Economy of Sri Lanka

Economic history

Since becoming independent from Britain in February 1948, the economy of the country has been affected by natural disasters such as the 2004 Indian Ocean earthquake and a number of insurrections, such as the 1971, the 1987-89 and the 1983-2009 civil war. Between 1977 and 1994 the country came under UNP rule in which under President J.R Jayawardana 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. In 2001, Sri Lanka faced bankruptcy, with debt reaching 101% of GDP. The impending currency crisis was averted after the country reached a hasty ceasefire agreement with the LTTE and brokered substantial foreign loans. After 2004 the UPFA government has concentrated on mass production of goods for domestic consumption such as rice, grain and other agricultural products. however twenty five years of civil war slowed economic growth, diversification and liberalisation, and the political group Janatha Vimukthi Peramuna (JVP) uprisings, especially the second in the early 1980s, also caused extensive upheavals.

Following the quelling of the JVP insurrection, increased privatization, economic reform, and a stress on export-oriented growth helped improve the economic performance, increasing 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 also exposed the fundamental policy failures and structural imbalances in the economy and the need for reforms. The year ended in parliamentary elections in December, which saw the election of United National Party to Parliament, while Sri Lanka Freedom Party retained the Presidency.

During the short lived peace process from 2002 to 2004, the economy 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, the economy experienced a gradual recovery. During this period Sri Lanka has been able to reduce defense expenditures and begin to focus on getting its large, public sector debt under control. In 2002, economic growth reached 4%, aided by strong service sector growth. The agricultural sector of the economy staged a partial recovery. Total FDI inflows during 2002 were about $246 million

The Mahinda Rajapakse government halted the privatization process and launched several new companies as well as re-nationalising previous state owned enterprises, one of which the courts declared that privatizationis null and void. Some state-owned corporations became overstaffed and less efficient, making huge losses with series of frauds being uncovered in them and neopotism rising. During this time EU revoked GSP plus preferential tariffs from Sri Lanka due to alleged human rights violations, which cost about USD 500 million a year.

The resumption of the civil-war in 2005 led to a steep increase defense expenditures. The increased violence and lawlessness also prompted some donor countries to cut back on aid to the country.[2][3].

A sharp rise in world petroleum prices combined with economic fallout from the civil war led to inflation that peaked 20%. However, as the civil war ended in May 2009 the economy started to grow at a higher rate of 8.0% in the year 2010 and reached 9.1% in 2012 mostly due to the boom in non-tradable sectors. However the boom didn't last and the GDP growth for 2013 fell to 3.4% in 2013 and only slightly recovered to 4.5% in 2014.

In 2016 the unity government succeeded in lifting an EU ban on Sri Lankan fish products which resulted in fish exports to EU rising by 200% and in 2017 improving human rights conditions resulted in the European Commission proposing to restore GSP plus facility to Sri Lanka.

Macro-economic trend

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

For purchasing power parity comparisons, the US Dollar is exchanged at 113.4 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.

Pre 2009 there was a continuing cloud over the economy the civil war and fighting between the Government of Sri Lanka and LTTE. However the war ended with a resounding victory for the Sri Lankan Government on 19 May 2009 with the total elimination of LTTE.

Financial institutions

The Central Bank of Sri Lanka is the monetary authority of Sri Lanka and was established in 1950. The Central Bank is responsible for the conduct of monetary policy in the country and also has supervisory powers over the financial system.

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 [5] in Colombo since 1995 and it also has branches across the country in Kandy, Matara, Kurunegala, Negombo and Jaffna. In 2009, after the 30 years long civil war came to an end, the CSE was the best performing stock exchange in the world.

Tourism

Tourism is one of the main industries in Sri Lanka. Major tourist attractions are focused around the islands famous beaches located in the southern and the eastern parts of the country and ancient heritage sites located in the interior of the country and resorts located in the mountainous regions of the country. Also, due to precious stones such as rubies and sapphires being frequently found and mined in Ratnapura and its surrounding areas, they are a major tourist attraction.

The 2004 Indian Ocean Tsunami and the past civil war have reduced the tourist arrivals, however the number of tourists visiting have been recently increasing, beginning in early 2008. March 2008 by 8.6% and Sri Lanka attracted 1,003,000 tourists in 2012 according to the Central Bank of Sri Lanka's 2013 roadmap.

