Overview
With an economy of $80.58 billion, and a per capita GDP of about $4,000, Sri Lanka has mostly enjoyed strong growth rates in recent years. 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.

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.

Foreign exchange reserves, which fell by 11% in 1999, decreased further in 2000. In response, the government floated the rupee on January 23, 2001. This led to a significant nominal depreciation in 2001, but the rupee has since stabilized and reserves have gradually been replenished.

The year 2003 is poised to be another eventful year for Sri Lanka. Continued peace has allowed further progress on macroeconomic stabilization during the first half of the year. Economic growth has picked up to 5.5% in the first quarter, from 0.5% in the comparable period in 2002. This growth was largely driven by the services sector (particularly telecom and tourism), and the industrial sector posted modest growth. Both exports and imports have risen 13% in the first 4 months. Interest rates are declining. The inflation rate hovers around 9%. External reserves were sufficient to cover 5.1 months of imports. The Colombo Stock Exchange has rebounded to become one of the better performers in the area. The CSE rose 45% in 2002 and hit a record high in June 2003 as business confidence continued to expand. Fortunately, the SARS epidemic did not spread to Sri Lanka, and tourism was not severely affected. Sri Lanka's garment exporters reported a surge in orders, shifted from China due to SARS. On the negative side, in mid-2003 Sri Lanka experienced its worst floods in 50 years, which caused extensive damage in south and southwestern parts of the country. The government is relying on donor funding to reconstruct the flood-damaged areas, avoiding recourse to government finances. The adverse impact from floods on overall growth for 2003 is estimated to be marginal.

Economic recovery is expected to consolidate during the rest of 2003, and GDP growth for the year is predicted at 5.5%, increasing to 6.5% in 2004. All major sectors of the economy are expected to expand. This growth will, however, depend on the continuation of the peace process, policy adjustments (particularly budgetary control), and structural reforms.

The future of Sri Lanka's economic health is uncertain but largely dependent on the continuation of the peace process, political stability, and continued policy reforms--particularly in the area of fiscal discipline and direct management. Implementation of major reforms in the civil service and education sectors and more disciplined spending and improved revenue collection would help generate stronger economic growth. If privatization continues and export orientation strengthens, weaknesses in government will have less impact on growth. Real growth is expected to continue in the 4%-6% range beyond 2003 but may remain below the 8%-9% growth needed to move quickly into the status of a middle-income or newly developed country.

Other challenges include diversification from Sri Lanka's key exports--tea and garments. Garment exports will face increased competition in a quota-free era when the Multi Fiber Arrangement expires in 2005. The future of the tea industry is threatened by a shortage of plantation labor and growing competition. There are new efforts to diversify exports, explore tourism potential, and improve competitiveness. The government has an ambitious information and communications technology strategy to connect and service every corner of the country. This project, if implemented successfully, could change Sri Lanka's economy and social fabric and would take it into the information age. The government hopes to take advantage of Sri Lanka's strategic location on shipping routes, make use of the Indo-Lanka Free Trade Agreement, and sign free trade agreements with other countries to achieve regional trading hub status. If peace returns and all these efforts bear fruit, real growth could be in the 6%-7% range beyond 2004, and will help realize the government's intention of making Sri Lanka the gateway to South Asia.

The service sector is the largest component of GDP (54%). In 2003, the service sector continued its strong expansion, fueled primarily by strong growth in telecom and financial services. Public administration and defense expenditures have remained steady. Repatriated earnings of Sri Lankans working abroad continued to be strong. Tourism continues to be a significant contributor to this sector as well, although it has not reached full potential due to continued worries about the conflict. There also is a small but growing information technology sector, especially information technology training and software development and exports.

Manufacturing accounts for about 15.9% of GDP. The textile, apparel, and leather products sector is the largest, accounting for 44% of total industrial output. The second largest industrial sector, at 24% of total manufacturing output, is food, beverages, and tobacco (this sector grew by 4.6% in 2002). The third-largest industrial sector is chemical, petroleum, rubber, and plastic products--16% of output, with 5.7% growth in 2002.

Agriculture has lost its relative importance to the Sri Lankan economy in recent decades. It accounts for 20.1% of GDP and provides employment to 33% of the working population. Rice, the staple cereal, is cultivated extensively. The plantation sector consists of tea, rubber, and coconut; in recent years, the tea crop has made significant contributions to export earnings and saw production increases of about 5% in 2002. Tea prices have continued to decline due to record world tea output in recent years. The construction sector accounts for 7.4% of GDP and mining and quarrying 1.8%. In recent years, the government has eliminated many price controls and quotas, reduced tariff levels, eliminated most foreign exchange controls, and sold more than 55 state-owned companies and 20 estate-holding companies. Colombo boasts one of the most modern stock exchanges in the region, and the Sri Lankan Government offers a range of tax and other incentives to attract potential investors.


Trade and Foreign Assistance
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.

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.


Labour
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.

Year

Gross Domestic Product

US Dollar Exchange (SL Rs.)

1980

66,167

16.53

1985

162,375

27.20

1990

321,784

40.06

1995

667,772

51.25

2000

1,257,637

77.00

2005

2,363,669

100.52


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.