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Lankan Economy: A Critical Analysis

the Past and Present
Introduction
ri

Economic Performance

Lanka,

excellent

has

had

prospect

development

Dr. M. Ganeshamoorthy

an

Economic growth of Sri Lanka during

for

the

last

six

decades

was

since

insufficient to make a big push for

independence in 1948. Unlike the

an economic takeoff, but it was not

Senior Lecturer
Department of
Economics
University of Colombo

other former British colonies, Sri

too small compared to the countries

Lanka was well-equipped with

that followed similar populist and

superior

social

nationalist policies or faced with

t h a n 4 p e r c e n t e x c e p t in 2 0 0 1

infrastructure, advanced political,

v i o l e n t civil c o n f l i c t s o r w a r at

(Ganeshamoorthy, 2002). The main

l e g a l and g o v e r n i n g s y s t e m s , a

times. On average, Sri Lanka has

conclusion one might d r a w from

population with adaptive mentality

been able to maintain a growth rate

Table 1 is that the country's growth

and a pool of financial resources to

of 3-4 percent between 1950 and

performance was closely associated

finance development expenditures.

1977 and 5 - 6

with

(World B a n k ,

Sri Lankan e c o n o m y has shown

e c o n o m i c and

1953;

Snodgrass,

1998; Lakshman and Tisdel, 2000).
The country, however, soon plunged
into serious economic and political
problems,
l o s i n g its
initial
advantage for development, mainly
due to the short-sighted or wrong
political and economic priorities,
ambitious
welfare-enhancing
p r o g r a m s w i t h o u t an e c o n o m i c
backing for its sustainability, and
U

t

e

r

a

Table 1

prolonged civil
war that lasted
for nearly three
d e c a d e s
( A 1 a i1 im a ,
1997)
The
country

has

b e c o m e a test
case
among
development
economists as
an
economy
characterised
by
slow
e c o n o m i c
growth
with
high
social
welfare
and
basic h u m a n
n e e d
s at i s f a c t i o n
( O s m a n i ,
1994).
10

remarkable

percent thereafter.

r e s i l i e n c e to

political

and

economic

ideologies of the ruling parties.

both

internal and external shocks such

The two main parties that ruled the

as oil crisis, droughts, riots and

country almost alternatively since

civil war. The country was able to

independence till 1994, namely, the

maintain

positive growth rates

United National Party ( U N P ) and

around 2-3 percent in the early

the Sri Lanka Freedom Party (SLFP),

1970s during severe droughts and

have followed diametrically opposed

the youth uprising. During the civil

political and economic ideologies.

war era since 1983 to 2009, the

Being a pro-western

c o u n t r y ' s g r o w t h rate w a s more

party, the UNP subscribed to liberal

capitalist

Political regimes, economic policy and economic performance of
Sri Lanka from 1950 to 2010

Time Period

Political Regime

Economic Policy

Economic
Growth %

1950-1955

UNP -

rightwing populist

liberal market economy

4.26

1956-1964

MEP-

leftwing socialist

closed economy

2.50

1965-1969

UNP - rightwing populist

partial open market economy

4.64

1970-1976

SLFP - leftwing socialist

closed economy

2.52

1977-1993

UNP - rightwing capitalist

open market economy

4.92

1994-2000

PA - leftwing capitalist

open market economy

5.17

with human face

with intervention

UNP- rightwing capitalist

open market economy

1.25

PA - leftwing capitalist

open market economy
with intervention

5.65

with human face
UPFA - leftwing nationalism

open market economy

6.36

2001-2002
2003-2004

2005-2010

with nationalistic
* Average Annual Economic Growth
UNP - United National Party
SLFP - Sri Lanka Freedom Party
Source: Author's compilation.

sentiments

MEP - Mahajana Eksath Peramuna
UPFA - United People's Freedom Alliance

Economic Review: June/July 2011

market e c o n o m y i d e a l s and the
country's economic policies were
directed towards this end at the
times of the UNP rule, whereas the
SLFP
was
an
anti-western
n a t i o n a l i s t i c p a r t y b e l i e v i n g in
socialist ideals, so that periods of
the SLFP was witnessed in closed
economy
with
widespread
nationalistic sentiments.

the
current

The

not

deviate

much

from

its

predecessor

in

terms

of

main focus has

country

towards a high growth path as was
happened

in

Singapore

Malaysia. T h i s i m p e d i m e n t

and
has,

however, been r e m o v e d in 1994
following a left- wing PA (People's
Alliance) g o v e r n m e n t decided to
follow

the

economic

policies

adopted by the previous government
without

major

changes.

