Economy of Sri Lanka

Economy of Sri Lanka

Currency	Sri Lankan rupee (LKR)
Fiscal year	Calendar year
Trade organisations	SAFTA, WTO
Statistics
GDP	US$ 80.591 Billion (World bank.) / US$ 233.637 Billion PPP
GDP growth	7.3% (2013)
GDP per capita	US$ 3,818.161 (2015) / US$ 11,068.996 USD PPP
GDP by sector	agriculture: 12.8%; industry: 29.2%; services: 58% (2009 est.)
Inflation (CPI)	6.9% (2012 est.)
Population below poverty line	4.3% (2011 est.)
Gini coefficient	36.4 (2013)
Labour force	8,319,680(
Labour force by occupation	agriculture: 32.7%; industry: 26.3%; services: 41% (December 2008 est.)
Unemployment	4.3% (2011)
Main industries	processing of rubber, tea, coconuts, tobacco and other agricultural commodities; telecommunications, insurance, banking; tourism, shipping; clothing, textiles; cement, petroleum refining, information technology services, construction
Ease-of-doing-business rank	81st
External
Exports	$10.89 billion (2011 est.)
Export goods	textiles and apparel, pharmaceuticals, tea, spices, diamonds, emeralds, rubies, coconut products, rubber manufactures, fish
Main export partners	United States 21.8% United Kingdom 8.3% India 4.5% Germany 4.2% (2013 est.)
Imports	$20.02 billion (2011 est.)
Import goods	textile fabrics, mineral products, petroleum, foodstuffs, machinery and transportation equipment
Main import partners	India 21.5% China 17.6% Singapore 10.1% United Arab Emirates 6.1% Iran 4.9% (2013 est.)
FDI stock	US$1 Billion (2011)
Gross external debt	$19.45 billion (31 December 2009 est.)
Public finances
Public debt	81% of GDP (2011 est.)
Revenues	$8.495 billion (2011 est.)
Expenses	$12.63 billion (2011 est.)
Economic aid	$808 million (2006)
Credit rating	Standard & Poor's: BB- (Domestic) B+ (Foreign) B+ (T&C Assessment) Outlook: Stable Moody's: B1 Outlook: Stable Fitch: B+ Outlook: Positive
Foreign reserves	$7.2 billion (17 April 2011 est.)
Main data source: CIA World Fact Book All values, unless otherwise stated, are in US dollars.

With an economy worth $80.591 billion (2015) ($233.637 billion PPP estimate), and a per capita GDP of about $11,068.996 (PPP), Sri Lanka has mostly had strong growth rates in recent years until the government toppled early in 2015 where most development projects were stopped abruptly on corruption claims. In GDP per capita terms, it is ahead of other countries in the South Asian region.

The main economic sectors of the country are tourism, tea export, apparel, textile, rice production and other agricultural products. In addition to these economic sectors, overseas employment contributes highly in foreign exchange, 90% of expatriate Sri Lankans reside in the Middle East.

Since becoming independent from Britain in February 1948, the economy of the country has been affected by natural disasters such as the 2004 Indian Ocean earthquake and a number of insurrections, such as the 1971, the 1987-89 and the 1983-2009 civil war. The parties which ruled the country after 1948 did not implement any national plan or policy on the economy, veering between left and right wing economic practices. The government during 1970-77 period applied pro-left economic policies and practices. Between 1977 and 1994 the country came under UNP rule and between 1994 and 2004 under SLFP rule. Both of these parties applied pro-right policies. In 2001, Sri Lanka faced bankruptcy, with debt reaching 101% of GDP. The impending currency crisis was averted after the country reached a hasty ceasefire agreement with the LTTE and brokered substantial foreign loans. After 2004 the UPFA government has concentrated on mass production of goods for domestic consumption such as rice, grain and other agricultural products.

Almost five years after the end of the three-decade civil conflict, Sri Lanka is now focusing on long-term strategic and structural development challenges as it strives to transition to an upper middle income country. Key challenges include ensuring that growth is inclusive, realigning public spending and policy with the needs of a middle income country, ensuring appropriate resource allocations for the various tiers of government, and enhancing the role of the private sector, including provision of appropriate incentives for increasing productivity and exports.

