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OVERVIEW OF SRI LANKAN ECONOMY
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Overview of Sri Lankan Economy

Jan 22, 2018

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Page 1: Overview of Sri Lankan Economy

OVERVIEW OF SRI LANKAN ECONOMY

Page 2: Overview of Sri Lankan Economy

OVERVIEW

Sri Lanka as an economy is known to be operating as an Open economy, although it

depicts certain capitalistic and socialist characteristics depending on the different ruling regimes

in the country. But, being a country engaged in a non-aligned policy, the economy was although

shaped throughout the history of Sri Lanka with certain significant incidents making very large

impacts. Until the trade liberalization in the Colonial era, since the colonial rulers were mostly

traders, the country is known to have a Ruler-centric trading mechanism. But, when the country

was opened up in European markets directly, the nature of Sri Lankan economy was taking more

shape according to the Western theories of Economy and in fact, the direction of Sri Lankan

economy was decided in a manner which could be described by a study called, Macroeconomics.

“The field of economics that studies the behavior of the aggregate economy. Macroeconomics

examines economy-wide phenomena such as changes in unemployment, national income, rate of

growth, gross domestic product, inflation and price levels.”

( Extracted from : www.investopedia.com )

As mentioned above, the colonial period was predominantly a very open market

as it was controlled and directed as per the policies and requirements of the British

emperor. The main focus point of this report comes after this colonial period as the

country’s economy was shaped according to the needs and wants of the people.

These changes were often reflected in the different political regimes in the country

by which the report is segregated and analyses separately on. The macroeconomic

conditions of these different periods along with various different significant

incidents during these periods are explained using statistical and descriptive

analysis reports after referencing various publications of recognized organizations.

The report analyses the period on the overall employment, inflation, industries operated,

imports, exports and foreign exchange policies of the government, education and any other

indicators to reflect the overall quality of life/standard of living during the period.

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CONTENTS

Title Pages

Overview ii

Table of Contents iii

Sri Lankan Economy during 01

1956 – 1970 01

1970 – 1977 06

1977 – Present 14

References 24

Workload Matrix 25

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SECTION 01

Sri Lankan economy from 1956 to 1970

From the time Sri Lanka obtained freedom its economy was a liberal system. At this time

also, Britain was the main supported for the country’s economy and it was mainly based on

imports and exports which is called as “Dualistic export economy”. 90% of foreign currency was

obtained through importing plantation such as tea, coconut and rubber. When UNP came into

power at 1948 their focus was also on imports and cultivation while industries were not

encouraged. During this time economy was so called “open”, in other words barriers on imports

and foreign exchange transactions were almost non-existent. Due to this “Expenditure to Income

ratio” of the country was 95% while the Average economic growth rate of the country from

independence to 1956 was approximately 3.6% which was quite a low value.

Period 1956-1970 was considered a remarkable time in the srilankan economy as lots of

economic changes took place in that period. When we start from 1956 onwards, the first main

revolution that occurred was introduction of a Central planning system under SLFP. Central

planning system means economic decisions of the country are mainly taken by the government.

There was a huge bias towards agricultural industries. The main aim of the government was to

get rid of an economy which is solely based on importing and exporting as they understood that

it is not favorable in the long run. As no any private sector entity had enough resources to carry

out a massive investment, government had to hop on in order to support the economy. To

achieve that first step was to increase tax and impose restrictions on imports and foreign

payments in the country. A clear separation line between necessary imports and unnecessary

imports was drawn by the government in order to get control over the economy of the country.

There was a huge benefit from that action which was encouragement of local manufacturers and

small industries reaching towards self-sufficiency.

To further support the cause duties on vehicles, liquor, fuel and tobacco was gradually

increased in the budget in 1960 and an extra charge of 5% was imposed on imports and later they

prohibited importing expensive textile, vehicles and few other electric items and open economic

policies were no longer encouraged. Even cost of studying abroad was increased. When it

reached 1962, a condition where license was needed for any import and few items were only

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imported by the state owned entities only. Lots of measures were taken to maintain the price

stability of necessary goods. The state owned companies manufactured a wide range of products

which was used to be imported such as paper, fertilizer, textile, rubber and provided them for the

consumption of people. These barriers lead to massive growth in industrial activity in early

1960’s and nearly 22 public sector entities were formed eg: people’s bank and minor scale

private businesses were also trying to raise their heads. This helped to achieve economic

sustainability.