Yet,

another t u m b l i n g bloc, the civil
war, played a major role in reducing

Growth performance of Sri Lanka
varies significantly under different
political regimes. Economic growth
of Sri Lanka w a s relatively high

47.9
42.8
47.7
52.8
57.8

sector to G D P has increased from

been on the rural economy with a

3 6 . 9 p e r c e n t to 5 7 . 8 p e r c e n t in

nationalistic sentiment (Election

2010, making Sri Lanka a services

M e n i f e s t o of P e o p l e ' s A l l i a n c e
government in 1994 and Mahinda

sector-driven

Chintana 2005). The remarkable

contribution

growth performance of the current

sector to G D P has also risen from

economy.
of t h e

The

industrial

UPFA regime since 2005, despite an

19.6 percent in 1950 to 29.4 percent

ever increasing war b u d g e t ,

has

in 2010. This change is considered,

shown that high economic growth

however, as inadequate to sustain

is feasible even under a left-wing

the

government if economic policies are

industrialisation growth path. The

d i r e c t e d on right p a t h ( C e n t r a l

typical transition

Bank of Sri Lanka, 1995-2010).

developed economy to a developed

economy

on
o f an

its
under­

country status usually involves a
economy

transformation from agriculture to

u n d e r w e n t significant structural

industry, and then from industry to

The

Sri

Lankan

changes during the last sixty years

services sector dominant economy

(Table

was

as it was happened in the United

dominated by the agriculture sector

K i n g d o m ( U K ) , G e r m a n y and in

( 4 6 . 3 % of G D P (Gross D o m e s t i c

many

P r o d u c t ) ) in 1950. T h e r e l a t i v e

However,countries

i m p o r t a n c e of the

during the p e r i o d s of right-wing
governments c o m p a r e d to that of
the leftwing. T a b l e 1 shows that
this trend continued till 1993, and
then, there was a

36.9
45.4

Source: Annual Reports, Central Bank of Sri Lanka.

the growth potential of the country
thereafter (Arunatilake etal, 2000).

Services

Industry
19.6
16.8
23.8
29.6
26.0
27.3
29.4

37.8
28.3
27.6
26.3
19.9
12.8

1980
1990
2000
2010

macroeconomic

policies was a major impediment for

Agriculture
46.3

Year
1950
1960
1970

regime itself did

Nevertheless,

the

from 1950 to 2010

UPFA

p o l i c y .

could have taken

Structural change of GDP of Sri Lanka

2

right

direction.

T h e d i s c o n t i n u i t y in e c o n o m i c
launching a development drive that

Table

positive step in

remarkable

departure from the hitherto existed

2 ) . The

economy

western

countries.
such

as

Singapore, Hong Kong and

the

sector to GDP has come down to a

Maldives

the

mere 12.8 percent in 2010, while

transformation from agriculture to

the contribution of the s e r v i c e s

services sector-driven economies,

agriculture

have

made

practice of c h a n g i n g
economic policies with
the

change

in

government

the

of

g o v e r n m e n t in
d e c i d e d to
the

PA
1994

continue

p o l i c i e s of

1946

1953

1963

1973

1980

1990

2000

2010

Adult Literacy

58

65

72

78

86

88

90.7

91.3

School enrolment

41

58

65

86

100

100

100

100

43

56

63

66

68

72

74

75

34

18

9.8

10

(2005)

(2006)

6.1

6.2

a

different p a r t y . T h e
newly-elected

Social indicators of Sri Lanka from 1946 to 2010

Table 3

the

previous regime with
some b a s i c

changes

that

deemed

(aged 5-14)
Life expectancy
Infant mortality

141

71

56

46

(1,000 live births)
Death rate (1.0001

20

11

9

8

6

6

Birth rate \(1,000)
—t
*

39

34

28

28

21

18.4

17.6

necessary. The new

37

policy was termed a s

Natural increase(%]

1.7

2.8

2.5

2.0

2.2

1.5

1.7

1.5

'market economy with

Population growth

2.3

3.3

2.5

1.6

1.8

1.1

1.3

1.0

human face' and this

Source: Compiled by the author using data at Snodgrass (1998). Central Bank of

w a s c o n s i d e r e d as a

Sri Lanka 2010.

Economic Review: June/July 2011

.