The Sri Lankan economy has seen robust annual growth at 6.4 percent over the course of 2003 to 2012, well above its regional peers. Following the end of the civil conflict in May 2009, growth rose initially to 8 percent, largely reflecting a “peace dividend”, and underpinned by strong private consumption and investment. While growth was mostly private sector driven, public investment contributed through large infrastructure investment, including post war reconstruction efforts in the North and Eastern provinces. Growth was around 7 percent in 2013, driven by a rebound in the service sector which accounts for approximately 60 percent of GDP. With nearly 2 million Sri Lankans living abroad, overseas employment has contributed with foreign exchange and remittances in the order of 10 percent of GDP in 2013. Overall, unemployment at 4 percent is low, although youth unemployment (ages 15–24) at around 17.3 percent and low female labor force participation at 30 percent do pose a challenge.

Sri Lanka has met the Millennium Development Goal (MDG) target of halving extreme poverty and is on track to meet most of the other MDGs, outperforming other South Asian countries. Whereas South Asia as a whole is on track or an early achiever for nine of the 22 MDG indicators, Sri Lanka manages this for 15 indicators. Among the targets achieved early are those related to universal primary education and gender equality. Sri Lanka is expected to meet the goals of maternal health and HIV/AIDs. Progress on reaching the goals related to malnutrition and child mortality is, however, slower. Indicators are mixed on the environment: while Sri Lanka is an early achiever on indicators of protected area, ozone depleting substance consumption, safe drinking water and basic sanitation, it has stagnated or is slipping backwards on forest cover and CO2 emissions.

Sri Lanka experienced a big decline in poverty between 2002 and 2009 – from 23 percent to 9 percent of the population. Despite the very positive story of poverty reduction and shared prosperity, important development challenges remain in Sri Lanka. Pockets of poverty continue to exist, specifically in the districts of Batticaloa (in the Eastern Province), Jaffna (in the Northern Province), Moneragala (in Uva Province) and in the estate sector.

An estimated 9 percent of Sri Lankans who are no longer classified as poor live within 20 percent of the poverty line and are, thus, vulnerable to shocks which could cause them to fall back into poverty.

The Government strategic vision is laid out in the Mahinda Chintana document of 2010. The strategy describes three clear goals: doubling per capita income through sustained high investment; shifting the structure of the economy; and ensuring inclusive growth, improvement in living standards and social inclusion.

Sri Lanka is currently an IDA/IBRD blend country and the World Bank Country Partnership Strategic objectives are aligned to support the country achieve its development goals.

The country aspires to achieve the goal of doubling of per capita income to $4,000 by 2016 from an estimated US$3,194 in 2013, but faces three particular macroeconomic challenges. Sustaining an 8 percent-plus annual growth to meet this goal will require:

(i) fostering private sector development and greater private investment;

(ii) increasing exports to generate jobs and managing the current account deficit; and

(iii) further addressing fiscal imbalances and reversing the declining trend in revenue collection.

Such growth would need to be driven by a high investment rate of above 40 percent of GDP, which seems ambitious given the country’s 31 percent level in 2013.

The second goal is shifting the structure of the economy to be more knowledge-based, globally integrated and competitive, environmentally friendly, internally integrated and increasingly urban. Sri Lanka has a solid base for achieving this goal, with a well educated population and a wealth of environmental assets. Challenges going forward include providing systems and incentives to give the labor force the types of skills needed for a knowledge economy, establishment of economic policies that encourage competitiveness, stronger efforts on environmental sustainability and adaptation to climate change, and modernizing infrastructure systems to integrate the disparate parts of the country and meet the needs of an increasingly urban population.

Ensuring improvement in living standards and social inclusion:

Thanks to a long history of attention to access to basic services, Sri Lanka excels for its income level on most social indicators. Malnutrition, however, is an exception. As Sri Lanka becomes a middle income country, new challenges are emerging (e.g. a rapidly aging population) and improving the quality of services will be a major issue going forward. While increasing the quality of services, the Mahinda Chintana aims to ensure that benefits are equitably shared across all segments of the population and that social inclusion is a priority.

In addition, the World Bank supports the country’s emerging challenges and needs with a combination of technical support, knowledge products relevant to lending and the use of IDA/IBRD lending.

Strengthening Sri Lanka’s resilience to natural disasters and climate change has become a priority for the country’s development agenda. Climate-related hazards pose a significant threat to economic and social development in the country. The World Bank Group is well placed to assist Sri Lanka in increasing both its physical and fiscal resilience to climate and disaster risk, through adaptation enhancing investments and a Catastrophe Deferred Draw-Down Option (CAT-DDO) which is a contingent credit line that provides immediate liquidity to IBRD member countries in the aftermath of a natural disaster. A comprehensive program of support in this area is proposed in the upcoming progress report of the Country Partnership Strategy.