State industrial co-operation act on 1957 also paved the way to state owned industries and

the “Ten year plan” launched by the government was to ensure full employment of the economy,

increase in production/output and revenue and the standard of living of the overall society. this

strategy forecasted 6% annual growth rate in economy and predicted that GDP value will

therefore doubles in every 12 year time resulting in a GDP 8 times of GDP of 1959.Previous

government’s allocation for industries were 4.7% while ten years plan’s allocation was 20%.This

was known as the initial step of industrialization in Sri Lanka.

But this plan didn’t work exactly like it was planned mainly due to the acquisition of

power by UNP from 1965-1970.During the time of UNP government Sri Lankan rupee was

lowered by 20% with the devaluation of the sterling pound. When economic policies of the

country were changed in 1965, it was more slanted towards a liberal system again according to

colonial intentions and these didn’t contribute to economic growth of the nation. During 1965-

1970 more attention was given to construction and few changes was taken place to ensure

economic sustainability such as increase in loan limits and decrease in loan rates, state

investments in cultivation, construction of government premises such as schools, post offices and

hospitals, increase in the allowed amount of land owned by a person by the government etc.

During 1956-1970 inflation rates fluctuates over time. Although there is not much

evidence to prove the accuracy of the rates in this period, it is believed that rate was quite low in

1960 and it was maintained at low levels till liberalization of economic policies later in

1977.When we asses them in more detail; CPI Inflation rate gradually decrease in 1960 to a

minimum of nearly -4 then reach a higher value in 1965 and between 1965-1970 it obtains a

peak value of approximately 8% and falls back to 1% in 1970.GDP Inflation also decreases at

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1960 then increases up to 3% then in 1965 it falls approximately to 0%, during 1965-1970 it

increases to 9% and then decreases slightly to 7% in 1970.

(Variation of Inflation rates as given in “Investigating Inflation Persistence of Sri Lanka” by P.K.G Harischandra)

Current President of Sri Lanka Mr. Maithreepala Sirisena always mentioning that he is

willing to follow Mr. S.W.R.D Bandaranaike’s economic standards when developing the

country. Solaman Bandaranaike was the prime minister of Sri Lanka from 1956-1960. His

economic policy was based on a closed economy. From 1956-1970 there were 3 other Prime

Ministers, Mr. Wijayanandha Dhahanayake(1959-1960), Mr. Dudley Senanayake(1960/03-

1960/07 & 1965-1970) and Mrs. Sirimavo Bandaranaike(1960-1965).

Our economy in 1956’s was most like Russia’s economy, so Sri Lanka had mostly looked

like a socialist republic in these time period. The government was the decision maker in the

economy. Private sectors were not capable in getting the economy in their hands. 1956-1960 was

actually closed economy, foreign investments in Sri Lanka was discouraged. In this time period

government has decided to nationalize the public bus service port services and insurance sector.

Paddy field and agricultural products have been encouraged to span their amounts, since the

government has imposed higher taxes in importing those products. Actually most of the

agricultural products are banned in importing. Government has declared a price floor on paddy to

ensure a standard one price in the market. The farmers are provided with subsidiary fertilizers by

the government to enhance the growth of paddy field sector. Paddy lands are rented by the

government on Because of these decisions by the government the agricultural sector in Sri Lanka

was on a peak at that time. Some of the industries like Cement and Steel have started in this

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country. Some of them are existing even today. Since the socialist attitude of the government,

free health service and free education system was established in this country, which is the reason

for worshipping Mr. Bandaranaike even today by some people. Sri Lankan government was able

start to two government owned banks, first one them was Bank of Ceylon and the second one

was People’s Bank.

Mr. Dudley Senanayake’s second ruling period(1965-1970) again Sri Lanka started

opening the economy in to the world. In this time period Sri Lanka was mostly looked like as a

country which holds new Liberal policies in economy. Foreign investors are motivated in

investing in Sri Lanka. Because of this decision Sri Lankan government made a promise to

foreign investors that their industries would not be nationalized by the government and in a case

of nationalizing their industry, the government promised to pay the full compensation to foreign

investors. Government had to take decision to attract foreign investors to Sri Lanka because of

the previous policies of the government. But government haven’t let the foreign industries to

liberalize the economy completely so in 1966 dual exchange rate was introduced. From this

method non-essential luxury goods are entitled to higher rate. Because of this decision to limit

the importing goods from foreign countries, the agricultural sector was stood at the peak as it

was in 1956’s.

