growth
Part 2: SRI LANKAN ECONOMY
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Recent growth has been driven byconstruction and a few services sectors
15.7%
12.7%
11.1%
10.5%
9.9%
7.7%
4.6%
4.4%
3.0%
2.5%
2.0%
1.5%
1.4%
1.3%
1.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%
Other personal service activities
Transportation of goods and passengers including Warehousing
Construction
Wholesale and retail trade
Financial Service activities and auxiliary financial services
Real estate activities, Including Ownership of dwelling
Manufacture of food, beverages & Tobacco products
Mining and quarrying
Professional services
Accommodation, Food and beverage service activities
Education
Marine fishing and Marine Aquaculture
Manufacture of furniture
Growing of spices, aromatic, drug and pharmaceutical crops
Public administration and defense; compulsory social security
Contribution to Change in GDP (2010-2014)
Source: EIU calculations based on Department of Census & Statistics
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Which sectors contributed to growth
in 2015?
1.6
0.7
6.2
4.4
5
2
7.9
6.76.9
6.2
3.4
4.8
Agriculture Industry Services GDP
GDP Growth (%) in Q1, Q2, Q3 of 2015Q1:95% of increase in GDP camefrom personal services, finance andinsurance, real estate. Post-elections, construction and miningwere key drops (over 32%)
Q2:70% of increase came fromthe same sectors + wholesaleand retail trade. Interim budgetstimulus measures had kicked inand this drove consumption
Q3:60% of increase came from
finance & insurance; personalservices; food & beverage andwholesale/retail (benefiting fromstimulus). Agriculture also pickedup sharply with favourableweather
Source: EIU calculations based on Department of Census & Statistics
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Q4 growth?: will be close to 6%, with2015 full year at 5.5-5.6%
Source: EIU calculations based on Department of Census and Statistics
9.5
6.3
4.3
4.9
6
4.8
8.3
Q1 Q2 Q3 Required growthin Q4
GDP Growth in 2015
ADB @ 6.3% IMF @ 5% IMF @ 6% Budget Speech @ 6
!
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Inflation
Part 2: SRI LANKAN ECONOMY
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Core inflation will edge up through 2016 and then stabilise
-2%
0%
2%
4%
6%
8%
10%
12%
January
February
March
April
May
JuneJuly
August
September
October
November
December
January
February
March
April
May
JuneJuly
August
September
October
November
December
January
February
March
April
May
JuneJuly
August
September
October
November
December
January
February
March
April
May
JuneJuly
August
September
October
November
December
2012 2013 2014 2015
Movements in CCPI and CCPI (Core) Year-on-Year Jan 2012 to Jan 2016
CCPI CCPI (Core.Ind)
Core inflation has begun edging up: LKR depreciation will drive higher prices from import side
Benign oil prices will continue to help but full benefit not enjoyed due to lack of pricing formula
2016 Outlook: 4.5-5.0%
So
urce:
CBSLMonth
lyEconom
ic
Indicators
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Currency
Part 2: SRI LANKAN ECONOMY
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LKR depreciation will continue in 2016- Alongside other EM currencies driven by Yuan depreciation
- CBSL intervention will be limited except for large movements
130.73 130.45
130.29
130.19130.60
130.94
131.02
132.73
132.90
133.50
133.90 133.88
138.88
140.89142.02
143.45 143.90
143.94
120.00
125.00
130.00
135.00
140.00
145.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 01stJan
08thJan
20thJan
2014 2015 2016
Trend of USD:LKR Exchange Rate
10% slide froma year ago
2016 Outlook: LKR150
Source: Central Bank of Sr i Lanka
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Fiscal
Part 2: SRI LANKAN ECONOMY
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Declining tax ratio - Continued fiscalweakness - Possible ratings downgrade
14.6%14.2%
13.3%12.8% 12.9% 12.9%
12.0%11.6%
10.7%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Annual Average Tax Rate
SL tax ratio is well belowrecommended levels for a
middle-income country
of around 18%
Heavy reliance on indirecttaxes, particularly importtrade taxes, which isproblematic in adepreciating LKR era
Fiscal deficit hasimplications for possiblesovereign ratings revision(50% likelihoodaccording to SCB)
2016 deficit target of 16.4%is well below the median for
countries that have B-rated sovereign debt of 21.4%
Source:
EIUca
lcu
lations
base
don
Min
istryo
fFinance,
CBSL
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0 500 1000 1500 2000 2500
2012
2013
2014
2015
2016*
Tax Revenue
Non-Tax Revenue
Grants etc
Ambitious revenue targets for 2016
are unlikely to be met Heavy reliance on
non-tax revenue
Unprecedented
increase of 200%
Projected tax
revenueincreases are
unlikely to be met +tax policy uncertainty
RAMISmay help
improveadministration
Source: EIU calculations based on Ministry of Finance Budget documents
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Unrealistic revenue expectations?
