Economy

Economic History

In the 19th and 20th centuries, Sri Lanka became a plantation economy, famous for its production and export of cinnamon, rubber and Ceylon tea, which remains a trademark national export. The development of modern ports under British rule raised the strategic importance of the island as a centre of trade. During World War II, the island hosted important military installations and Allied forces. However, the plantation economy aggravated poverty and economic inequality. From 1948 to 1977, socialism strongly influenced the government's economic policies. Colonial plantations were dismantled, industries were nationalised and a welfare state established. While the standard of living and literacy improved significantly, the nation's economy suffered from inefficiency, slow growth and lack of foreign investment.

From 1977 the UNP government began incorporating privatisation, deregulation and promotion of private enterprise. While the production and export of tea, rubber, coffee, sugar and other agricultural commodities remains important, the nation has moved steadily towards an industrialised economy with the development of food processing, textiles, telecommunications and finance. By 1996 plantation crops made up only 20% of export, and further declined to 16.8% in 2005 (compared with 93% in 1970), while textiles and garments have reached 63%. The GDP grew at an average annual rate of 5.5% during the early 1990s, until a drought and a deteriorating security situation lowered growth to 3.8% in 1996. The economy rebounded in 1997-2000, with average growth of 5.3%.

Modern Economy

The year of 2001 saw the first economic contraction in the country's history, as a result of power shortages, budgetary problems, the global slowdown and continuing civil strife. Signs of recovery appeared after the 2002 ceasefire. The Colombo Stock Exchange reported the highest growth in the world for 2003, and today Sri Lanka has the highest per capita income in South Asia.

In April 2004, there was a sharp reversal in economic policy after the government headed by Ranil Wickremesinghe of the United National Party was defeated by a coalition made up of Sri Lanka Freedom Party and the leftist-nationalist Janatha Vimukthi Peramuna called the United People's Freedom Alliance. The new government stopped the privatisation of state enterprises and reforms of state utilities such as power and petroleum, and embarked on a subsidy program called the Rata Perata economic program. Its main theme was to support the rural and suburban SMEs and protect the domestic economy from external influences, such as oil prices, the World Bank and the International Monetary Fund. However, this policy of subsidising imported commodities such as fuel, fertiliser and wheat soon took its toll on the fiscal sector. In 2004 alone Sri Lanka spent approximately US$ 180 million on a fuel subsidy, as fixing fuel prices had been an election promise. 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 billion (US$ 650 million) or around 3% 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.

Labour

More than 20% of the 6.1 million-strong labour 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 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.

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; US exports amounted to $218 million in 2002, according to Central Bank trade data - US Customs data places US exports to Sri Lanka at $166 million in 2002. Wheat accounted for 14% of US exports to Sri Lanka in 2002, down from the previous year.

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 totalled $4.5 billion.