Education

In 1956 after winning the elections, S W R D Bandaranaike became the prime minister of

the country. He changed the official language of the country into Sinhala. As a result of that

students could learn through mother tongue. He gave nutritious mid-day meal for students who

needed food security. As well as comprehensive teacher trainings for teachers. He made the

opportunity to Buddhist monkhood to expand their knowledge by uplifting the Vidyalankara and

Vidyodaya Pirivenas(educational institutions) to the status of universities.

After introducing the free and compulsory education, even though denominational

schools were given the option of joining free education system some school decided to stay out

of this system. In 1961, the state nationalised all denominational schools under private board.

Caste and belief did not consider in this education system. In the process, everyone considered as

the same and education became a monopoly of the state.

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Health policy

Mr Bandaranaike reformed health policies with his wide experience. He brought the

Western and Eastern systems of medicine. People used both the systems together. Then he

established ayurvedic research centres to protect the status of the native physician.

Farmer rights

Sri Lanka was basically an agricultural country and rice the foremost food of the people.

Therefore to increase rice productivity he improved the condition of the paddy farmers. From the

Paddy Lands Act of 1958 gave the protection to tenant paddy farmers. They received half the

produce and the landowner the balance. Moreover, the tenant could get entitlement of tenure and

they could get their right to the land.

During the period 1956 – 1959, the agricultural development policy of farmer settlement

was continued under irrigation. In 1957 the Walawe River development scheme was started.

Employee rights

Prime Minister Bandaranaike commenced to uplift the life and condition of the Sri

Lankan employee. As a result of that he declared 1st of May as May Day, to commemorate the

contribution of labour to the national wealth. This made a huge change in working condition of

the workers. As well as Introduction of the Employees’ Provident Fund was a great achievement

in this period and fund was collected through compulsory contribution from the employer and

employee. Government introduced this fund to provide retirement benefits to workers and their

families in the public sector.

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SECTION 02

Sri Lankan Economy from 1970 to 1977

Background of Industries

Within the period before 1970 the government started Import Substitution Industry

strategy and this strategy was further enhanced within the period of 1970-1977. This was

implemented to overcome balance of payment difficulties which aroused due to the marking of

closed economic policies in 1956.

During the period imported items were brought under substantial tariffs and import

quotas and license were restricted. It is considered as the most restricted period of economy in all

time of Sri Lankan history. In this period socialist oriented policies were maintained and the

intention was to be self-sufficient in rice and other agricultural industries. Government’s main

focused industries were the plantations such as Paddy, Tea, Rubber, Coconut and also meeting

the domestic demand in textiles, footwear, some food processing industries was observed within

the period.

Under the Business Acquisition Bill several industries were taken over and the State

Industrial Corporation Act, caused opening of new industrial corporations such as the State Gem

Corporation, the State Plantation Corporation, the State Graphite Corporation and the Ceylon

Petroleum Corporation. During the period large amount of industries were nationalized with the

intention of creating a national economy. Government controlled the prices of the economy and

the high involvement interrupted the market mechanism as main industries were conducted by

government. The land reforms law in 1972 and nationalization of plantations in 1975 were some

measures which marks the state domination of trade and other industries at that time. The state

showed an interest in attracting foreign capital through issuing a white paper in 1972 which was

a failure since the foreign investors didn’t prefer the contradictory economic policies. Private

sector industries were discouraged and as a result the size of public sector increased from ten

percent in 1950 to 30 percent in 1977.

However the government encouraged non-traditional exports and FDIs mainly in import

competing industries. The manufacturing industries which were on a boost due to protected and

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profitable market before 1970, suffered from lack of foreign exchange due to country’s balance

of payment difficulties in 1970’s. These enterprises depended highly on imported raw materials

and were closed down rapidly. It was estimated that only 40 percent of the capacity of the

industrial sector was used in 1974. This is a cause in decline of industries in GDP around early

70’s.

The mining industry was improved in this period due to opening up of State Gem

Corporation and State Graphite Corporation. Before the period most of the output was smuggled

out of the country and opening up of state owned corporations promoted the legal channels of

exporting thus improving the industry. Graphite was exported commercially as crude graphite.