Economic history

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 five years of civil war has slowed economic growth [2], diversification and liberalization, and the political group Janatha Vimukthi Peramuna (JVP) uprisings, especially the second in the early 1980s, also caused extensive upheavals.

The Mahinda Rajapakse government halted the privatization process and launched several new companies. Sri Lanka has a relatively high Human Development Index with a high literacy rate (90.1%) which are the result of universal education policies and widespread healthcare. Sri Lanka's Human Development Index and literacy rate are among the highest in the South Asian region, and infant mortality is among the lowest. Sri Lanka has 555 publicly funded hospitals.

Following the quelling of the JVP insurrection, increased privatization, economic reform, and a stress on export-oriented growth helped improve the economic performance, increasing 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 reforms. The year ended in parliamentary elections in December, which saw the election of a pro-capitalism party to Parliament, while the socialism oriented Sri Lanka Freedom Party retained 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, the economy experienced 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 reached 4%, aided by strong service sector growth. The agricultural sector of the economy staged a partial recovery. Total FDI inflows during 2002 were about $246 million.

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.

The resumption of the civil-war in 2005 led to a steep increase defence expenditures. The increased violence and lawlessness also prompted some donor countries to cut back on aid to the country.[3][4].

Sri Lanka has also accumulated a 9.2% deficit and the central bank has not intervened since late 2006 to print more currency [5].

A sharp rise in world petroleum prices combined with economic fallout from the civil war led to inflation that peaked 20%. However, as the civil war ended in May 2009 the economy started to grow at a higher rate of 8.0% in the year 2010.

Macro-economic trend

This is a chart of trend of gross domestic product of Sri Lanka at market prices by the International Monetary Fund with figures in millions of Sri Lankan Rupees.

Year	Gross Domestic Product	US Dollar Exchange
1980	66,167	16.53 Sri Lankan Rupees
1985	162,375	27.20 Sri Lankan Rupees
1990	321,784	40.06 Sri Lankan Rupees
1995	667,772	51.25 Sri Lankan Rupees
2000	1,257,637	77.00 Sri Lankan Rupees
2005	2,363,669	100.52 Sri Lankan Rupees

For purchasing power parity comparisons, the US Dollar is exchanged at 113.4 Sri Lankan Rupees only.

In 1977, Colombo abandoned statist economic policies and its import substitution trade policy for market-oriented policies and export-oriented trade.

Sri Lanka's most dynamic industries now are food processing, textiles and apparel, food and beverages, telecommunications, and insurance and banking.

By 1996 plantation crops made up only 20% of exports (compared with 93% in 1970), while textiles and garments accounted for 63%. GDP grew at an annual average rate of 5.5% throughout the 1990s until a drought and a deteriorating security situation lowered growth to 3.8% in 1996.

The economy rebounded in 1997-98 with growth of 6.4% and 4.7% - but slowed to 3.7% in 1999. For the next round of reforms, the central bank of Sri Lanka recommends that Colombo expand market mechanisms in nonplantation agriculture, dismantle the government's monopoly on wheat imports, and promote more competition in the financial sector.

Pre 2009 there was a continuing cloud over the economy the civil war and fighting between the Government of Sri Lanka and LTTE. However the war ended with a resounding victory for the Sri Lankan Government on 19 May 2009 with the total elimination of LTTE.

Government provides employment for 13% of the work force and follows state enterprise oriented policies.

Privataization of such enterprises has stopped and reversed, with several new state enterprises launched

External sector

Trade account issues

In the recent past, the Sri Lankan Government has identified some key focal areas to address the external imbalances of the economy, especially with regard to reducing its high trade deficit (~15% of GDP for 2012) in order to make the economy comply with the Marshall–Lerner condition. Sri Lanka's oil import bill accounts for an estimated 27% of total imports while its pro-growth policies have resulted in an investment goods import component of 24% of total imports. These inelastic import components have led to Sri Lanka's Export goods price elasticity + Import goods price elasticity totaling less than 1, resulting in the country not complying with the Marshall–Lerner condition.

Current version: 1.0.7.

Sri Lanka Export Treemap by Product (2012) from Harvard Atlas of Economic Complexity

Some of the suggested proposals include:

• Import substitution of investment goods and consumer goods
• Tax concessions towards value added exports
• Negotiating longer credit periods for oil imports
• Allowing the external value of the currency to be determined by market forces (with minimal central bank intervention).