11 —

directly bypassing the industrial

sufficient e c o n o m i c growth as it

participation of the private sector

sector. T h e m a j o r a d v a n t a g e of

drained resources meant for the

in health and education sectors has

services sector growth is that, it

country's

helped reducing

requires a short time to develop

(Snodgrass, 1998).

economic

growth

them.

with relatively s m a l l a m o u n t of

growing

resources using simple technology

The increase of population and the

compared to industries.

u n i v e r s a l n a t u r e of the w e l f a r e

However,

services sector-led economic growth

provisions made its

is highly fragile since the services
sector is

These

difficult,

more vulnerable to both

and

maintenance

the

major contributors to the services

are

with

the

faster

participation of l o c a l as well as
foreign private investors (Central
Bank of Sri Lanka, 2010).
The welfare measures adopted by

the welfare provisions particularly

s u c c e s s i v e g o v e r n m e n t s in Sri

the subsidised food. These moves

L a n k a c a n be c o n s i d e r e d a s a

sector of Sri Lanka include retail

met

and wholesale trade, transport and
communication, banking, insurance

sectors

successive

g o v e r n m e n t s tried to scale d o w n

internal and external shocks. The

expenditure on

two

with

stiff

resistance

-

strategy to achieve redistributive

s o m e t i m e s turned to be violent-

justice.

from

distribution

and real estate a n d g o v e r n m e n t

o r g a n i s e d groups as

Lanka's

income

did

change

not

welfare

highly

significantly even after six decades

11010).

politicised. Therefore, any move on

after independence. More than half

reducing welfare expenditure w a s

of the country's income is enjoyed

considered as politically too costly

by the top richest twenty percent

and governments maintained this

while the b o t t o m poorest twenty

Sri Lanka has been considered as

welfare state intact till the major

percent receive o n l y 4.7 percent

an

change

outlier

among

developing

in 1977.

was

Sri

services (Central Bank of Sri Lanka,

Social Welfare C o n d i t i o n s

issue

the

The universal

c o u n t r i e s on the s o c i a l welfare

n a t u r e of the food subsidy

indicators a n d the fulfilment of

abolished replacing it with a food

basic

h u m a n n e e d s . T h e first

stamp scheme on a selective target

government of the independent Sri

basis in the budget of 1978. Yet,

Lanka announced proudly that the

the other two pillars, free health

primary objective of the new regime

was

and free education, continued, but

was to create a welfare state in the

t h e e x p e n d i t u r e on t h e s e

country. The three ambitious pillars
of Sri Lanka's welfare policy, viz.
free health, free education and free

frequently

been

significantly.

has

clipped

Spending

on

(Table 4). This does not show the
existence of a fair distribution of
income in the country.

Therefore,

the larger portion of any economic
growth a c h i e v e d b y the country
goes to the richest segments of the
society.

Intervention

of

the

government is, therefore, essential
to help p o o r e r s e g m e n t s of the
society and to reduce poverty. The
UPFA

g o v e r n m e n t ' s efforts

in

education and health is considered

poverty

as

soft

commendable. T h e increased focus

infrastructure. The faster growing

on the r u r a l e c o n o m y , w h e r e a

nations, such as, India and China,

majority of p o o r p e o p l e live, by

comparable with developed high-

invest heavily on education

capacity building as well as creating

income

research and development. The

opportunities

government spending on education

programs

and health in Sri Lanka is a mere 2

government

percent of the GDP at present. T h e

produced

or subsidised food on a universal
basis have led to such a remarkable
a c h i e v e m e n t in social indicators
(Table 3). T h e s e indicators
and

are

middle-income

countries.

Nevertheless,

sustainability of these p r o g r a m s
w a s the major p r o b l e m w i t h o u t
Table

4

investment

Income distribution of Sri Lanka from

Richest 20%
share
Poorest 20%
share
Middle 60%
share
Gini Coefficient

under

initiated

various
by

the

recently

has

favourable results. The

1953 to 2 0 0 9 / 1 0
1996/
1997

2003/
2004

2006/
2007

2009/
2010

54.1

56.8

56.8

53.0

55.1

54.7

52.1

5.0

3.8

3.7

3.6

4.1

3.6

4.6

4.7

49.1

42.1

39.5

39.6

42.9

41.3

40.7

43.2

0.35

0.43

0.45

0.46

0.43

0.46

0.49

0.47

1973

1978/
1979

56.7

55.2

45.9

5.1

3.9

38.2

40.9
0.45

and

been

1986/
1987

1963

0.46

on

have

1981/
1982

1953

Source: Central Bank of Sri Lanka,
12

an

reduction

(various years).
Economic Review: June/July 2011

incidence of poverty expressed in
terms of poverty head count index

Table 5

Government

in 2 0 1 0

indicating

a

s i g n i f i c a n t p r o g r e s s in p o v e r t y

2000

operations

Government
Expenditure

Government
Revenue and
grants

Year

has come down from 22.7 in 2002
to 7.6

fiscal

(as a

percentage

Overall b u d g e t
deficit
(after grants)