National Output and Prices

Year

GDP at

Current

Market

Prices

(Rs. mn)

(a)

GDP

Growth

Rate

(%)

(a)

Share of GDP Share of GDP

(at Current Factor (at Current Market Prices) (a)

Cost Prices) (a)

Agricul- Industry Services Con- Invest- National ture

(%) (%) sumption ment Savings (%)

(%) (%) (%)

Annual Average

Price Index

CCPI(b) CCPI WPI GDPD (1952 (c) (2002 (1974 (a) (d) =100) =100) =100) (1996

=100)

Annual Average

Price Change

CCPI(b) CCPI WPI GDPD

(1952 (c) (2002 (1974 (a) (d) =100) =100) =100) (1996 (%)

(%) (%) =100) (%)

1970 13,664 4.3 28.3 23.8 47.9 84.2 18.9 15.0 138.2 5.9 5.9 1971 14,050 0.2 27.1 24.7 48.2 84.9 17.1 14.7 141.9 6.2 2.7 3.7

1972 15,247 3.2 26.3 24.2 49.5 84.3 17.3 14.8 150.9 6.4 6.3 4.1

1973 18,404 3.7 27.3 25.4 47.3 87.5 13.7 11.5 165.4 7.5 9.6 17.6

1974 23,771 3.2 33.2 25.1 41.8 91.8 15.7 7.5 185.8 100.0 9.5 12.3 25.9

1975 26,577 2.8 30.4 26.4 43.2 91.9 15.6 7.4 198.3 103.4 10.2 6.7 3.4 7.5

1976 30,203 3.0 29.0 27.1 43.9 86.1 16.2 13.1 200.7 111.9 10.8 1.2 8.2 5.9

1977 36,407 4.2 30.7 28.7 40.6 81.9 14.4 17.7 203.2 135.5 12.8 1.2 21.1 18.8

Reference: Department of Census and Statistics, Central Bank of Sri Lanka

Overall employment of the economy

In the early 70’s unemployment rate in Sri Lanka was about 24%. The GDP Growth

Rates were at low level and private foreign investment fell to a negligible level as result of

economic policies adopted under the state-controlled economy. So private ownership of land was

limited, with remaining land and plantation companies and many private industries were

nationalized. The overall effect was a virtual collapse of the economy in the Mid-1970. In the

late 1970s that led to the large external and domestic imbalances.

United Front formed a new government in the general elections of 1970.This had a

complete opposite view than previous government. The state started to play the role a producer

in the economy, a radical import substitution industrial policy was implemented. Under the State

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Industrial Corporation Act, new industrial corporations were established. The role of the state in

the economy expanded with this.

The size of the public sector increased from 10% to 30% in 1977 and the number of state

enterprises increased from a handful in 1960 to more than one hundred by 1970.

The united Front government which came to power in 1970 took various important steps

to take the decision making authority down to lower levels. In order to do this they established

numerous local level institutions.

As the initial step they established

District Development Council -Initiate the work done by public.

Divisional Development Council - The functions were to formulate development plans,

identification and coordination and monitoring of plan implementation.

Agricultural Productivity Committees - To provide advises regarding agricultural

activities.

Cultivation Committees -To promote agricultural development and protection of the

rights of tenant farmers.

Peoples’ Committee -To apply and check on the implementation of national economic

plans according to the needs of the country.

This formation of district, divisional and village levels broad the participation of all segments of

public in decision making. These formations were done under Divisional Development Councils

Program (DDCP).

By 1972, the DDCP was implemented island wide. By 1973, 590 Councils were fully

established and they had 1900 projects proposals of which 900 projects were approved and funds

were made for implementation. These comprised of 341 agricultural projects, 512 industrial

projects and 47 infrastructural projects. Nearly 2000 acres were brought under cultivation, 68

poultry projects with a bird population of 150,000 were established and this enabled 7904

persons to find employment at an expense of Rs.4.2 million. Over the period 1970 to 1976, a

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total of Rs. 127 million was spent and 33,271 jobs were created. Some of these offered only part

time engagement.

The establishment of Councils could be viewed as a delegation of responsibility to area-

wide authorities. During this period, establishment of Public Corporations in the industrial sector

was very evident. Agricultural Productivity Committees established under the Agricultural

Productivity Law promoted and coordinated all the agricultural services in the Division.

Thus services extended to farmers, supply of seed, fertilizer, credit and technical advice,

were all delivered from a center which was the hub of development at the divisional level. The

Agricultural Productivity Committees (APCs) also offered a satisfactory service to the rural

farmers.