Key cushioning items in the current account

• Tourism revenue (Sri Lanka's tourism revenue accounted for ~US$1bn for FY2012 with ~1mn tourist arrivals)
• External worker remittances accounted for ~US$6bn in FY2012
• However, as the income account reported a negative balance owing to high debt servicing payments and repatriation of income from foreign investments, the current account deficit was reported at 5.5%to 2012 GDP.

Capital account

• Within the capital account, borrowings still account for a significant proportion as opposed to Foreign direct investments.
• FDIs were estimated at ~US$800mn for FY2012

Overall balance (BOP)

• The economy ended with an overall positive balance of US$151mn for 2012 (vs. a US$1,061mn deficit in FY2011)

[6]

Financial institutions

The Central Bank of Sri Lanka is the monetary authority of Sri Lanka and was established in 1950. The Central Bank is responsible for the conduct of monetary policy in the country and also has supervisory powers over the financial system.

The Colombo Stock Exchange (CSE) is the main stock exchange in Sri Lanka. It is one of the most modern exchanges in South Asia, providing a fully automated trading platform. The vision of the CSE is to contribute to the wealth of the nation by creating value through securities. The headquarters of the CSE have been located at the World Trade Center Towers [7] in Colombo since 1995 and it also has branches across the country in Kandy, Matara, Kurunegala, Negombo and Jaffna. In 2009, after the 30 years long civil war came to an end, the CSE was the best performing stock exchange in the world.

See also: Central Bank of Sri Lanka and Colombo Stock Exchange

Economic infrastructure and resources

Transportation and roads

Main article: Transport in Sri Lanka

Most Sri Lankan cities and towns are connected by the Sri Lanka Railways, the state-run railway operator. The Sri Lanka Transport Board is the state-run agency responsible for operating public bus services across the island.

The total length of Sri Lankan roads exceeds 11,000 kilometres (6,840 mi), with a vast majority of them being paved. The government has launched several highway projects to bolster the economy and national transport system, including the Colombo-Katunayake Expressway, the Colombo-Kandy (Kadugannawa) Expressway, the Colombo-Padeniya Expressway and the Outer Circular Highway to ease Colombo's traffic congestion. The government sponsored Road Development Authority (RDA) has been involved in several large-scale projects all over the island in an attempt to improve the road network in Sri Lanka. Sri Lanka's commercial and economic centers, primarily the capitals of the nine provinces are connected by the "A-Grade" roads which are categorically organized and marked. Furthermore, "B-Grade" roads, also paved and marked, connect district capitals within provinces.

Energy

The energy policy is governed by the Ministry of Power and Energy, while the production and retailing of electricity is carried out by the Ceylon Electricity Board. Energy in Sri Lanka is mostly generated by hydroelectric power stations in the Central Province. The Sri Lankan Government and many individual "green groups" in Sri Lanka have been focusing on eco-friendly solutions to energy development and the country is undergoing changes to enforce stricter environmental policies in industries, both public and private.

Economic sectors

Tourism

Unawatuna Beach

Main article: Tourism in Sri Lanka

Tourism is one of the main industries in Sri Lanka. Major tourist attractions are focused around the islands famous beaches located in the southern and the eastern parts of the country and ancient heritage sites located in the interior of the country and resorts located in the mountainous regions of the country. Also, due to precious stones such as rubies and sapphires being frequently found and mined in Ratnapura and its surrounding areas, they are a major tourist attraction.

The 2004 Indian Ocean Tsunami and the past civil war have reduced the tourist arrivals, however the number of tourists visiting have been recently increasing, beginning in early 2008. March 2008 by 8.6% and Sri Lanka attracted 1,003,000 tourists in 2012 according to the Central Bank of Sri Lanka's 2013 roadmap.

Tea industry

Tea estate in the central highlands.

Main article: Tea industry of Sri Lanka

The tea industry, operating under the Ministry of Public Estate Management and Development, is one of the main industries in Sri Lanka. It became the world's leading exporter in 1995 with a 23% share of global tea export, higher than Kenya's 22% share. The central highlands of the country have a low temperature climate throughout the year and annual rainfall and the humidity levels that are suitable for growing tea. The industry was introduced to the country in 1867 by James Taylor, a British planter who arrived in 1852.

Recently, Sri Lanka has become one of the countries exporting fair trade tea to the UK and other countries. It is believed that such projects could reduce rural poverty. but

Apparel and textile industry

Main article: Apparel industry of Sri Lanka

The apparel industry of the Sri Lanka mainly exports to the United States and Europe. Europe increasingly relies on Sri Lankan textiles due to the high cost of labor in Europe. There are about 900 factories throughout country serving companies such as Victoria's Secret, Liz Claiborne and Tommy Hilfiger.