17.2

26.7

-9.5
-10.4

reduction in the estate, rural and

2001

17.0

27.5

urban sectors. Yet, the poverty level

2002

17.0

25.4

-8.5

2003

15.6

22.9

-7.3

2004

15.3

22.8

-7.5

2005

16.8

23.8

-7.0

2006

17.3

24.3

-7.0

2007

16.6

23.5

-6.9

2008

15.6

22.6

-7.0

2009

15.0

24.9

-9.9

2010

14.9

22.0

-7.9

is higher in the estate sector (11.4)
well a b o v e the national a v e r a g e
(7.6), making Sri Lankan poverty as
an 'estate p h e n o m e n o n ' (Central
Bank of Sri Lanka, 2010).
The Role of Government Sector
Sri

Lanka

maintains

a

large

of

Source: Central Bank of Sri Lanka, 2010.

g o v e r n m e n t s e c t o r in t e r m s o f
number of employees, government

while simplifying the tax structure

institutions and ministries and the

a n d m a k i n g tax

size of public e x p e n d i t u r e .

efficient. The present government

resources

The

r e q u i r e d to run

the

administration

h a s b e e n a b l e to i n c r e a s e

tax

government machinery are mainly

revenue collection significantly

derived

with new m e a s u r e s a n d

from

taxation

and

efficient

borrowing, G e n e r a t i n g a d e q u a t e

implementation (Central Bank of Sri

income through taxation has its

Lanka, 2010).

l i m i t a t i o n s g i v e n the

shoots

up

expenditures

unnecessarily high. T h e civil w a r
has resulted considerable drain in
the public coffers, and even two
years after the completion of war,
the defence expenditure could not
be

scaled

down

because

the

government priority to maintain the
fighting formations and structures

country's

d e v e l o p e d d u r i n g the w a r . It is

narrow tax base and an inefficient

T h e e x p e n d i t u r e s o f Sri L a n k a n

mostly

tax administration. Since the half

government

expenditure w o u l d be reduced in

of the country's national income is
enjoyed

by t h e t o p r i c h e s t

20

p e r c e n t o f the s o c i e t y , r e v e n u e
generation from income taxation

have

government

(Table 5). Expenditure on defence,

perceived threat in the country.

public

administration

expenditure
Ministry

taxes is constrained by various tax

Finance are the

concessions offered by successive

m

g o v e r n m e n t s to i n v e s t o r s as a n

expenditure

i n c e n t i v e to e n c o u r a g e p r i v a t e

items.

The

investment and the existing higher

large-

sized

tax rates. T a x e s in international

government

importance

till
of

1977.
trade

The
taxes

a

j

of
o

sector

at

r

the

c e n t r a l ,
provincial a n d
divisional
secretariat

diminished since 1977 as a result

levels

of trade liberalisation initiatives o f

off considerable

the g o v e r n m e n t a n d

amount

domestic

siphons
of

indirect taxes as a main source of

public

tax

recent

the huge central

r e c o m m e n d a t i o n s by the T a r i f f

government

Commission can be considered as

with more than

an attempt to widen the tax base

100 ministries

revenue.

The

funds;

Table 6

f o r e s e e a b l e future
still

the
a

and
Public debt as a percentage of GDP of

Year

Domestic

Foreign

1950

13.7
28.9
46.1
43.7

3.2
5.1
17.5
33.5
41.7
55.0
51.9
43.1
45.3
45.6
46.3
47.6
39.0
37.5
37.1
32.8
36.5
36.1

1960
1970
1980
1985
1990
1995
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

as

considers

38.6
41.6
43.3
53.8
58.0
60.0
56.0
54.7
51.6
50.3
47.9
48.5
49.8
45.8

Total
16.9
34.0
63.6
77.2
80.2
96.6
95.2
96.9
103.3
105.6
102.3
102.3
90.6
87.9
85.0
81.4
86.2
81.9

Source: Annual Reports, Central Bank of Sri Lanka.
.

Economic Review: June/July 201

defence

the

r e v e n u e from c o r p o r a t e i n c o m e

governments

that

negative savings for the government

allocated to the

of r e v e n u e for the Sri L a n k a n

unlikely

o u t w e i g h e d its r e v e n u e , m a k i n g

was limited. Augmenting more

trade have been the major source

always

13

Public defence is utmost priority for
any country in a situation of actual

loans

or

effectively

perceived

threat

to

its

Table
7
Total public debt
outstanding of Sri Lanka from 1950
to 2010

possible debt trap unless the
taken

are

in

used

productive

s o v e r e i g n t y a n d stability. W h e n

investment. The effective use

Year

those

of l o a n s in e x p a n d i n g

the

1950

threats

wane

away,

Public D e b t (Million Rs)
654

government should bring down

country's growth potential

1955

1,121

military e x p e n d i t u r e s and direct

could improve the repayment

1960

2,282

them towards civilian use {Budget

c a p a c i t y of a l r e a d y

taken

1965

4,435

Speeches, 2010 and 2011).

