Sri Lanka Economy

ECONOMY

Sri Lanka is a lower-middle income developing nation with a gross domestic product of about $32 billion. This translates into a per capita income of $1,600. Sri Lanka's 91% literacy rate in local languages, and life expectancy of 72 years rank well above those of India, Bangladesh, and Pakistan. English language ability is relatively high but has declined significantly since the 1970s.

Sri Lanka's income inequality is severe, with striking differences between rural and urban areas. About 15% of the country's population of 20.1 million remains impoverished. Civil conflict, falling agricultural labor productivity, lack of income-earning opportunities for the rural population, high inflation and poor infrastructure outside the Western Province are impediments to poverty reduction.

In 1978, Sri Lanka shifted away from a socialist orientation and opened its economy to foreign investment. But the pace of reform has been uneven. A period of aggressive economic reform under the UNP-led government that ruled from 2002 to 2004 was followed by a more statist approach under former President Chandrika Kumaratunga and current President Mahinda Rajapaksa.

Despite a brutal civil war since 1983, economic growth has averaged around 4.5%. In 2001, however, GDP growth was negative 1.4%--the only contraction since independence. Growth recovered to 4.0% in 2002. Following the 2002 ceasefire and subsequent economic reforms, the economy grew more rapidly, recording growth rates of 6.0% in 2003 and 5.4% in 2004. The December 2004 Indian Ocean tsunami killed 32,000 people, displaced 443,000, and caused an estimated $1 billion in damage. The tsunami's overall economic impact was less severe than originally feared, with the economy growing by 6% in 2005 as the damage was offset by the reconstruction effort. The economic situation in Sri Lanka is stable, but hampered by the resumption of hostilities between the government and the LTTE, escalating oil prices, and high inflation and interest rates. GDP grew by 6.8% in 2007, down from 7.7% growth in 2006. Sri Lanka's key exports such as garments and tea performed well. Remittances from foreign workers, estimated at $2.5 billion, also helped the economy.

President Rajapaksa's broad economic strategy was outlined in his election manifesto "Mahinda Chintana" (Mahinda's Thoughts), which now guides government economic policy. Mahinda Chintana policies focus on poverty alleviation and steering investment to disadvantaged areas; developing the small and medium enterprise (SME) sector; promotion of agriculture; and expanding the already enormous civil service. The Rajapaksa Government rejects the privatization of state enterprises, including "strategic" enterprises such as state-owned banks, airports, and electrical utilities. Instead, it plans to retain ownership and management of these enterprises and make them profitable.

The future of Sri Lanka's economic health primarily depends on political stability, return to peace, and continued policy reforms--particularly in the area of fiscal discipline and budget management. Rising oil costs and the 24-year conflict have contributed to Sri Lanka's high public debt load (86% of GDP in 2007). Sri Lanka needs economic growth rates of 7-8% and investment levels of about 30% of GDP for a sustainable reduction in unemployment and poverty. In the past 10 years, investment levels have averaged around 25% of GDP.

The service sector is the largest component of GDP at around 60%. In 2007, the service sector continued its strong expansion, fueled primarily by strong growth in telecom, trading, transport, and financial services. Public administration and defense expenditures increased in 2007 due to resumption of hostilities, expansion of public sector employment, and the expenses associated with maintaining a 106-minister cabinet. There also is a growing information technology sector, especially information technology training and software development. The tourism sector has been impeded by the volatile security situation.

Sri Lanka depends on a continued strong global economy for investment and for expansion of its export base. The government plans an ambitious infrastructure development program to boost growth. It hopes to diversify export products and destinations to make use of the Indo-Lanka and Pakistan-Sri Lanka Free Trade Agreements, GSP+ treatment by the European Union and other regional and bilateral preferential trading agreements.

Industry accounts for 28% of GDP. Manufacturing is the largest industrial subsector, accounting for 18% of GDP. The construction sector accounts for 6% of GDP. Mining and quarrying account for 2% of GDP. Electricity, gas and water account for 2% of GDP. Within the manufacturing sector, food, beverage, and tobacco is the largest subsector in terms of value addition, accounting for 46%. Textiles, apparel, and leather is the second-largest sector with 24% of value addition. The third-largest sector in value added terms is chemical, petroleum, rubber, and plastic products.

Agriculture has lost its relative importance to the Sri Lankan economy in recent decades. It employs 31% of the working population, but accounts for only about 12% of GDP. 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.

Trade and Foreign Assistance
Sri Lanka's exports (mainly apparel, tea, rubber, gems and jewelry) are estimated at $7.7 billion and imports (mainly oil, textiles, food, and machinery) are estimated at $11.3 billion for 2007. The resulting large trade deficit was financed primarily by remittances from Sri Lankan expatriate workers, foreign assistance, and commercial borrowing. Sri Lanka must diversify its exports beyond garments and tea. Garment exports face increased competition since the 2005 expiration of the worldwide Multifiber Arrangement. The tea industry is challenged by a shortage of plantation labor and by growing competition.

Exports to the United States, Sri Lanka's most important market, are estimated to be around $2.1 billion for 2007, or 27% of total exports. For many years, the United States has been Sri Lanka's biggest market for garments, taking almost 50% of total garment exports. India is Sri Lanka's largest supplier, accounting for 21% of imports valued at over $2.6 billion. United States exports to Sri Lanka are estimated to be around $230 million for 2007, consisting primarily of wheat, electrical apparatus, textiles and specialized fabrics, medical and scientific equipment, plastics, and paper.

Sri Lanka is highly dependent on foreign assistance, with the World Bank, the Asian Development Bank, Japan, and other donors disbursing loans totaling $1.4 billion in 2007. China has become a major lender for infrastructure projects, such as a new port and a coal power plant. Iran has also promised significant infrastructure loans. Foreign grants amounted to $275 million in 2007. While implementation of aid projects has been spotty over the years, the government is trying to improve this record by streamlining tender processes and increasing project management skills.

Labor
The unemployment rate has declined in recent years to about 6.3% in 2007. The rate of unemployment among women and high school and college graduates, however, has been 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 better matches between graduates and jobs.

Approximately 20% of the 7.04 million-strong work force is unionized, but union membership is declining. 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 plantation sector. The president of the CWC also is Minister of Youth Empowerment and Socio Economic Development. Other strong and 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.

Public sector trade unions have recently resisted government moves to restructure the state-owned electrical utility board and the petroleum company.

There are 1.5 million Sri Lankan citizens working abroad. A majority are women working as housemaids. Remittances from migrant workers, estimated at around $2.5 billion in 2007, are an important source of foreign exchange for Sri Lanka, second only to earnings from apparel exports.

Economy (2007)
GDP: $32.3 billion.
Annual growth rate: 6.8%.
Natural resources: Limestone, graphite, mineral sands, gems, and phosphate.
Agriculture (12% of GDP): Major products--rice, tea, rubber, coconut, and spices.
Services (60% of GDP): Major types--tourism, wholesale and retail trade, transport, telecom, financial services.
Industry (28% of GDP): Major types--garments and leather goods, rubber products, food processing, chemicals, refined petroleum, gems and jewelry, non-metallic mineral-based products, and construction.
Trade: Exports--$7.7 billion: garments, tea, rubber products, jewelry and gems, refined petroleum, and coconuts. Major markets--U.S. ($2.1 billion), U.K., India. Imports--$11.3 billion. Major suppliers--India, Singapore, Hong Kong, China, Iran, Malaysia, Japan, U.K., U.A.E., Belgium, Indonesia, South Korea, U.S. ($227 million).