78.7%
5.3%
18.5%
0.9%
-2.9%
5.1%
0.3%
0.2%
-6.2%
0.1%
30.4%
18.4%
2.4%
1.6%
45.7%
0.6%
0.4%
0.2%
0.0%
0.3%
Taxes on Domestic Goods And Services
Taxes on International Trade
Taxes on Income & Profits
License Taxes & Other
Return on Government Assets
Sale Proceeds and Charges
Social Security Contributions
Current Transfers
Capital Revenue
Revenue From Departmental Enterprises
2016 Projections
2015 Revised Estimates
Tax
Revenue
!"#$%&'Rev
enuev
affected by LKRdepreciation
unlikely tomaterialise inone year
consumptionaffected by
tightening
interest ratesSource: EIU calculations based on Ministry of Finance Budget documents
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Inconsistencies in revenue numbers
In LKR Bn 2014 2015 2016
Budget Speech 1,050.00 1,284.00 1,584.00
Budget Estimates 987.93 1,292.70 1,461.00
Difference 62.07 (8.70) 123.00
Inconsistenciesin taxratio data betweenBudget Speech, BudgetEstimates sheet, and
CBSL Annual Report
Inconsistenciesin taxrevenue data betweenBudget Speech andBudget Estimates sheet
Difference of LKR123bn in 2016
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FinancingDebt
Part 2: SRI LANKAN ECONOMY
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0 100 200 300 400 500 600
2012
2013
2014
2015
2016*
Non-Bank Borrowings Bank Borrowings Foreign Purchases of Treasuries
Domestic borrowing in 2016 reliant on non-bankborrowing, implications for upward movement ofinterest rates
Higher non-bank andbank borrowing cancrowd out privatesector credit availability
Greater reliance onnon bank borrowingwill have implicationsfor upward movementof domestic interestrates
Foreign investmentinto LK Treasuries mayfall alongside pulloutsfrom EMs, falling riskappetite, and globalinterest rate rise
Source: EIU calculations based on Ministry of Finance Budget documents
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FX Reserves hit by foreign investors exitinggovernment securities since H2 2015,
but this appears to be tapering off
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
28th
Janu
ary
25th
Febr
uary
25th
Mar
ch
29th
Apr
il
27th
May
24th
June
29th
July
26th
Aug
ust
23rd
Sept
embe
r
28th
Octo
ber
24th
Nov
embe
r
22nd
Dec
embe
r
VOLUMEINR
SMN
Government Securities held by Foreigners
foreign bond-holdingshave fallen by 33%in
a year
Source: EIU calculations CBSL monthly indicators
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-400 -300 -200 -100 0 100 200 300 400 500 600
2012
2013
2014
2015
2016*
Project Loans Commercial Borrowing Debt Repayment
Financing from international capital
markets will be trickier in 2016 Already the yield onthe 2025 LK sovereignhas edged about 1%higher in thesecondary market
Adverse global marketconditions, US Fedrate tightening cycle,reduced appetite foremerging market
investments
Commodity exporterspulling out their EMinvestments due tolow surpluses
Source: EIU calculations CBSL monthly indicators
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ExternalSector
Part 2: SRI LANKAN ECONOMY
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Slowdowns in remittances & tourism,and exports remain flat
-40
-20
0
20
40
60
80
100
2011 2012 2013 2014
External Trade Performance Year-on-Year Growth
Total Exports Total Imports Trade balance Earning from Tourism Worker Remittances
Exports fell4.5%
Tourism grew18%*base effect
2016
Source: EIU calculations based on DCS data
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Export destination vulnerability needsto be addressed with diversification
65% go to high-income countries
10% go to Middle-East and North Africa
3% go to India
Source: EIU calculations based on EDB Performance Reports and CBSL Annual Reports (various years)
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Worrying slowdown in remittances
38
96
27-17
26
45
33 33
116
21 1910 6
0 5 2 6 5
-40
-20
0
20
40
60
80
100
120
2011 2012 2013 2014 2015
Quarterly Growth in Remittance Inflows (YoY) Why have remittances slowed?
