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Economy of Sri Lanka

From Academic Kids

Contents

Overview

With an economy of $16.6 billion, and a per capita GDP of about $872, Sri Lanka has mostly enjoyed strong growth rates in recent years. Sri Lanka began to shift away from a socialist orientation in 1977. Since then, the government has been deregulating, privatizing, and opening the economy to international competition. Twenty years of civil war has no doubt slowed economic diversification and liberalization, and the leftist Janatha Vimukthi Peramuna (JVP) uprisings, especially the second in the late 1980s, also caused extensive upheavals and economic uncertainty.

Following the quelling of the JVP, increased privatization, reform, and a stress on export-oriented growth helped revive the economy's performance, taking GDP growth to 7% in 1993. Economic growth has been uneven in the ensuing years as the economy faced a multitude of global and domestic economic and political challenges. Overall, average annual GDP growth was 5.2% over 1991-2000. In 2001, however, GDP growth was negative 1.4%--the first contraction since independence. The economy was hit by a series of global and domestic economic problems and affected by terrorist attacks in Sri Lanka and the United States. The crises exposed the fundamental policy failures and structural imbalances in the economy and the need for bold reforms. The year ended in parliamentary elections in December, which saw the election of a more pro-capitalism party to Parliament (the Sri Lanka Freedom Party retains the Presidency).

The government of Prime Minister Ranil Wickremasinghe of the United National Party has indicated a strong commitment to economic and social sector reforms, deregulation, and private sector development. In 2002, Sri Lanka commenced a gradual recovery. Early signs of a peace dividend were visible throughout the economy--Sri Lanka has been able to reduce defense expenditures and begin to focus on getting its large, public sector debt under control. In addition, the economy has benefited from lower interest rates, a recovery in domestic demand, increased tourist arrivals, a revival of the stock exchange, and increased foreign direct investment (FDI). In 2002, economic growth bounced up to 4%, helped by strong service sector growth. Agriculture staged a partial recovery. Industrial sector growth, however, faltered for the second consecutive year due to weak demand and lower prices for Sri Lanka's exports. The government was able to exert fiscal control, and inflation trended down. Total FDI inflows during 2002 were about $246 million and are expected to exceed $300 million in 2003. The largest share of FDI has been in the services sector. Good progress was made under the Stand By Arrangement, which was resumed by the International Monetary Fund (IMF). These measures, together with peaceful conditions in the country, have helped restore investor confidence and created conditions for the government to embark on extensive economic and fiscal reforms and seek donor support for a poverty reduction and growth strategy.

Foreign exchange reserves, which fell by 11% in 1999, decreased further in 2000. In response, the government floated the rupee on January 23, 2001. This led to a significant nominal depreciation in 2001, but the rupee has since stabilized and reserves have gradually been replenished.

The year 2003 is poised to be another eventful year for Sri Lanka. Continued peace has allowed further progress on macroeconomic stabilization during the first half of the year. Economic growth has picked up to 5.5% in the first quarter, from 0.5% in the comparable period in 2002. This growth was largely driven by the services sector (particularly telecom and tourism), and the industrial sector posted modest growth. Both exports and imports have risen 13% in the first 4 months. Interest rates are declining. The inflation rate hovers around 9%. External reserves were sufficient to cover 5.1 months of imports. The Colombo Stock Exchange has rebounded to become one of the better performers in the area. The CSE rose 45% in 2002 and hit a record high in June 2003 as business confidence continued to expand. Fortunately, the SARS epidemic did not spread to Sri Lanka, and tourism was not severely affected. Sri Lanka's garment exporters reported a surge in orders, shifted from China due to SARS. On the negative side, in mid-2003 Sri Lanka experienced its worst floods in 50 years, which caused extensive damage in south and southwestern parts of the country. The government is relying on donor funding to reconstruct the flood-damaged areas, avoiding recourse to government finances. The adverse impact from floods on overall growth for 2003 is estimated to be marginal.

Economic recovery is expected to consolidate during the rest of 2003, and GDP growth for the year is predicted at 5.5%, increasing to 6.5% in 2004. All major sectors of the economy are expected to expand. This growth will, however, depend on the continuation of the peace process, policy adjustments (particularly budgetary control), and structural reforms. Recovery in the global economy also is important as well as effective aid utilization. According to the Finance Minister, the fiscal deficit is forecast to decline to 7.5% of GDP in 2003, with the government instituting more controls on fiscal management. Given Sri Lanka's high debt burden (105% of GDP), fiscal consolidation is central to budget planning and macroeconomic programming. Stagnant government revenue, however, remains a big worry in 2003.

