Economy of Sri Lanka

Economy of Sri Lanka

With an economy of $27.4 billion [] ($95.5 billion PPP estimate [] ), and a per capita GDP of about $4,700 (PPP), Sri Lanka has mostly enjoyed strong growth rates in recent years.

The main economic sectors of the country are tourism, tea export, apparel, textile, rice production and other agricultural products. In addition to these economic sectors overseas employment contributes highly in foreign exchange, most of them from middle-east.

After getting political independence from British colonialism in February 1948, the economy of the country has been affected by Tsunami and a couple of insurrections such as the 1971, the 1987-89 and the ongoing civil war. The parties which ruled the country after 1948 did not implement any national plan or policy on the economy, veering between left and right wing economic practices. The government during 1970-77 period applied pro-left economic policies and practices then after 1977 to 1994 UNP rule and 1994-2004 SLFP rule applied pro-right policies. After 2004 the UPFA government is highly concentrating on mass production of domestic consumption such as rice, grain and other agricultural products. [cite web|url=|title=Asian Development Outlook 2008|work=Asian Development Bank]

Economic history

Sri Lanka began to shift away from a socialist orientation in 1977. Since then, the government has been deregulating, privatizing, and opening the economy to international competition. Twenty years of civil war has no doubt slowed economic growth [] , diversification and liberalization, and the leftist Janatha Vimukthi Peramuna (JVP) uprisings, especially the second in the late 1980s, also caused extensive upheavals. [cite web|url=|title=The Economy of Sri Lanka|work=The Postcolonial Web-National University of Singapore]

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

The government of Prime Minister Ranil Wickremasinghe of the United National Party has indicated a strong commitment to economic and social sector reforms, deregulation, and private sector development. In 2002, Sri Lanka commenced a gradual recovery. Early signs of a peace dividend were visible throughout the economy--Sri Lanka has been able to reduce defense expenditures and begin to focus on getting its large, public sector debt under control. In addition, the economy has benefited from lower interest rates, a recovery in domestic demand, increased tourist arrivals, a revival of the stock exchange, and increased foreign direct investment (FDI). In 2002, economic growth bounced up to 4%, helped by strong service sector growth. Agriculture staged a partial recovery. At present Agriculture in Sri Lanka needs keen attention as it directed towards disastorus situation. Industrial sector growth, however, faltered for the second consecutive year due to weak demand and lower prices for Sri Lanka's exports. The government was able to exert fiscal control, and inflation trended down. Total FDI inflows during 2002 were about $246 million and are expected to exceed $300 million in 2003. The largest share of FDI has been in the services sector. Good progress was made under the Stand By Arrangement, which was resumed by the International Monetary Fund (IMF). These measures, together with peaceful conditions in the country, have helped restore investor confidence and created conditions for the government to embark on extensive economic and fiscal reforms and seek donor support for a poverty reduction and growth strategy. However, the resumption of the civil-war in 2005 led to a steep increase defence expenditures. The increased violence and lawlessness also prompted some donor countries to cut back on aid to the country. [] [] . Sri Lanka has also accumulated a 9.2 % deficit and the central bank has not intervened since late 2006 to print more currency [] . A sharp rise in world petroleum prices combined with fallout from the civil war has led to inflation hitting 20%. [cite web|url=|title=Background Note: Sri Lanka->section "Economy"|work=U.S. State Department]


Sri Lanka had switched to a floating currency after a worsening currency crisis due to sterilized intervention in January 2001 [] . Foreign reserves had been exhausted defending the rupee from free fall during the 1990s. By 2004, sterilized intervention was resumed to prevent further depreciation of the rupee and was eased off in 2005 after a rush of foreign aid due to the tsunami. By 2006, sterilized intervention was restarted as the rupee lost further ground. The IMF categorizes the Sri Lankan rupee as a managed float [] . By 2006, the rupee depreciated by 5 % and depreciated a further 4.2 % within the first half of 2007 [] . This has been due to flight of capital out of the country because of rising uncertainty and resumption of the longstanding civil war. The rupee has been under pressure due to widening trade and budget deficit, increased cost of living, cost of fuel imports and rising inflation. The rising uncertainty has given rise to a thriving black market for trading between dollars and rupees. Official trading through the central bank has been problematic for many traders, coming under increasing moral persuasion to avoid selling rupees for the sake of national interests [] .


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

Macro-economic trend

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

For purchasing power parity comparisons, the US Dollar is exchanged at 27.69 Sri Lankan Rupees only.