loans. In a situation w h e r e

1970

8,689

domestic

resource

1975

14,564

difficult,

1980

51,346

sources

1985

130,284

1990

310,779

country has been graduated

1995

635,696

fuel inflation, and public borrowing

to a l o w e r m i d d l e - i n c o m e

2000

1,218,700

from domestic sources crowds out

group,

of

2005

2,222,341

resources meant for private sector

concessionary lending are no

2006

2,582,648

investment. T h e UPFA government

longer available for Sri Lanka,

2007

3,041,685

in r e c e n t t i m e h a s r e s o r t e d

and

Widening budget deficits has been

mobilisation

a major threat to macroeconomic

resorting to foreign

stability in the c o u n t r y .

Deficit

financing from inflationary sources

market-based

to

borrowings using

is

is

inevitable.

Since

the

sources

the

has

2008

3,588,762

seek

2009

4,161,422

for

2010

4,590,245

country

compelled

to

treasury bills and (sovereign) bonds

commercial

as the primary borrowing devices.

borrowing.

The recent e n g a g e m e n t w i t h . t h e

taking bigger loans to repay

International Monetary Fund (IMF)

the loan that h a v e already

to obtain support in the form of a

b e e n t a k e n arid using

Standby A g r e e m e n t required Sri

loan

recurrent

p a y m e n t s on p u b l i c b o r r o w i n g .

L a n k a to fulfil the c o n d i t i o n of

expenditure of the government will

Reducing this rate is going to be a

reducing budget deficit to less than

set

a

real challenge for Sri Lanka in the

7 percent of GDP, the target which

d a n g e r o u s d e b t t r a p a s it w a s

y e a r s to c o m e . A c o n s i d e r a b l e

the government had missed mainly

happened

amount of resources will outflow to

to
a

sources

Nevertheless,

finance

trend

Source: Annual Reports, Central Bank
of Sri Lanka.

the

of falling

into

e v e n in s u c h

hyper

due to the war-related spending.

economy as the United States of

service the debt in the future

The government should reduce its

America (USA).

well

b u d g e t d e f i c i t to a m a n a g e a b l e

as

(Central Bank of Sri Lanka,

2010)

proportion while re-scheduling the

Every

country's spending priorities more

including the new born in 2010 owe

Saving, Investment and

towards economic development and

a total of Rs. 222,255.60, out of

F o r e i g n Direct Investment

to create a stable macroeconomic

which

environment conducive for private

f o r e i g n e r s . T h i s is n o t a s m a l l

Sri Lanka has been regarded as a

amount compared to the size of the

consumer economy with a higher

Sri L a n k a n e c o n o m y . M o r e o v e r ,

m a r g i n a l p r o p e n s i t y to c o n s u m e

O v e r s h o o t i n g of targeted budget

around

(MPC) of around 80 percent. T h e

deficits has been a major feature

currently

sector investment (IMF, 2009).

citizen

Rs.

6

of t h i s

country

98,028.51

percent
spent

is

to

of G D P is
on

interest

private savings rate of the country

of public finances of the country.
This relates to the problem of

Table 8

Savings and investment in Sri Lanka from 2006 to 2010

increases in public borrowings
and mounting up of public debt
- both d o m e s t i c a n d

foreign

origin (Table 6 ) .
Table 7 shows that public debt
of Sri Lanka is mounting up and
pushing
14

the country

into a

Private Savings % G D P
Government Savings % G D P
Domestic Savings % GDP
National Savings % GDP
Investment % G D P
Saving - Investment gap

2006
19.3
-2.3
17.0
22.3
28.0
5.7

2007
18.7
-1.1
17.6
23.3
28.0
4.7

2008
19.8
-2.0
13.9
17.8
27.6
9.8

2009
21.6
-3.7
17.9
23.7
24.4
0.7

2010
20.8
-2.1
18.7
24.7
27.8
3.1

Source: Central Bank of Sri Lanka, Annual Report 2010
'—

Economic Review: June/July 2011

has been low compared to that in

investment

other countries in the region. It was

extremely

even much low when compared to

since the government

countries

such as J a p a n

and

is

revenue

development. Japan, for example,

finance

had maintained a 3 0 - 3 5 percent

expenditures (Budget

savings

Speech, 2000-2010).

and

A possible alternative

http-.//mises.org/daily/298).

