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Sri Lanka - Economy (Notes)

ECONOMY Sri Lanka is a lower-middle income developing nation with a gross domestic product of about $25.8 billion. This translates into a per capita income of $1,355. 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 a quarter of the country's population of 19.8 million remains impoverished. Civil conflict, falling agricultural labor productivity, lack of income-earning opportunities for the rural population, 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 in 2006 was stable, despite a resumption of hostilities between the government and the LTTE and escalating oil prices. GDP growth in 2006 was a strong 7.4%. 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 have contributed to Sri Lanka's high public debt load (93% of GDP in 2006). 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. 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. As in previous years, the service sector was the largest component of GDP at 56.2%. In 2006, the service sector continued its strong expansion, fueled primarily by strong growth in telecom, trading, and financial services. Public administration and defense expenditures increased in 2006 due to resumption of hostilities, expansion of public sector employment, and the expenses associated with maintaining a 104-minister cabinet. There also is a growing information technology sector, especially information technology training and software development. The tourism sector suffered heavily in 2005 following the tsunami and is once again facing difficulties due to the current volatile security situation. Industry accounts for 27% of GDP. The textile, apparel, and leather products sector is the largest, accounting for 39% of total industrial output. The second-largest industrial sector, at 22% of total manufacturing output, is food, beverages, and tobacco. The third-largest industrial sector is chemical, petroleum, rubber, and plastic products. The construction sector accounted for 7.2% of GDP in 2006. Mining and quarrying accounts of 1.9% of GDP. Agriculture has lost its relative importance to the Sri Lankan economy in recent decades. It employs 33% of the working population, but accounted for only 16.8% of GDP in 2006. 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) were $6.8 billion and imports (mainly oil, textiles, food, and machinery) were $10.2 billion in 2006. The resulting large trade deficit was financed primarily by foreign assistance and by remittances from Sri Lankan expatriate workers. Sri Lanka must diversify its exports beyond garments and tea. Garment exports face increased competition following 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, were $2.1 billion in 2006, or 29% of total exports. For many years, the United States has been Sri Lanka's biggest market for garments, taking almost 60% of total garment exports. India is Sri Lanka's largest supplier, accounting for 21% of imports valued at $2.1 billion in 2006. The United States exported approximately $236 million to Sri Lanka in 2006 consisting primarily of textiles and specialized fabrics, tobacco, newsprint, food and beverages, chemicals, synthetic rubber-primary, electrical apparatus, telecommunications equipment, computers and accessories, and industrial supplies. Sri Lanka is highly dependent on foreign assistance, with the World Bank, the Asian Development Bank, Japan, and other donors disbursing loans totaling $912 million in 2006. Foreign grants amounted to $301 million in 2006. 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 and was placed at 6.5% in 2006. 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. More than 20% of the 7.5 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. Private sector workers are also agitating for a 'living wage' significantly higher than the current minimum wage.