The Economic Performance of Sri Lanka

The Island of Sri Lanka has a tropical atmosphere, sited in the Indian Ocean 880 km north of the
equator. Its temperature ranges between 25-30% Celsius. It has a population of 20 million, multi-
ethnic and religious with a rich and diverse culture. In 2006, it was hit with the Tsunami, and in 2004,
with the Indian Ocean earthquake and several insurrections in 1971, 1987-89, a civil war in 1983-
2009 which has drastically affected her economy. She gained her independence from Britain in
February 1948.
Topic Coverage

1. Economy Outline 2. conflict and the 3. Facilitate 4.Pro-poor Growth

economy environment with
Private sector

Performance of How economic Monetary and Education

Growth impact to conflict? Fiscal Policy

Poverty and Financial Sector Health

Inequality

formation of the
economy

Demography and
Environment

1. Economy Outline

Performance of Growth

Economic growth defined as increase the level of production (out put) by a country period of time.

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Value 6.0 -1.5 4.0 6..0 5.4 6.0 7.7 6.8 6.0 3.0

Ten Year Average – 5.0

Figure 01
Cumulatively, Sri Lanka has achieved very good performance. This was earmarked by a 5.0%
between 2000 and 2009.In 2008, there was a surge in the per capita GDP from US$600 in 2000 to
US$ 1,250. This also affected the constant-price terms by a 2/3 increase. The post-Tsunami was
motivated by reconstruction and fiscal policies, growth accelerated by 7.7% in 2006. Economic
alteration and, poverty alleviation and increase in living standards could be achieved if equitable
shared.

Sri Lanka was bankrupt in 2001, with amounting to 101% of GDP; in 2009, thwarted growth rate
goes down 3.0. Nevertheless, Sri Lanka has achieved very good collective growth after finishing war
and focused on producing goods for home utilization including grain, rice among other agricultural
produce through achieve growth rate next year.

Poverty and Inequality

According to the UNDP’s Human poverty Index portrays its dedication to equity and social justice.
Using index processes frequency of admission to safe water, child sustenance, life expectancy, and
literacy. Of 103 developing countries, Sri Lanka was ranked 42, with an 18 score recorded in 2008
Human Development Report, outstanding for a lower-middle-income country which goes beyond the
estimated regression prediction for a country like Sri Lanka.

Formation of the economy

The major formation of the economic in the country is textile, tea exports, travel industry, clothing,
serial production and other agro based products. Furthermore the overseas employments contribute
their foreign exchange from country likes Dubai, Kuwait in Middle-east.
Industry of Travel

International tourist arrivals are expected to grow between 3% and 4% by end of 2010. Despite the
2004indian Tsunami and along with before 2009 civil war have declined the tourist arrivals; however
the international media reports publish about the improvements in industry of 2008 by 0.6%, March
2008 by 8.6% the tourism industry is poised for a rebound in view of the pent-up demand for travel
arising from the global economic crisis in 2009. In this regard, the negative growth of 4.3 percent rate
for 2009 in international tourism is beginning to indicate positive outlook with two percent growth
during the last quarter of the year. This momentum has continued and reflected favourably by an
intensifying upward trend for the first four months of 2010.

• Tea industry
This industry was introduced by the British planter James Taylor in 1852. Sri Lanka is one of the
countries exporting tea to the UK among other countries. Sri Lanka prides itself in the tea industry as
its main foreign exchange, making it the world’s leading exporter in 2002 with 23% and Kenya with
22%. Due to annual rainfall and the level of humidity, low temperature climate throughout the year,
the central highlands are quality tea because of favourable geographical factors. This helps alleviate
poverty. The tea industry specialises on exportation than domestic use.

• Apparel and Textile Industry

Sri Lanka has about 900 factories throughout the country serving companies like Victoria’s
Secret, Tommy Hilfiger and Liz Claiborne. This industry produces high quality readymade
garments and exports to US and Europe.

Figure 02

But with only a 1.9 percent EU market and 2 percent US market share indicate that Sri Lanka
is not major garment supplier.

• Agriculture
It is the culture for 2500 years for the agricultural sector to produce household consumption such as
coconut, grain and rice. Cannabis, the local medication of Sri Lanka is purposely grown-up designed
for the desires of Ayurveda.
Demography and Environment

The population of the Sri Lanka is 20 million with in 2009 that increase of 1.3% a year. The 0.53 of
low age dependency rate was used for 2006 converting from the moderate rate of population growth.
These explain when every 100 working-age adult among 53 dependents. This two rates support
reducing the household’s consumption burden for reduction the growth of demand and income
earners for public services. Moreover reducing entry rate of job seekers, favourable trend of
demographic are decrease youth unemployment which be able to active conflict in Sri Lanka.

• People

According to the US department data the Southwest and Central parts of Sri Lanka are occupied by
the Sinhalese and Indo-Aryan group, who make up 73.8% of the population. While the Northeast is
occupied by Sri Lankan Tamils, a Dravidian largest minority group of 12.6% of the population.