Agriculture

Main articles: Agriculture in Sri Lanka and Livestock in Sri Lanka

The agricultural sector of the country produces mainly rice, coconut and grain, largely for domestic consumption and occasionally for export. The tea industry which has existed since 1867 is not usually regarded as part of the agricultural sector, which is mainly focused on export rather than domestic use in the country.

The Five-hub concept

The 5-hub concept introduced in Mahinda Chintana (GoSL's policy document), focuses on developing the Sri Lankan economy subject to the development of the following five hubs

Key focal areas and goals

Maritime hub

• Colombo Port – Container mega hub
• Hambantota Port – Free port service, industrial and multi-purpose
• Galle Port – Cruise shipping centre
• Trincomalee – Port-related industries
• Oluvil Port – Commercial and fisheries
• Kankasanthurei & Point Pedro – Regional port

Aviation hub

• Second international airport at Mattala
• Modernisation of the Bandaranaike International Airport (BIA) and building of second runway at the BIA
• Development and upgrading of domestic airports
• Position Colombo as a regional logistics and services hub and as a hub for budget airlines

Commercial hub

• Establish Sri Lanka as the foremost centre in the region in the provision of commercial services, International banking and international investments
• A Singapore-type model to be followed via the growth of ports and tourism
• Main challenges include lack of:
  • Physical infrastructure,
  • Digital infrastructure,
  • Human capital infrastructure and
  • Regulatory and legal infrastructure

[8]

Energy hub

• Develop renewable energy sources
• New oil refinery at Hambantota
• Oil exploration and production – 3 sea basins (offshore) have been identified (Mannar, Cauvery, Southern Waters)
• Develop oil trade-related ancillary services including gas, no energy force

Knowledge hub

• Target IT literacy and internet access for all
• Creation of knowledge-based jobs
• Commence degree programmes directly targeting foreign students
• Accredited foreign universities to set up university colleges in Sri Lanka

[9]

Global economic relations

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, receiving more than 63% of the country's total garment exports. India is Sri Lanka's largest supplier, with imports worth $835 million in 2002. Japan, traditionally Sri Lanka's largest supplier, was its fourth-largest in 2002 with exports of $355 million. Other important suppliers include Hong Kong, Singapore, Taiwan, and South Korea. The United States is the 10th-largest supplier to Sri Lanka; U.S. imports amounted to $218 million in 2002, according to Central Bank trade data.

A new port is being built in [Hambantota] in Southern Sri Lanka, funded by the Chinese government as a part of the Chinese aid to Sri Lanka. This will ease the congestion in Sri Lankan ports, particularly in Colombo. In 2009, 4456 ships visited Sri Lankan ports.

Credit rating and commercial borrowing

Sri Lanka had applied for credit ratings from international agencies in its efforts to apply for loans from international markets in 2005 after the election of Mahinda Rajapakse as president. Standard and Poor's has rated Sri Lanka a "B+" speculative rating, four grades below investment grade. Fitch has rated Sri Lanka with "BB-" which is three grades below investment grade. Standard and Poor's maintains Sri Lanka is constrained by providing widespread subsidies, a bloated public sector, transfers to loss-making state enterprises, and high interest local and international burdens [10]. Standard and Poor's estimates public sector debt has reached 95% of GDP [11], in comparison to CIA estimates of 89% of GDP [12]. Sri Lanka in mid-2007 sought to borrow $500 million from international markets to shore up the deteriorating exchange rate and reduce pressure on repayment of the domestic debt market [13]. The head of the opposition UNP, Ranil Wickremasinghe has warned that such intense borrowing is unsustainable and will not repay these loans if elected to power [14].

Foreign assistance

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 International Monetary Fund, World Bank, Asian Development Bank, Japan, the European Union and the United States, totalled $4.5 billion.

See also

• Central Bank of Sri Lanka
• Colombo Stock Exchange

External links

• Global Economic Prospects: Growth Prospects for South Asia The World Bank, Dec. 13, 2006
• World Bank Trade Summary Statistics Sri Lanka 2012
• CSE ALL-SHARE
• CIA Factbook
• Economy of Sri Lanka at DMOZ
• Information and News
• Sri Lanka's Most Trusted Investment Community
• Community-driven Market and Stock Predictions for the Colombo Stock Exchange (cse.lk)