Slump in oil prices have affecteddisposable income in Gulf regionmigrant-host countries
Saudi Arabian Government has begun(mid December 15) cuts to fuel andutility subsidies in order to bridgesoaring budget deficit
About 50% of SLs remittances (USD
7 billion) comes from the Middle East
Growing financial instability andgeopolitical unrest in the Middle East,driven by ISIS attacks
1/3rd
of annualimports
85%
of tradebalanceRe
mittances
cover
Source: EIU calculations based on CBSL monthly indicators and annual reports (various)
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Tourism earnings not growing rapidly
Tourist arrivals have steadily risen but below targets set by government and industry
By now we should be seeing very strong growth - international media exposure, favourable security, etc
Some of the tourism earnings may not get captured in this data due to rising informal offerings (e.g.
AirBnB)
0
100,000
200,000
300,000
400,000
500,000
600,000
0
20
40
60
80
100
120
140
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2013 2014 2015
Tourist Arrivals and Tourism Earnings
Tourism Earnings (Rs.mn) Tourist Arrivals
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Distressed Sectors: Tea
Severe de-valuation of the Russian Rubledue to sanctions Lower oil prices and fall in purchasing
power in the middle east Shortage of hard currency inUkraine due
to Ukraine-Russia conflict Economic sanctions on Iran, continuing
Syrian crisis, and the ongoing unrest inLibya,Egypt and Iraq.
OUTLOOK 2016 Export market conditions unlikely to improve significantly in 2016. Although sanctions on Iran have been lifted, demand conditions not expected to hugely
improve Auction prices are expected to improve marginally during the first half of 2016, given
low prices in 2015 and the positive sentiments seen in the market on a probable
improvement of prices Cost issues arising from low productivity will continue due to political nature of the
issue
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Distressed Sectors: Rubber
Rubber industry earnings declining since the 2010-2011, with both the volumesand F.O.B recording a falling trend from 2013 onwards.
EU accounted for 11.6% of Sri Lankas rubber export share - week economicconditions in the EU has contributed for a weaker demand
Competition from countries such as Vietnam has reduced Sri Lankas export share
in the world market
OUTLOOK 2016
63% of rubber industry is smallholders and they are heavily subsidised - lack of
competition from the reliance of subsidies will hinder the growth in this sector. The Ministry of Plantation is planning to allocate a sum of Rs 1 Billion will for the
purpose of rubber replanting - estimated cost: LKR 850,000 is needed to replant a
hectare).
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MonetaryPolicy
Part 2: SRI LANKAN ECONOMY
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Timeline of CBSL policy rate changes
5
5.5
6
6.5
7
7.5
8
8.5
9
9.5
10
JanFeb
Mar
Apr
MayJu
nJul
AugSep
Oct
Nov
DecJanFeb
Mar
Apr
MayJu
nJul
AugSep
Oct
Nov
DecJanFeb
Mar
Apr
MayJu
nJul
AugSep
Oct
Nov
Dec
2013 2014 2015
!"#$
!$
Currently held at 7.5% and 6%
Source: Central Bank of Sr i Lanka
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Private sector credit has soaredthroughout 2015
2014: Private sector credit growth hadcontinued to slow slow despite the recordlow policy rates and low inflation.