Tea industry

The tea industry, operating under the Ministry of Public Estate Management and Development, is one of the main industries in Sri Lanka. It became the world's leading exporter in 1995 with a 23% share of global tea export, higher than Kenya's 22% share. The central highlands of the country have a low temperature climate throughout the year and annual rainfall and the humidity levels that are suitable for growing tea. The industry was introduced to the country in 1867 by James Taylor, a British planter who arrived in 1852.

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

Apparel and textile industry

The apparel industry of the Sri Lanka mainly exports to the United States and Europe. Europe increasingly relies on Sri Lankan textiles due to the high cost of labour in Europe. There are about 900 factories throughout country serving companies such as Victoria's Secret, Liz Claiborne and Tommy Hilfiger.

Agriculture

The agricultural sector of the country produces mainly rice, coconut and grain, largely for domestic consumption and occasionally for export. The tea industry which has existed since 1867 is not usually regarded as part of the agricultural sector, which is mainly focused on export rather than domestic use in the country.

IT industry

Export revenue of Sri Lankan IT sector is estimated to be USD 720 million in 2013.

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, receiving more than 63% of the country's total garment exports. India is Sri Lanka's largest supplier, with imports worth $835 million in 2002. Japan, traditionally Sri Lanka's largest supplier, was its fourth-largest in 2002 with exports of $355 million. Other important suppliers include Hong Kong, Singapore, Taiwan, and South Korea. The United States is the 10th-largest supplier to Sri Lanka; US imports amounted to $218 million in 2002, according to Central Bank trade data.

A new port is being built in Hambantota in Southern Sri Lanka, funded by the Chinese government as a part of the Chinese aid to Sri Lanka. This will ease the congestion in Sri Lankan ports, particularly in Colombo. In 2009, 4456 ships visited Sri Lankan ports.

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 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 [6]. Standard and Poor's estimates public sector debt has reached 95% of GDP [7], in comparison to CIA estimates of 89% of GDP [8]. 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 [9]. The head of the opposition UNP, Ranil Wickremasinghe has warned that such intense borrowing is unsustainable and will not repay these loans if elected to power [10].

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 International Monetary Fund, World Bank, Asian Development Bank, Japan, the European Union and the United States, totalled $4.5 billion.

Debt and IMF assistance

During the past few years, the country's debt has soared as it was developing its infrastructure to the point of near bankruptcy which required a bailout from the International Monetary Fund (IMF). "Without an IMF loan, Sri Lanka would have been in a precarious position," in May 2016 according to Krystal Tan, an Asia economist at Capital Economics who added that "foreign exchange reserves only covered around 80 percent of short-term external debt". The IMF had agreed to provide a $1.5 billion bailout loan in April 2016 after Sri Lanka provided a set of criteria intended to improve its economy.

By the fourth quarter of 2016 the debt was estimated to be $64.9 billion. Additional debt had been incurred in the past by state-owned organizations and this was said to be at least $9.5 billion. Since early 2015, domestic debt increased by 12 percent and external debt by 25 percent.

In late 2016 the World Bank provided US$100 million in financing and the Japan International Cooperation Agency provided a US$100M loan, both intended to "provide budget financing and to support reforms in competitiveness, transparency, public sector and fiscal management", according to the World Bank. The bank also reported that the country's government had agreed that there was a need for reforms "in the areas of fiscal operations, competitiveness and governance" and if fully implemented, "these could help the country reach Upper Middle Income status in the medium term" according to the bank.

In November 2016, the International Monetary Fund reported that it would disburse a higher amount than the US$150 million originally planned, a full US$162.6 million (SDR 119.894 million), to Sri Lanka. The agency's evaluation was cautiously optimistic about the future: "While inflation has abated, credit growth remains strong. The central bank indicates its readiness to tighten the monetary policy stance further if inflationary pressures resurge or credit growth persists. The authorities intend to continue building up reserves through outright purchases while allowing for greater exchange rate flexibility. The banking sector is currently well capitalized. Steps are being taken to find a resolution mechanism for the distressed financial institutions. Going forward, there is a need to strengthen the supervisory and regulatory framework, and identify and mitigate vulnerabilities in the financial sector, particularly with regard to non-banks and state-owned banks."