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
Press
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of
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1960-90,
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The
World
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The
given
the
has been impressive despite lower economic growth. Recent efforts to
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