solution to increase

Table 8 shows recent data on the

investment

trends

promoting the inflow

the

savings

and

investment of the country. Since
the

government

savings

are

negative, d o m e s t i c s a v i n g of the
c o u n t r y is l o w e r t h a n

private

savings, indicating a crowding out
of

private

savings

by

the

government sector. T h e country's
national saving rate in 2 0 1 0 was
around 25 percent of GDP while the
investment as a percentage of GDP
was around 28 percent. Thus, an
investment savings gap of 3 percent
was filled by foreign investment.
The ruling UPFA government has

of

foreign

UPFA

2004
2005
2006
2007

is

The

government

was highly optimistic

287
604
734
889
601
516

2008
2009
2010

direct

investment.

210
175
082
122
229
234

1999
2000
2001
2002
2003

its recurrent

of development (Herbener, 1999;

Investment

USD Million

corporate saving) at the early stage

in

Foreign Direct

Year

is

i n s u f f i c i e n t e v e n to

(household

Foreign Direct Investment in
Sri Lanka from 1999 to 2010

difficult

Singapore at their initial stage of

rate

Table 9

Source: Central Bank of Sri Lanka, A n n u a l
Reports (various issues)

of attracting a large
volume of foreign direct investment

The main FDI contributors to Sri

with the end of civil w a r in m i d

Lanka in recent times are the arc

2009. But, such an influx did not

rivals of China and India. These two

happen as expected, and the actual

countries have increased

foreign direct investment (FDI) in

presence in Sri Lanka by raising

Sri Lanka is low as evident from

their investment, particularly in the

Table 9. T h e size of inward FDI in

government's

Sri L a n k a w a s very small w h e n

development projects such

c o m p a r e d to c o u n t r i e s s u c h

as

their

ambitious

southern port,

airport,

as

power

India, Vietnam, and China and it

generation, building railways and

is even a very small fraction of Sri

housing projects as well as private

Lanka's GDP. However, the Board

business

of I n v e s t m e n t ( B O I ) e x p e c t s to

e n g a g e m e n t o f t h e s e two A s i a n

annual e c o n o m i c g r o w t h rate o f

attract FDI amounting

USD 1

superpowers in Sri Lanka is viewed

more than 8 percent until 2016.

billion in 2010, and to increase this

as a cold power struggle to control

Maintenance of an annual growth

amount to USD 1.5 billion in 2012

a strategic location in the Indian

rate of 8-9 p e r c e n t r e q u i r e s an

and USD 2.0 billion in 2013.

Ocean. Sri Lanka maintains a very

targeted at doubling the per capita
income of the country by 2016. T o
achieve this a m b i t i o u s task, the
country n e e d s to maintain

an

ventures.

The

investment rate of 32 -35 percent
of GDP. T h e c u r r e n t i n v e s t m e n t
rate of 27.8 percent of GDP is well
below

this

country

requirement.

needs

to

Table 10

Easy of doing business in Sri Lanka

The

increase

Chad

Singapore

Sri Lanka

Easy of Doing Business (Rank)

1

102

138

Starting a business

4

34

182

G D P to m a t e r i a l i s e t h e g r o w t h

Dealing with construction permit

2

169

101

forecast which is not a simple task

Registering property

15

155

137

to achieve (IPS, 2007).

Getting credit

6

72

152

Protecting investors

2

74

154

Paying taxes

4

166

179

1

72

171

investment by another 5 percent of

Raising public investments

to

bridge the gap is also a hectic task

Trading across boarders

given

Enforcing contracts

13

137

164

Closing a business

2

43

183

the

bottlenecks

in

the

government finances. Government
investment at present is 6.2 percent
of G D P . I n c r e a s i n g g o v e r n m e n t

Economic Review: June/July 201

Source: Central Bank of Sri Lanka,

2010.
15

'.ordial r e l a t i o n s h i p with both
countries.

The obstacles

Table

11

Sri Lanka's largest export

destinations

(as a

percentage of total exports) from 2006 to 2010

and

bottlenecks in the economy have to
be r e m o v e d to a t t r a c t FDI from
other sources in large volumes.

2007

2008

2009

2010

25.8

23.0

22.2

21.1

12.8

13.3

13.4

14.4

12.3

India

7.1

6.7

5.2

4.5

Italy

3.7

5.2

5.5

6.2

5.6

Germany

4.8

5.7

5.0

4.9

4.8

5.2

5.2

5.1

4.8

Destination

United States of America
United Kingdom

The doing business index places Sri
Lanka in the middle range of 102

2006
29.1

Export

5.6

Dd

rank among 183 countries. The data

Belgium -Luxembourg

5.2

in Table 10 indicate that Sri Lanka

United Arab Emirates

2.5

2.7

3.1

3.0

3.0

needs

Russia

2.7

2.7

2.7

2.7

2.9

p r o g r e s s in t h e r a n k i n g , if the

Netherlands

1.8

2.0

1.9

2.2

2.2

c o u n t r y is to a t t r a c t F D I from

Singapore

1.1

1.0

0.9

1.2

2.2

to

make

a

significant

internationally-reputed

multi­

national companies operating purely
on b u s i n e s s i n t e r e s t s .