• Gender

While evaluating of Sri Lankan on gender equity indicator would be in good form .To guaranty that
all citizens are used to full extent and for faster economic growth consequences of productive
capacity, there is gender equity. In 2004, (the ratio of male to female) life expectancy was 0.93 by
birth. Basically, women live longer than men.
 • Unemployment

The Sri Lankan labour force constitutes of anyone aged 10 or above who is employed or seeking
employment, not leaving out own-accounts owners in the farms and informal sectors.

• Labour

After falling recently, there was an increase in unemployment from 5.2% in 2008 to 5.9% in
2009.There is little unemployment for less educated workers than high school and college graduates.
In order to better prepare students, the government has embarked on educational reforms between jobs
and graduates.

2. Conflict and the economy

How economic impact to conflict?

Ever thought Sri Lanka sustain high rate of growth rate and poverty reduction as discuss above, crush
progress during conflict intended for some reasons.

1. Fiscal recourses such as, improving agricultural productivity and Investing in infrastructure is
expenditure of deflect with the conflict.

2. The military expenditure effect badly for fiscal deficit without compensating revenue gains.

3. Crating uncertainty frustrate with clash from foreign direct investment and domestic. One
hand reducing the available of capital in same time effect to management skills and
technology.

3. Facilitate environment with Private sector

• Monetary and Fiscal Policy

Fiscal policy defined as an expenditure and revenue collection of government to influence the
economy. Monitory policy is the process of supply of money, rate of interest towards attains
objectives for stability of economy. Equally these policies may use for control the performance of the
economy in short run..

The Sri Lanka major risk for sustainability of economic growth is Fiscal and monetary policies.
Inflation is the clearest signal of a macro economy which climbed to 22.60 in 2009.

Table 02
Year Inflation Rank
Rate(Consumer
Prices)

2003 9.60% 37

2005 5.80% 158

2007 12.10% 200

2009 22.60% 208

Figure 04

According to Central Bank of Sri Lanka, inflation rate increased ( as shown in table 02) which
indicate prices rose by 43.04% during the last decade.. If this trend won’t reversed these circumstance
will be arise.

-Undermine the rupee (Sri Lankan currency Rs.)

-Increase investment risk

-High inflation threaten to interest rate

-Intensify poverty

-Generate labour conflict

-Damage on the political systems

• Financial Sector
The financial Sector key elements are fostering productive investment, mobilizing saving and
convalescing risk management. When evaluating with lower-middle-income countries, Sri Lanka’s
financial system is mature, however the sector of banking development simple indicator is the expand
collection of monetary, which measure the ratio of broad money to GDP which has been
progressively rising, getting 43.2 percent by 2005.

Broad money = currency + bank deposit (in Sri Lanka)

Another factor is an active banking systems, the ratio go up from 28.6 percent in 2003 to 32.9 percent
in 2007 throughout domestic credit to the private sector by GDP. The prime borrows real interest rate
fell to nearly zero in 2005 and became negative in 2006 and 2007 for the reason that capital gains are
tax free, interest charges are tax deductible and even they use funds for unproductive purpose such as
importing excess inventory.

The demand of rapid growth encourage for financial resources of credit creating misallocation
through negative real interest rate, however cracking down on inflation or allocate nominal interest
rate get higher rapidly can restore positive real interest rate by the government.

• External Factor

Globalization has created new challenges, cost-effective approaches to deal with the resulting
adjustment cost and full international market’s advantages and provincial inequity. International
commerce and finance example of Primary changes together with press on in telecommunication
technology, reduced transport costs, also lower policy barriers, and cover encourage an increase in
global integration. As a country Sri Lanka can improve growth and reduce poverty by motivating
effectively and efficiently productivity using goods and services, capital, technology. The ending
response will be increasing consumer choice.

• International Trading with the Current Accounts Balance

Sri Lankan development is still lacking behind among international trade after discarding the closed-
economy model with trade flows equal to 76.3% GDP in 2008, which is below expectation taking into
consideration the country’s characteristics, as compared to Thailand 136.4% and Philippines 102.4%.

• Foreign Investment, External Debt and the Exchange Rate

Enhancing competition, transferring technology and developing human capital are ways FDI can
increase productivity gains. In 2009, 1.0% was registered, lower than 2001’s 1.1% before the
armistice and higher than Thailand’s 0.9% or 0.6% for the Philippines. Totally, Sri Lanka follows the
LMI-Asia’s normal rate of 1.5% and global LMI’s 2.1% and the regenerating target of 2.2%.

1. Pro-Poor Growth Environment

• Education
Sri Lankan government provides primary and advance level schooling for all without charge. Further
Sri Lanka’s education display and disclose impressive performance for a lower class and middle class
income country. According to the UNESCO data explains a net enrolment rate of primary school was
95.1 for 2008, on form beyond the regression benchmark (86.6) as well a standard for LMI-Asia
(95.1)

• Health

Sri Lanka prides which they can provide excellent public health circumstances event thought low
levels of public spending. A major form of investing in person capita is via basic health service with
growth benefits and poverty alleviation. Economic growth interventions can be influenced by
understanding health conditions. This is evident in the drop from 1.9% to 1.7% indicator.

Reference

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Ralph T. Byrns, Gerald W. Stone. (2005). Macro Economics (6th edition ed.). (B. Kaplan, Ed.) New-
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