The first cooperative boat building project in the entire island started at a boatyard in

Matara in 1972. From 1972 to 1977 crayon industry did produce around a tenth of the crayon

requirements of the country. During this period, a large number of business enterprises were

nationalized and delegated to new para-statal corporations or companies. Some examples are the

State Graphite Corporation, the State Gem Corporation, the State Plantation Corporation and the

Ceylon Petroleum Corporation.

Economic growth from 1970-1976 averaged less than 3% annually while the vital

agriculture sector grew at less than 2% leading to large increases in food imports. Per capita

income growth was less than 1% leading to declining consumption levels. By 1976

unemployment had reached almost 25% of the labor force, leaving 1.5 million unemployed in a

population of 15 million. Per capita income stagnated at around $190 per annum, in the early

1970s.The 1970-1977 periods witnessed the high-point of a socialist economic development

strategy in Sri Lanka and the low-point of economic and political achievements.

Imports exports and foreign exchange Policies

Within this period of 7 years, the country depended severely on the Import Substitution

Industries and their low performance caused low economic growth and unemployment. This later

caused to move to an export oriented economy in years after 1978.

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The economy has hit an import growth rate of 11.7% within the period while the rate was

only 7.9% in later years after 1978 which is a dramatic change. The main cause for this high

import rate is the implementation of Import Substitution strategy since these industries depended

highly on the imported raw materials. The intermediate goods imports has grown by 30% within

the era due to these industries while the rate was only 8% after trade liberalization. In contrast

the growth rate of investment goods was only 4.8%, where it turned to 7.3% after trade

liberalization in later years. Imports of machinery and equipment, building materials and

implementation of massive projects after opening up the economy would be the main reason for

this higher growth rate of investment goods in later years after 1977.

Composition of Imports (Percentage share)

The major export of the country was the agricultural produce, which accounted for about

79% of the economy by 1977, which mainly consist of Tea, Rubber and Coconut. Industrial

exports accounted for about 14% of total exports. Despite of the closed economy, high

performance in agricultural exports has contributed greatly for export performance within the

period. In 1970 the total exports were accounted to US$339 million and this has increased to

US$767 million by 1977.

Export Category/ Item 1950 1977

Agriculture 93.7 79.3

Of which: Tea, Rubber, Coconut 93.7 74.3

Other agriculture produce 5.1

Industrial n.a. 14.2

Of which: Textiles and garments 2.1

Petroleum 9.0

Other industrial 3.0

Others (including minerals) 6.3 6.5

100.0 100.0

Import categories/Items 1970 1977 Consumer goods 55.4 42.2

Food 45.7 36.3

(of which-rice) (13.7) (15.3) Other consumer goods 9.7 5.9 Intermediate goods 20.0 44.1

Investment goods 23.6 12.4

Unclassified 1.0 1.3

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Composition of Exports (Percentage Share)

It is also observed that the growth rates of imports and exports in the closed economy are

higher than that of the open economy period. This might be due to the prevailing of smaller base

values in the closed economy and due to the civil unrest after later years.

Within this period Government introduced a two tier foreign exchange rate system for the

fixed exchange rate system. The foreign currency exchange rates were conducted by the

Government and deciding it by market operations was not allowed. Strict rules for foreign

currency were conducted. Government conducted foreign currency exchange rates. As a result

in this period Sri Lanka has an over valuated exchange rate.

Inflation during the period

During the period of 1970 to 1977, Sri Lankan economy went through major changes.

These changes in the economic policies are the results of change in the political leadership. Pre

1970 when the UNP (United National Party) carrying out the policies for the Sri Lankan

economy, policies were made growth oriented while the SLFP (Sri Lanka Freedom Party) led

governments made policies equity oriented. When the SLFP came into the leadership in 1970

economy of Sri Lanka became a closed economy.

One instance where price of consumer good when sky high was during 1973 to 1974.

Droughts in Sri Lanka in the areas producing food made food supply shortages in the economy.

This was further worsened by the same reason in the supplying countries of the same products.

This caused food price levels to go high not just in Sri Lanka as well as in the world market.

Sri Lanka has always been a country depended on oil from other countries. This made a

huge impact in 1973. That was due to the first oil crisis in 1973. There was a sharp increase in

the fuel prices. Since the oil price is a crucial factor for every other goods and services, it made

all the prices of domestic productions go high. Effect of oil price increasing is clearly reflected

by the inflation rates increasing from 6.2 percent in 1972 to a 12.3 percent in 1974.

