Sri Lanka was mainly an agricultural country at the time of independence in 1948. The contribution of the agricultural sector to the economy and the number of people who were engaged in the agricultural sector declined only slightly between 1948 and 1977 (Kelegama, 2006). Before 1977, the economy was inward looking, with strict trade and financial sector controls that included high import restrictions and exchange controls. These controls created economic problems, such as a high budget deficit, a balance-of-payments crisis, a low economic growth rate and high unemployment levels (Kelegama, 2006).
In 1977, Sri Lanka introduced open economic policies and adopted a market oriented approach (Central Bank of Sri Lanka, 2012b). The economic policies during this period were directed towards industrialisation, private sector participation in economic activities, and institutional reforms in the public sector
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(Kelegama, 2006). Textiles and apparel, food and beverages, telecommunications, insurance, and banking and other financial service sectors became the most dynamic sectors of the country’s economy (Kelegama, 2006).
However, the economy of Sri Lanka and the life of its people were affected by two major events. The first event, was the prolonged civil war6 that started in the early 1980s. According to the World Bank (2013), there were 77,832 war-related deaths between 1980 and 2008. The total economic cost of the 26-year war was estimated at US$200 billion (Athukorala, 2010). In May 2009, the Government of Sri Lanka declared victory and the civil war ended. This created hopes of peace and stability. The second event, was the Indian Ocean tsunami in December 2004. The Indian Ocean tsunami brought the largest natural disaster to the country in its recorded history (United Nations Development Programme, 2012). More than 35,000 people died, 100,000 houses were damaged, and 500,000 people were displaced (Harsha, Samarawickrama, & Imamura, 2007). The severe damage caused to the infrastructure and the environment exceeded US$900 million (Harsha et al., 2007).
In spite of these events, Sri Lanka has experienced rapid economic growth (United Nations Development Programme, 2012). The economy has seen robust annual growth of 6.4 per cent over the period 2003 to 2012. This growth is well above that of its regional peers (World Bank, 2014). The macroeconomic indicators show positive trends in economic and social performance during the last 5 years (Central Bank of Sri Lanka, 2013). Table 1 illustrates key economic indicators of the Sri Lankan economy for the period 2009 - 2013.
6 The civil war waged between the government of Sri Lanka and a separatist guerrilla group from
1983 to 2009. The guerrillas attempted to break off the northern and eastern regions of the country as a separate sovereign state. The terror attacks were directed towards destroying government-owned infrastructure such as roads, rail, airports, and seaports. The effect of terror activities was felt outside the north and east regions of the country, with separatist guerrillas detonating bombs in other regions of the country to destroy government-owned property and human life (Abeysekera, 2011).
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Table 1: Key economic indicators of the Sri Lankan economy for the period 2009- 2013 Economic indicator 2009 2010 2011 2012 2013 Real GDP growth (%) 3.5 8.0 8.2 6.3 7.3 GDP by sectors (%) Agriculture 12.0 11.9 11.2 11.1 10.8 Industry 28.6 28.7 29.3 30.4 31.1 Services 59.3 59.3 59.5 58.6 58.1
Per capita GDP (US $) 2,057 2,400 2,836 2,922 3,280
Unemployment as a % of labour force 5.8 4.9 4.2 4.0 4.4 Inflation rate 3.5 6.2 6.7 7.6 6.9 Export (US $ Mn) 7,085 8,626 10,559 9,774 10,394 Imports (US$ Mn) 10,207 13,451 20,269 19,190 18,003 Public debt as a % of GDP 86.2 81.9 78.5 79.2 78.3
Source: Central Bank of Sri Lanka (2013)
Sri Lanka has Gross Domestic Product (GDP) of US$67.2 billion (Central Bank of Sri Lanka, 2013). The GDP growth rate has averaged close to 7 per cent per annum over the past 5 years. In 2011, Sri Lanka recorded its highest growth rate since independence of 8.2 per cent with the major contribution coming from an increase in the industry and service sectors (Central Bank of Sri Lanka, 2013). The industrial sector’s total contribution to the GDP was 31.1 per cent in 2013. The services sector, where wholesale and retail trade, transport and communication and banking, insurance and real estate play a major role, contributed 58.1 per cent of GDP in 2013. Agriculture, which was the mainstay of the economy when the country gained its independence and accounted for 40 per cent of GDP, has decreased in relative importance over the years. By 2013, the agriculture sector accounted for only 10.8 per cent of GDP.
Between 2009 and 2013, the per capita income of the country increased from US$2,057 to US$3,280. This growing trend in per capita income supports the country’s rising economic status as a middle-income country (Dutz & O'Connell, 2013). As a result the World Bank has listed Sri Lanka as a lower-middle income developing country (World Bank, 2014). Other economic indicators such as a one- digit inflation rate and a low unemployment rate over the past 5 years are also favourable (Central Bank of Sri Lanka, 2013). However, the exchange rate continues to show an unstable continuous decline due to a negative foreign trade
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balance, unfavourable world economic conditions, and continuous increases in the price of crude oil (Central Bank of Sri Lanka, 2013). Rising oil prices and the 30- year long civil war have also contributed to Sri Lanka’s high public debt (78 per cent of GDP in 2013).
Sri Lanka is a recipient of large amounts of foreign assistance from the World Bank, the International Monetary Fund (IMF), the Asian Development Bank, China and Japan (U.S. Department of State, 2011). The World Bank has been providing financial assistance to Sri Lanka for close on six decades (World Bank, 2005, 2017). The current active World Bank portfolio comprises of 18 projects with a total net commitment value of US$2.1 billion (World Bank, 2017). Sri Lanka has a 3-year Extended Fund Facility program with the IMF, which is primarily focused on reducing fiscal deficit, rebuilding foreign exchange reserves, and introducing a simpler, more equitable tax system to restore macroeconomic stability and promote inclusive growth (International Monetary Fund, 2017). These financial aid packages however, come with conditions as requirements of the loans. For example, the IMF announced that the second review reached a staff-level agreement with Sri Lankan authorities subject to submission of a new Inland Revenue Act to the Parliament by June 2017 (World Bank, 2017). The United States of America, United Kingdom, other European countries (Germany, Italy, Belgium, Netherland and France), and India are the main destinations for Sri Lankan exports. China, India, Singapore, United Arab Emirates and Japan are the main origins of Sri Lanka imports (Central Bank of Sri Lanka, 2017).
Sri Lanka ranks high on the Physical Quality of Life Index and the Human Development Index. In 2012, Sri Lanka was ranked 92 in the Human Development Index7 and grouped in the high human development category (United Nations Development Programme, 2013). In comparison with other developing countries, Sri Lanka had a literacy rate of 95.6 per cent and a high life expectancy of 75.1 years in 2012 (Central Bank of Sri Lanka, 2013). These quality of life indices reflect
7 This classification is based upon the island’s indicators of life expectancy (75.1 years); mean years
of schooling (9.3) in association with expected years of schooling (12.7); and its per capita gross national income at purchasing power parity (US$5,170).
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sustained government intervention in the health and the education sectors (Wijewardena & Yapa, 1998).