Reasons: 1) Growth in non-tradables thatrequired little credit (except import trade);2) construction driven by public spending
(debt); 3) drop in gold prices alongside QEtaper led to dramatic fall in pawningadvances and rise in NPLs; 4) lagged
transmission of low policy rates into higherbank lending
By H1 2014 credit began to expand, andhas since soared throughout 2015,
accelerated by: consumption rise after Interim Budget
stimulus measures (early 2015),including rapid rise in motor vehicleimports
consumption spending fuelled byenergy price cuts (early 2015)
interest rate cut (April 2015)
0
5
10
15
20
25
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep
2013 2014 2015
Private Sector Credit Growth
Source: EIU calculations based on Central Bank of Sri Lanka
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LabourMarket
Part 2: SRI LANKAN ECONOMY
O ll l i l
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Overall unemployment is low,female unemployment remains high
5.4
5.9
4.9
4.2 4
4.44.3
2008 2009 2010 2011 2012 2013 2014
2 2 2 3 3 3 3
Male Female Total
Unemployment ratehovering just above 4%
Remaining can beregarded largely asstructural unemployment
Female unemployment isdouble that of maleunemployment - mustbe addressed to tacklelabour shortage
N & E data notcomplete, but seems tonot have added lots tounemployment numbers
2 - excludes North & East3 - all island Source: Dept. of Census & Statistics
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Why are workers staying out of thelabour force?
57.1
55.555.7
54.5
53.854
53.4
54.9
54.2
2006 2007 2008 2009 2010 2011 2012 2013 2014
Labour force participationrates are declining YoY
Fallen from 57.1% to
54.2% in 8 years
Indicates that people arestaying out of the labourforce - not seeking work
Industries areexperiencing shortage ofworkers
Total Labour Force Participation Rate (%) - 2006-2014
Source:Dept.
ofCensus
&
Statist
ics
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New effort to address labourshortages in industries
An effort by the PMs office : chamber invited to submit commentson their approach
EIU recommended:
accelerated TVET programmes in targeted sectors andoccupational groups to tackle immediate shortages, based onindustry demand (technicians, hospitality, IT, etc) - Penang model
of PPP for electronics industry
new policy and regulatory measures to boost female labourforce participation (incentives for setting up childcare services,reform of maternity benefits system, etc)
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What are we looking at on thepolicy and institutional side?
Policy:
Implementing tax policy changes and associated uncertainty?
New FDI strategy and new Investment Bill to update outdated laws
Overall: policy cohesion or confusion?
Institutions:
New Agency for Development, Agency for International Trade, andMegapolis Authority
Overall: institutional overlap or coordination?
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EIU FORECASTS
Part 3
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Global Risks and Headwinds in 2016
Sharper than expected slowdown in China; authorities unableto manage volatility; systemic effects aggravate
Faster than expected interest rate rise by US Fed, leading to
sharper contraction of EM funds availability
Sharp rise in global risk aversion(multiple possible triggers)leading to sharp depreciations; and idiosyncratic/unexpectedshocks in a large emerging market
Escalating geopolitical tensions escalate; affecting confidenceand disrupting global trade, financial, and tourism flows
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2016 Forecast: Key Macro Variables
Growth: 5.0 - 5.5% (GoSL: 6.5%; IMF: 5.5%)
Inflation: 4.5 - 5.0% (core inflation edging up, import costsdue to LKR depreciation, except oil)
Budget Deficit: rise to 6.5% above GoSL forecast of 5.9%
(likely to postpone some capital spending)
Rupee: depreciating further, closer to LKR 150
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Anushka WijesinhaChief EconomistCeylon Chamber of [email protected]
Jayani RatnayakeEconomist
Economic Intelligence [email protected]
Saumya AmarasiriwardenaResearch AssistantEconomic Intelligence Unit
mailto:[email protected]:[email protected]:[email protected]