Source: Central Bank of Sri Lanka, 2010.

For an

international investor, there are 101

Apollo hospital, Shell gas company,

on human rights issues in recent

countries in the list to choose from,

SriLankan Airlines, and Sri Lanka

times. The country's principal allies

before c o n s i d e r i n g Sri L a n k a .

Indian Oil Company can be recent

include China, India, and Russia,

Hailing nationalism, patriotism, or

example of such uncertainty.

Ukraine, Iran, and some countries

emotional speeches showcasing the
g l o r y of t h e p a s t d o n o t

help

attracting sensible investors, but
certainly

creating

a

in Africa, E a s t A s i a a n d in the
Performance of the Foreign

Middle East.

Sector

suitable

This is not the first instance that

business e n v i r o n m e n t conducive

Sri L a n k a ' s r e l a t i o n s w i t h

for profitable v e n t u r e s w o u l d do

western

better.

deterioration with the end o f the

nations

the

Sri Lanka l o c k s h o r n s with the

started

western
incidence

three decades of civil war in mid
Main p r o b l e m s in attracting FDI
include;
l. Labour market rigidities: Labour
laws are very rigid and hiring a

2009.

countries.
of this

The

first

nature

had

occurred in the late fifties following

T h e West alleges that Sri

the nationalisation of foreign oil

Lanka violated human rights during

c o m p a n i e s by the left-wing SLFP

the conduct of war and thereafter,
a charge that Sri Lanka vehemently

g o v e r n m e n t to e s t a b l i s h
Petroleum

labourer is relatively easy but firing

denies. Sri Lanka sought help from

him out of the j o b is e x t r e m e l y

anti-western and Islamic countries

costly.

to counter the moves of the West

Ceylon

Corporation.

The

Russian g o v e r n m e n t promised to
supply crude oil to Sri Lanka at a

calling for an international inquiry

cheaper price if Sri Lanka were to

ii. Increasing cost of production due
to h i g h

wage

rates

and

ever

increasing cost of energy.
iii. Small size the domestic market.
iv. Macroeconomic instability due
to high b u d g e t deficit of 7 to 8
p e r c e n t of G D P a n d

increasing

foreign debt.
v.Problems related to accountability
and goods governance.
vi.Uncertainty

in

government

policies with regard to private FDI,

Table

Sri Lanka's main import origins (as a percentage
of total imports) from 2006 to 2010

Import Origin
India
Singapore
China
Iran
Japan
Hong Kong
United Arab Emirates
Malaysia
Thailand
Pakistan
Canada

2006
21.2
9.7
7.6
7.4
4.4
6.4

2007

2.1
4.3
2.0
1.4
2.1

2.9
2.5
2.0
1.6
0.7

23.1
9.9
8.2
7.5
3.7
6.4

2008
24.5
8.8
7.9
8.5
3.0
4.9
3.0
2.5
2.1
1.4
2.7

2009
17.8
10.4
10.1
8.8
2.2
5.1
4.0
2.8
2.7
1.9
2.7

2010
19.0
11.6
9.2
6.7
4.3
4.3
3.5
2.8
2.3
2.1
2.1

Source: Central Bank of Sri Lanka, 2010.

the recent government decisions on
16 —

12

,

Economic Review: June/July 2011

nationalise western oil companies,

But, even for

Keeping national interest in mind,

a

the government went ahead with its

observation,

plan of n a t i o n a l i s a t i o n . T h e U S

it

(United States) and

difficult

F r e n c h oil

Balance of payments of Sri Lanka

Table 13

from 2006 to 2010

casual

is

Current A c c o u n t Balance

Trade Balance

Tear

(billion U S D )

(billion U S D )

not
to

1.5

2006

3.3

2007

3.6

1.4

companies suffered as a result of

see the high

2008

5.9

3.9

the takeover and d e m a n d e d full

cost

2009

3.1

0.2

compensation at market value for

pursuing

2010

5.2

1.4

which the government did not agree.

such a policy

Source: Central Bank of Sri Lanka, 2010.

