Sri Lanka

Economy

Sri Lanka is historically famous for its cinnamon and tea (introduced by the British in the 19th century). From independence, till 1977, it was a strongly socialist economy but since then it has been increasingly pursuing privatization, market-oriented policies and export-oriented trade. While tea and rubber are still important, the most dynamic sectors are now food processing, textiles and apparel, food and beverages, telecommunications, insurance, and banking. By 1996, plantation crops made up only 20 percent of exports (compared with 93 percent in 1970), while textiles and garments accounted for 63 percent.

Related Topics:
Cinnamon - Tea - 19th century - 1977 - Socialist - Privatization - Rubber - Textiles - Telecommunications - Insurance - Banking - 1996 - 1970

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The GDP grew at an average annual rate of 5.5 percent during the early 1990s, until a drought and a deteriorating security situation lowered growth to 3.8 percent in 1996. The economy rebounded in 1997-2000, with average growth of 5.3 percent. 2001 saw the first economic contraction in the country's history, due to a combination of power shortages, budgetary problems, the global slowdown, and continuing civil strife. Signs of recovery appeared after the government and the LTTE signed the 2002 ceasefire. The Colombo stock exchange reported the highest growth in Asia for 2003, and today Sri Lanka has the highest per capita income in South Asia.

Related Topics:
GDP - 1990s - 1996 - 1997 - 2000 - 2001 - Continuing civil strife

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In April 2004, there was a sharp reversal in economic policy after the government headed by Ranil Wickremesinghe from the United National Party was defeated by a coalition made up of Sri Lanka Freedom Party and the left-nationalist Janatha Vimukthi Peramuna called the United People's Freedom Alliance.

Related Topics:
United National Party - Sri Lanka Freedom Party - Janatha Vimukthi Peramuna - United People's Freedom Alliance

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The new government stopped the privatization of state enterprises, reforms of state utilities such as power and petroleum and embarked on an unprecedented subsidy program. The main themes of what was called the Rata Perata economic program was to support the rural and suburban SMEs and limit the dependency of the country on imports.

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However a policy of directly subsidizing imported commodities like fuel, fertilizer and wheat, had the opposite effect. In 2004 alone Sri Lanka spent approximately US $ 180 mn on a fuel subsidy as fixing fuel prices was an election promise.

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To finance the expanded budget deficit arising from a range of subsidies and a public sector recruitment drive the government eventually had to print Rs 65 bn (US $ 65 mn) or around 3 percent of GDP. The expansionary fiscal policy, coupled with loose monetary policy eventually drove inflation up to 18% by January 2005, as measured by the Sri Lanka Consumer Price Index.

Related Topics:
Budget deficit - Monetary policy - Inflation

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By December 2004, the country was heading for a balance of payments crisis, as the currency depreciated and reserves dwindled. The December 26th Tsunami brought aidflows, and support from the IMF helped improve sentiment in the foreign exchange market.

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But GDP growth, which had climbed to 6.4% by the first quarter of 2004 had fallen to 4.8% by the first quarter of 2005.

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The tsunami helped stabilize the deterioration of macro-economic fundamentals as foreign debt relief and assistance from the International Monetary Fund strengthened both the external sector and fiscal operations.

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GDP growth in 2Q 2005 is expected to be higher, but inflation remains in double digits. Continued subsidies on oil (and thermal generated power) is beginning to put pressure on exchange rates again. Loose monetary policy has also been driving credit growth.

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The IMF in a report released in September 2005 has called for and end to 'fiscal domination' of monetary policy and more independance for the Central Bank so that inflation could be contained.

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The government is now seeking an international credit rating, with S & P, Moody's and Fitch Ratings being appointed to rate the country before the end of 2005.

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