Education and any other indicators to reflect the overall quality of life/standard of living

More importantly, the early 1970s saw a number of changes to higher education policy in

Sri Lanka. The 1973 University admissions were based on standardized according to language,

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and this forced Tamil medium students to score a higher mark than Sinhalese to qualify for

university admission. Which led to various violent activities in the country at the later stage.

Although in 1974 a district based quota was also introduced to university admissions criteria to

grant the educational opportunities for rural districts in the country. The implementation of the

common-curriculum in the 1970s and the introduction of intervention strategies to compensate

for socio-economic differences are some major efforts at ensuring equitable access to education.

Within this period primary education was offered free. Every village in the country had at

least a primary school. Total intake of education was 4.1 million of whom 50 percent were

females. It was estimated that the attendance of poor in education was approximately seven

years. The government makes special effort to attract poor children to schools by offering free

school textbooks and uniforms every year. The long-term impact of investment on education on

poverty reduction depends on its effectiveness on enhancing human capital formation and labor

productivity. But the low quality of education has cancel out the efficiency impact of educational

investment. Overall government expenditure on education has made an important contribution to

enhancing welfare. However, the quality of education is questionable. Athurupana (1997) shows

that though there is a willingness to pay for high-quality education, the government has not

provided a favorable environment to the establishment of new private schools and universities.

Over 1970-1977 period there was a marked broadening of the concept of human

development in response to pressure of social unrest and unemployment in the export economy.

The concept came to improve standards of living through the provision of services and the

maintenance of minimum consumption level. This lasted only for 3 months.

Health is one of the most important concerns of the Sri Lankan welfare state. This

contributes more to the enhancement of the quality of living. In this period of time various

immunization programs against diseases such as tuberculosis, tetanus, polio and measles were

started. And also child and maternal care was provided an extra care as well by conducting

various nutrition programs. According to records it shows that expenditure for health marked its

peak in 1971 by reaching 2.5% of GDP. It reveals that government had made much efforts

towards health service during this period. But due to these the ration of food which was given to

people was reduced and number of beneficiaries also limited according to their income. This was

additionally an anti- poverty measure to enhance the living conditions of the public.

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Several increases of wages were done during this period according to the need of public

and to make living conditions more favorable.

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SECTION 03

Sri Lankan Economy from 1977 to Present

When considering macroeconomics, Sri Lanka is a perfect subject to conduct a case study

due to its economic history of being a test subject of many contrasting economic policies. These

could be laid out as follows

Open, ‘non-interventionist’, free market policies (up to 1959/60)

Dirigiste import substitution industry alisation (ISI) (1960-1977)

Export oriented liberalization (post-1977)

Macro-economic situation in Sri Lanka during the period 1977 up to 2014

This period could be broken down in to a few major sections based on the noticeable changes

in many of the macro economic factors that reflect the political and social situations of the above

period.

1977-1994 United National Party ruling period

1994-2004 Sri Lanka Freedom Party ruling period

2004-2014 United Peoples Freedom Alliance ruling period

Firstly it would be suitable to consider the political policies and social incidents that occurred

in these periods and then project how these affected the economy via statistics and graphical

illustrations.

In 1977 Under the guidance of the First executive President J.R. Jayawardena , the ruling

bodies of Sri Lanka turned a new page in the economic history of Sri Lanka by ending the

socialist, internal oriented economic policies, such as limitation of exports and imports,

limitation of the foreign exchange currency and moved on to the era of trade liberalization. This

new economic policy had the following main characteristics.

Liberalization of the economy or the “Free economy policy

Economic liberalization in Sri Lanka had an immense change to the local market as this

paradigm shift resulted in more economic activities as the new paradigm motivated more

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investors and stakeholders to hold on to a specific stake in the market expecting a return. Hence,

the government opened up the market to private investors which reduced the involvement of the

government on every aspect and element of the economy. This is basically because of the market

speculation for expansion as the local market was now not confined to boundaries of the country

due to international trade. This is particularly seen through the statistics as the GDP and GNP

values which was rather constant prior to 1978, clearly indicating a growth from there onwards.