The future of Sri Lanka's economic health is uncertain but largely dependent on the continuation of the peace process, political stability, and continued policy reforms--particularly in the area of fiscal discipline and direct management. Implementation of major reforms in the civil service and education sectors and more disciplined spending and improved revenue collection would help generate stronger economic growth. If privatization continues and export orientation strengthens, weaknesses in government will have less impact on growth. Real growth is expected to continue in the 4%-6% range beyond 2003 but may remain below the 8%-9% growth needed to move quickly into the status of a middle-income or newly developed country.

Other challenges include diversification from Sri Lanka's key exports--tea and garments. Garment exports will face increased competition in a quota-free era when the Multi Fiber Arrangement expires in 2005. The future of the tea industry is threatened by a shortage of plantation labor and growing competition. There are new efforts to diversify exports, explore tourism potential, and improve competitiveness. The government has an ambitious information and communications technology strategy to connect and service every corner of the country. This project, if implemented successfully, could change Sri Lanka's economy and social fabric and would take it into the information age. The government hopes to take advantage of Sri Lanka's strategic location on shipping routes, make use of the Indo-Lanka Free Trade Agreement, and sign free trade agreements with other countries to achieve regional trading hub status. If peace returns and all these efforts bear fruit, real growth could be in the 6%-7% range beyond 2004, and will help realize the government's intention of making Sri Lanka the gateway to South Asia.

The service sector is the largest component of GDP (54%). In 2003, the service sector continued its strong expansion, fueled primarily by strong growth in telecom and financial services. Public administration and defense expenditures have remained steady. Repatriated earnings of Sri Lankans working abroad continued to be strong. Tourism continues to be a significant contributor to this sector as well, although it has not reached full potential due to continued worries about the conflict. There also is a small but growing information technology sector, especially information technology training and software development and exports.

Manufacturing accounts for about 15.9% of GDP. The textile, apparel, and leather products sector is the largest, accounting for 44% of total industrial output. The second largest industrial sector, at 24% of total manufacturing output, is food, beverages, and tobacco (this sector grew by 4.6% in 2002). The third-largest industrial sector is chemical, petroleum, rubber, and plastic products--16% of output, with 5.7% growth in 2002.

Agriculture has lost its relative importance to the Sri Lankan economy in recent decades. It accounts for 20.1% of GDP and provides employment to 33% of the working population. Rice, the staple cereal, is cultivated extensively. The plantation sector consists of tea, rubber, and coconut; in recent years, the tea crop has made significant contributions to export earnings and saw production increases of about 5% in 2002. Tea prices have continued to decline due to record world tea output in recent years. The construction sector accounts for 7.4% of GDP and mining and quarrying 1.8%. In recent years, the government has eliminated many price controls and quotas, reduced tariff levels, eliminated most foreign exchange controls, and sold more than 55 state-owned companies and 20 estate-holding companies. Colombo boasts one of the most modern stock exchanges in the region, and the Sri Lankan Government offers a range of tax and other incentives to attract potential investors.

Trade and Foreign Assistance

Exports to the United States, Sri Lanka's most important market, were valued at $1.8 billion in 2002, or 38% of total exports. For many years, the United States has been Sri Lanka's biggest market for garments, taking more than 63% of the country's total garment exports. India is Sri Lanka's largest supplier, with exports of $835 million in 2002. Japan, traditionally Sri Lanka's largest supplier, was its fourth-largest in 2002 with exports of $355 million. Other leading suppliers include Hong Kong, Singapore, Taiwan, and South Korea. The United States is the 10th-largest supplier to Sri Lanka; U.S. exports amounted to $218 million in 2002, according to Central Bank trade data--U.S. Customs data places U.S. exports to Sri Lanka at $166 million in 2002. Wheat accounted for 14% of U.S. exports to Sri Lanka in 2002, down from the previous year.