In 1977, Colombo abandoned statist economic policies and its import substitution trade policy for market-oriented policies and export-oriented trade. Sri Lanka's most dynamic industries now are food processing, textiles and apparel, food and beverages, telecommunications, and insurance and banking. By 1996 plantation crops made up only 20% of exports (compared with 93% in 1970), while textiles and garments accounted for 63%. GDP grew at an annual average rate of 5.5% throughout the 1990s until a drought and a deteriorating security situation lowered growth to 3.8% in 1996. The economy rebounded in 1997-98 with growth of 6.4% and 4.7% - but slowed to 3.7% in 1999. For the next round of reforms, the central bank of Sri Lanka recommends that Colombo expand market mechanisms in nonplantation agriculture, dismantle the government's monopoly on wheat imports, and promote more competition in the financial sector. A continuing cloud over the economy is the fighting between the Government of Sri Lanka and the LTTE, which has cost 65,000 lives in the past 15 years.

Financial institutions

The Central Bank of Sri Lanka is the monetary authority of Sri Lanka was established in 1950. The Central Bank is responsible for the conduct of monetary policy in the country and also has the supervisory powers over the financial system. [cite web|url=|title=Official Web site of Central Bank, Sri Lanka]

The Colombo Stock Exchange (CSE) is the main stock exchange in Sri Lanka. It is one of the most modern exchanges in South Asia, providing a fully automated trading platform. The vision of the CSE is to contribute to the wealth of the nation by creating value through securities. The headquarters of the CSE have been located at the World Trade Center Towers [] in Colombo since 1995 and it also has branches across the country in Kandy, Matara,Kurunegala and Negombo. [cite web|url=|title=Official Web site of Colombo Stock Exchange]

Economic infrastructure and resources

Transportation and roads

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

The total length of Sri Lankan roads exceeds convert|11000|km|mi|-1, with a vast majority of them being paved. The government has launched several highway projects to bolster the economy and national transport system, including the Colombo-Katunayake Expressway, the Colombo-Kandy (Kadugannawa) Expressway, the Colombo-Padeniya Expressway and the Outer Circular Highway to ease Colombo's traffic congestion.


The production of electricity in the country mostly done by the hydro power stations situated in central highlands. [cite web|url=|title=SRI LANKA: RENEWABLE ENERGY AND CAPACITY BUILDING|work=Global Environment Facility] [cite web|url=|title=Power Sector Assistance Evaluation|work=Asian Development Bank]

Economic sectors

Tea industry

The tea industry is one of the main foreign exchange gaining industry in Sri Lanka also became the world's leading exporter in 1995 shared 23% of the total export higher than Kenya shared 22%. The central highlands of the country, low temperature climate throughout the year, annual rainfall and the level of humidity are more favorable geographical factors for production in high quality tea. The industry was introduced to the country in 1867 by James Taylor, the British planter who arrived in 1852. [cite web|url=|title=TED Case Studies - Ceylon Tea|publisher=American University, Washington, DC]

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

[ [ Steenbergs Organic Fairtrade Pepper and Spice ] ] [ [] ]

Apparel and textile industry

The apparel industry of the country which producing high quality ready made garments and the main exporters are USA and Europe. There are about 900 factories throughout country serves world’s leading fashion designing companies like Victoria's Secret, Liz Claiborne and Tommy Hilfiger. [cite news|url=|title=Sri Lanka seeks US free trade|publisher=BBC News|date=8 April, 2002]


The agricultural sector of the country which producing domestic consumption such as rice, coconut and grain also a part of the culture since 2500 years. The tea industry which existing since 1867 is not a part of this sector of agriculture, it is mainly focusing on export market rather than domestic use in the country. [cite web|url=|title=Sri Lanka - Agriculture|]

Global economic relations

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

Credit Rating and Commercial Borrowing

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

Foreign assistance

Sri Lanka is highly dependent on foreign assistance, and several high-profile assistance projects were launched in 2003. The most significant of these resulted from an aid conference in Tokyo in June 2003; pledges at the summit, which included representatives from the IMF, World Bank, Asian Development Bank, Japan, the European Union and the United States totaled $4.5 billion.


External links

* [,,contentMDK:21160796~pagePK:146736~piPK:146830~theSitePK:223547,00.html Global Economic Prospects: Growth Prospects for South Asia] The World Bank, Dec. 13, 2006
* [ CIA Factbook]
* [ Information and News]

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