Trade liberalization allowed free flow of goods and services, but yet monitored and

controlled instantaneously by the government. Therefore, the customers and suppliers were

allowed to communicate effectively which consequently led to suppliers meeting various

different wants and needs of people as this effectively changed the market to be more diverse,

more differentiated and customer oriented by nature.

Reduced regulations pertaining to International Trade

The government policy on international relations changed according, which allowed more

trade between the countries. The main opportunity for customers was to access international

markets thus, allowing the Sri Lankan market to reach equilibrium which created a good strike of

balance between the profitability to investors and accessibility to goods and services by the time.

Hence, it should be mentioned that new and inherited local investors and businessmen were also

boosted because Sri Lanka been a country known for imports in the past was enabled to rebuild

on the same foundation in a mass scale. In fact that was very much profitable that virtually

expanded local market capacity, improved employment, establishing new business sectors even

such as car manufacturing etc. which in case was one of the major facts that led to bringing about

new business giants in the country such as the Upali industries, Dasa industries etc.

Cancel the Multiple exchange rates and official exchange rates. Then, established the

floating exchange rates decided according to Demand and Supply in exchange currency

market.

The open market policy by nature should facilitate free floating currency exchange rates in

order to make sure that the financial market operates in a healthy position and reach equilibrium.

Hence, the Sri Lankan currency there on has been varying mostly according to the demand and

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supply of international trade. But, considering the long run from 1977 to 2014, Sri Lankan

economy has being over reliant on imports which had majorly weakened the currency. This is

moreover seen through the indicators such as the value of fiscal deficit which is ever growing. It

should also be noted that the currency exchange rates are often affected by the seasonal

variations around December and April due to high consumption and demand for goods

demanding more foreign currency. The only event in the last decade that the Sri Lankan currency

strengthened was after the 2004 tsunami disaster because international aids, grants and subsidies

worth US$ 864.5mn flowed in to the country ultimately creating a huge supply of foreign

currency and a +2.4% appreciation even though the currency showed a -5.2% annual

depreciation on average.

The largest depreciation was recorded in 2011 as the entire world faced a recession. Hence,

accordingly, the country’s currency crashed which remains until date which is the main reason

why the county’s per capita expenditure rose during the recent past.

LKR to US$ exchange rate variation from 2006 to 2015 Q2 (Source : www.xe.com )

Foreign investments were increased in Sri Lankan Economy.

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The investments were largely boosted which was also boosted by policies such as low Interest

rates, free trade zones etc. The following graph shows the interest rates in Sri Lanka which

clearly indicates that the rates decreased in order to encourage investors to invest more on local

economic development.

Prices of the internal market mainly decided by market demand and supply, but prices of

some goods and services still control by government authorities. (Bus fees, petroleum

etc.)

Industries developed armed to foreign market

Prior to 1977 the economy focused on agriculture and self-sufficiency in order to strengthen

the local economy as to after the trade liberalization it changed in to trade and mostly on export

goods. A five year plan was introduced (1978-1983) targeting large amounts of public

investments funded mainly by foreign grants and loans in order to reduce unemployment. It’s

noticeable by the establishment of Colombo Stock Exchange in 1985, allowed more income of

resources to the country in terms of investment and allowing the local public to actively

participate in handling the economy.

The second phase of the five year project which was in act from 1986 to 1990, the

government focused mostly on infrastructure development. They invested Rs268 billion with the

emphasis on infrastructure projects such as roads, irrigation, ports, airports, telecommunications,

and plantations. Of this total, 50 percent was to be spent by the state sector. Foreign sources were

to supply Rs69 billion. Hence, the government’s target was to achieve development through

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creating an industrialized economy by which import goods such as apparel was introduced so

that employment could be improved largely on laborer level appealing young Sri Lankans to

reduce employment. It should also be noted that this policy was leveraged through the

introduction of free trade zones in the country into which many foreign investors were attracted

to creating many job opportunities locally. The target annual average growth for the gross

domestic product (GDP) was 4.5 %, a decrease from the 5.2 percent envisaged by the plan for

the 1985-1989 periods and the 6% actually achieved between 1977 and 1984.

The period between 1987-1990 was a very unstable era for the country because of the civil

unrest that took place. This brought drastically drawbacks to the national income as well as large

scale damage to government property. According to the PESTEL factors, the country now was in

unsuitable conditions for investment which reduced the marginal incensement of the stock

market turnover as well. The effect to the economy can be showed by the reduction in the GDP

estimated at 3 percent in 1987, down from 4.3 percent in 1986, and the lowest level in a decade.