Sri Lanka is highly dependent on foreign assistance, and several high-profile assistance projects were launched in 2003. The most significant of these resulted from an aid conference in Tokyo in June 2003; pledges at the summit, which included representatives from the IMF, World Bank, Asian Development Bank, Japan, the European Union and the United States totaled $4.5 billion. This funding was in response to a poverty reduction strategy program laid out in "Regaining Sri Lanka," an action paper authored by the Sri Lankan Government, and a number of studies commissioned by the donor community that, together, provide a basic framework for economic revival. While implementation of previous aid projects has been spotty, the government believes it can improve this record by streamlining tender processes and improving project management skills.

Labor

More than 20% of the 6.1 million-strong labor force, excluding the north and east, is unionized. Trade union membership is on the decline. There are more than 1,650 registered trade unions, many of which have 50 or fewer members, and 19 federations. Many unions have political affiliations. The Ceylon Workers Congress (CWC) and Lanka Jathika estate workers union are the two largest unions representing workers in the heavily unionized plantation sector. The president of the CWC also is Minister of Livestock Development and Estate Infrastructure. The CWC's agenda includes political issues, such as citizenship status for stateless Indian Tamils. Some of the stronger and more influential trade unions include the Ceylon Mercantile Union, Sri Lanka Nidhahas Sevaka Sangamaya, Jathika Sevaka Sangayama, Ceylon Federation of Trade Unions, Ceylon Bank Employees Union, Union of Post and Telecommunication Officers, Conference of Public Sector Independent Trade Unions, and the JVP-aligned Inter-Company Trade Union. The unemployment rate has declined in recent years and hovers at 10%. The rate of unemployment among high school and college graduates, however, remains proportionally higher than the rate for less-educated workers. The government has embarked on educational reforms it hopes will lead to better preparation of students and fewer mismatches between graduates and jobs. In addition, it also has begun a youth corps program to provide employment skills to the unemployed.

Miscellaneous data

GDP: purchasing power parity - $50.5 billion (1999 est.)

GDP - real growth rate: 3.7% (1999 est.)

GDP - per capita: purchasing power parity - $2,600 (1999 est.)

GDP - composition by sector:
agriculture: 21%
industry: 19%
services: 60% (1998)

Population below poverty line: 22% (1997 est.)

Household income or consumption by percentage share:
lowest 10%: 1.8%
highest 10%: 39.7% (1995-96 est.)

Inflation rate (consumer prices): 6% (1999 est.)

Labor force: 6.6 million (1998)

Labor force - by occupation: services 45%, agriculture 38%, industry 17% (1998 est.)

Unemployment rate: 9.5% (1998 est.)

Budget:
revenues: $2.7 billion
expenditures: $4.2 billion, including capital expenditures of $1.1 billion (1998 est.)

Industries: processing of rubber, tea, coconuts, and other agricultural commodities; clothing, cement, petroleum refining, textiles, tobacco

Industrial production growth rate: 6.3% (1998)

Electricity - production: 5,505 GWh (1998)

Electricity - production by source:
fossil fuel: 30.97%
hydro: 69.03%
nuclear: 0%
other: 0% (1998)

Electricity - consumption: 5,120 GWh (1998)

Electricity - exports: 0 kWh (1998)

Electricity - imports: 0 kWh (1998)

Agriculture - products: rice, sugarcane, grains, pulses, oilseed, spices, tea, rubber, coconuts; milk, eggs, hides, beef

Exports: $4.7 billion (f.o.b., 1998)

Exports - commodities: textiles and apparel, tea, diamonds, coconut products, petroleum products (1998)

Exports - partners: United States 40%, United Kingdom 11%, Middle East 9%, Germany 5%, Japan 4% (1998)

Imports: $5.3 billion (f.o.b., 1998)

Imports - commodities: machinery and equipment, textiles, petroleum, foodstuffs (1998)

Imports - partners: India 10%, Japan 10%, South Korea 8%, Hong Kong 7%, Taiwan 6% (1998)

Debt - external: $8.4 billion (1998)

Economic aid - recipient: $577 million (1998)

Currency: 1 Sri Lankan rupee (SLRe) = 100 cents

Exchange rates: Sri Lankan rupees (SLRe) per US$1 - 72.364 (January 2000), 70.402 (1999), 64.593 (1998), 58.995 (1997), 55.271 (1996), 51.252 (1995)

Fiscal year: calendar year

External link

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