In retaliation, the US government

for

invoked the famous Smoot-Hawley

country

legislation against Sri Lanka and

present context

of

a

small
like Sri Lanka

in t h e

Sri Lanka has been experiencing
d e f i c i t s in b o t h t h e t r a d e

and

current account balance (Table 13).

ceased all its aid and assistance
Sri L a n k a d e p e n d s

T h e higher trade deficit has offset

compensation to the oil companies

mainly on the western markets for

mainly by private transfer receipts

was made.

sought

its exports as shown in Table 11.

in the form of expatriate inward

assistance from Russia, China and

The USA and the UK are the two

r e m i t t a n c e s . H e n c e , the c u r r e n t

India for its immediate needs but

major export markets for Sri Lankan

account deficit records a lower

at the expense of a g o o d part of

products. One third of the country's

f i g u r e t h a n trade b a l a n c e . It is

foreign market, e c o n o m i c growth

exports

interesting

and international

relations. The

c o u n t r i e s . More than half of Sri

women's

r e l a t i o n s h i p w i t h the W e s t h a s

Lanka exports destines to western

balance of payments is extremely

been re-established

countries. It is mostly unlikely that

to the

country

Sri

until

the

Lanka

full

At p r e s e n t ,

by the U N P

goes

to

these

two

government in 1965, after making

any new allies of Sri Lanka could

the full payment of compensation

grant such a large market access
given

to the oil companies.

the

nature

of

export

to

note

that

the

to

the

contribution

important. T h e two major exports
o

f

Sri Lanka tea and garment are

produced mainly by female workers,
T

h

t

e

h

i

r

d

largest source of foreign

commodities of Sri Lanka, viz. tea,

exchange

In the current world geo-political

rubber,

unskilled female workers employed

p o w e r play, Sri L a n k a ' s

petroleum products, diamonds,

friends

coconut,

garments,

gems and jewellery. Indeed, both

o

t

o

a

more powerful than their western

China and India depend more on

b

counterparts w h o a r e plagued by

the US and European Union (EU)

financial crises a n d

economic

markets for their exports as well.

turmoil in recent times. Some are

Therefore, finding market for Sri

T

Lankan products in non-western

d

e

f

h

a

the twenty first century to be an

c o u n t r i e s m i g h t not be an e a s y

c

Asian century, and it is predicted

endeavour. The decision of the EU

that all the growth of the world is

to suspend the GSP+ concessions

going to happen in Asian countries

to

(Scott, 2008). A s such, o n e might

considerable

argue that Sri L a n k a ' s friendly

exports to the EU.

and

highly optimistic to conceive that

countries will be able to support by
providing market a c c e s s to their
countries in addition to financial
and

diplomatic

assistance

whenever required to counter the
moves of the w e s t e r n

countries.

Economic Review : June/July 201

Sri

Lanka

has

pressure

exerted
on

its

is

migrant

mainly in the Middle East. This is
n

seem economically s u p e r i o r

earning

favourable for Sri Lanka to
s

t

i

t

s

i

m

a

8

n

t

o

e

a

s

a

n

emerging

economy,

h

e

i

n

s

o

l

c

i

t

g

e

u

t

i

o

t

h

e

b a s i n g trade

requires
s

t

o

t

h

e

s

t

r

u

fundamental
c

t

u

r

e

o f exports
a n d i m p o r t s , a n d at l a r g e , the
economic structure of the country.
Efforts

to

diversify

exports

c o m m o d i t i e s h a v e not y e t m a d e
significant progress. T h e country
has identified tourism as a leading

Sri Lanka's imports are originated

sector that can help reducing the

m a i n l y from friendly c o u n t r i e s ,

trade gap, particularly after

India, Singapore and China are the

completion of the war in the North

first three largest exporters to Sri

and the East. However, at present,

Lanka. (Table 12).

the

country

does

not

have

the

the

capacity to cater to large number

Dilemmas

of

Economic

Development:

Economic Change in Sri Lanka, Sri

Approves US$2.6 Billion Stand By

the Maldives or Thailand. Tourism

Lanka Association of Economists

A r r a n g e m e n t for Sri Lanka, IMF

promotion activities of recent times

(SLAE), Colombo.

infrastructure

the

to

be

needs

developed to sustain the advantage
as a major t o u r i s t

destination.

High-spending tourists destine to
the

M a l d i v e s t h a n Sri

because

the

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Athukorala, P. and

Rajapathirana,

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1960-90,

high-spending tourists. Sri Lanka

Washington DC.

to t a k e

The

World

Bank,

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Since

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g r o w t h p e r f o r m a n c e o f Sri

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was not satisfactory

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The

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the

has been impressive despite lower
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Sri

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increase growth performance are
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Economic Review: June/July 201