By 1987 it was clear that the ongoing civil unrest was causing major economic difficulties,

mainly because rapidly increasing defense measures enforced by the government resulted in cut

back of capital expenditure and to run a large budgetary deficit. The decline in foreign

investment and extensive damage to infrastructure mounted as sectors such as tourism,

transportation, and wet rice farming suffered significant production losses directly related to the

decline in security.

The property damage in this period was in Northern and Eastern provinces to be Rs. 7.5

billion in August 1987 and was expected to be revised upwards to include the widespread

destruction in the Jaffna. In the Sinhalese areas, riots against the 1987 Indo-Sri Lankan Accord

caused damage to government property estimated at Rs. 4.8 billion. It should also be noted be

noted, the political turmoil at this moment caused a spike in unemployment, mainly in the

Government sector due to events such as abolishing all the employees who supported the “July

Strike”, noticeably created a large gap between the actual and the demand work force. Hence, the

country not only suffered in terms of economy, but also in standard of living. Thus, some of

these expelled employees still suffer in very poor living conditions.

The years to follow after 1990 were the period where the economy gradually built up

harvesting the benefits of the trade liberalization. But the full benefit was not gained due to the

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civil war in the north which troubled this country for over three decades. The constantly

increasing costs on national security pulled back the progression of the economy. The worst of it

was seen in 2001 when for the first time in the history GDP growth was negative 1.4%. 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. This led to the evidencing of the failure in policy

making and economic planning and even led to the change of the ruling party.

The next major hit to the Sri Lankan economy happens in 2004 December 26th

when a

massive tsunami effected the coastal areas of the island. This left the island with much damage to

the infrastructure in the coastal area as well as in a cut off of the income from tourism and all the

coast related industries. In the years to follow the government mainly focused on rebuilding the

property as well as the effected industries and also to provide subsidies for the effected parties.

In 19th

May 2009 it was another turning point in the history of this nation. It was the day

that ended the civil war in Sri Lanka which had been tormenting the country for over three

decades. This was a great opportunity to boost the economy due to the reduction of expenses on

warfare as well as reconstruction of effected areas. The period from then onward to the present

has been an era which great development in the infrastructure of the nation was conducted as

well as a considerable increase in the national income via tourism and exports have been

evidenced. Although, the country by financial stability is trying to regain position over the years

as the budget deficit caused majorly by the expenditure due to war. The deficit is yet being

increased as the former government focused on developing economy through infrastructure via

direct government intervention. The government policy was to create many jobs but the marginal

growth of each sector was not equivalent or proportional to the increment in labor. In fact, by

2014, most government sectors have excess employees for whom the government bears a cost.

Due to the post war situation and the development shifting to South and South East Asian

region during the 20th

century, the country gained good investments particularly from foreign

investors. This was largely due to stable socio-economic stability. The economic growth was

around 7% on average. Major sectors that regained position were construction from which large

numbers of lower level job opportunities were created and tourism pertaining to all the levels in

the hierarchy.

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In summary, from 1977, Sri Lanka turned into an open economy out of which mostly

prospered from.

Overall employment of the economy during the period (1977-2014)

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Industries operated (composition of GDP, government’s main focused industries)

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Imports, exports and foreign exchange policies of the government

In the study, three measurements are used to quantify the trade openness of Sri Lanka.

Those well -known measurements to assess trade openness are ratio of total exports to gross

domestic product(X/GDP), imports to gross domestic product(M/GDP) and total of exports and

imports to gross domestic products(X+M/GDP).

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References

http://www.fao.org/docrep/004/ac158e/ac158e0g.htm

http://www.island.lk/2009/02/04/midweek7.html

http://www.investopedia.com

www.statistics.gov.lk/

http://lankainf.blogspot.com/2012/10/sri-lanka-economic-between-1970-and.html

http://www.kln.ac.lk/uokr/ICBI2010/6.pdf

https://en.wikipedia.org/wiki/Economy_of_Sri_Lanka

www.sangam.org/BOOKS/SLEconomy.html

http://www.sundaytimes.lk/140209/columns/alternating-economic-policy-regimes-since-

independence-retarded-development-84930.html

http://www.cbsl.gov.lk/htm/english/08_stat/stat.html

http://www.xe.com

CIMA Certificate Level (2009 - Old Syllabus) – Economics, Kaplan publications

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