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COMMONWEALTH HEADS OF GOVERNMENT MEETING
A middle-income economy
By Dr Saman Kelegama
Executive Director of the Institute of Policy Studies, Sri Lanka
I
Saman Kelegama
is the Executive Director
of the Institute of Policy
Studies of Sri Lanka.
He is a Fellow of the
National Academy of
Sciences of Sri Lanka
and is the immediate
past President of the
Sri Lanka Economic
Association. He has
published a number of
books on Sri Lankan and
South Asian economic
issues and published
extensively in both
local and international
journals. He serves and
has served on a number
of government and
private sector Boards as
an independent member.
An Economist by
training, he completed
his doctoral work at the
University of Oxford.
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n ancient times, Sri Lanka was a trade hub in the
Indian Ocean connecting the East and the West
– a port of call for Arab, Chinese, and Greek
traders. It was this strategic position, coupled
with prosperous economic conditions prevalent in
ancient Sri Lanka, which led to a number of European
invasions during the 16th, 17th and 18th centuries
(Portuguese, Dutch, and British).
Commercial plantation (tea, rubber, and coconut)
led development took place during the British
colonial period. The plantation crops were supported
by the construction of facilitating infrastructure
consisting of roads, railways, ports, and banking and
insurance services. Sri Lanka also benefitted from
the implementation of wide-ranging social welfare
programmes based on the British welfare state, and
achieved Universal Adult Franchise in 1931. The
British legacy also included a democratic parliamentary
system and a top-rate administrative and civil service
network. Consequently, Sri Lanka was deemed as
one of the most promising nations at the time of
independence in 1948,
Sri Lanka was an agro-based economy, with
plantation crops accounting for 90 per cent of all
exports in 1948. Sri Lanka’s economic growth during
the post-independence years was disturbed by a
number of internal and external shocks, including the
youth rebellions in 1971 and 1988/89; the war based
on Tamil separatism in the North/East between 1983
and 2009; and the devastating Tsunami in 2004. After
experimenting with closed and open economic models
of development from 1948 to 1977, Sri Lanka finally
settled for an open economy model after 1977, with the
degree of openness varying according to the political
regime in power. Today, Sri Lanka’s GDP amounts to
approximately US$59 billion, and its per capita income
is US$2,923 – the latter being the second highest in
South Asia.
Growth
Sri Lanka showed an average growth of 3.5 to 4 per
cent between 1948 and 1977, and an average growth
of 5 per cent during 1978-2009. With the North/East
conflict ending in mid-2009, Sri Lanka saw a rapid
economic take off, with growth averaging at 8 per cent
during 2010-2011. This growth was accompanied
by unemployment reducing to 4 per cent, inflation
FIRST
levelling at 6 per cent, and poverty reducing to 8 per
cent. While certain sectors of the Sri Lankan economy
showed promising signs, particularly services, major
growth was observed from sectors such as tourism and
construction; industries such as ready-made garments;
and remittances. These were noteworthy achievements,
particularly at a time when the global economy was
sluggish and recovery was slow.
Dynamic services sector
Tourism, IT services, and port services are three subsectors of the service sector that has shown rapid
growth in the post-war era.
Sri Lanka is imbued with rich bio-diversity – perhaps
one of the few tourist destinations where sandy beaches,
wild life sanctuaries, ancient historical cities, and cool
hill stations can be reached within a short three-hour
land journey. Tourist arrivals increased from 447,890
in 2009, to over 1 million in 2012. A number of new
tourist hotels are now under construction to meet with
the growth in tourism, which is expected reach 2.5
million arrivals by 2016.
IT exports from Sri Lanka, since its modest
beginnings in mid-2000, have grown rapidly over the
last four years to reach close to US$500 million at
present. It is well on its way to reaching US$1 billion
by 2016. This growth was supported by improvements
in the IT literacy rate in the country from about 9 per
cent in 2005, to 40 per cent by 2012.
The Colombo Port has been modernised with upto-date infrastructure to accommodate triple E-class
mega ships and can handle approximately 5.2 million
containers. This is complemented by a new port in
the Southern city of Hambantota, which is expected
to be further expanded in the near future. Income
from port services has increased significantly over
recent years.
The International Airport in Katunayaka has
been upgraded and is now being supported by an
additional airport in the Southern town of Mattala.
The Katunayaka International Airport is a key airport
between Dubai and Singapore, and with the growth in
tourism, an increasing number of transit passengers,
and the arrival of more international airlines, it is on
the path towards becoming a regional air hub.
The 2011 A.T. Kearney Global Services Location
Index placed Sri Lanka in 21st place, ahead of some
well-developed nations in the western world. The
government plans to create five services-related hubs
to continue to drive growth in the coming years.
Free trade agreements for the larger Asian market
Sri Lanka’s annual exports are slightly above US$10
billion, while the import bill is close to US$20 billion.
Exports are dominated by ready-made garments, tea,
rubber products, gems and jewellery, while imports
are dominated by intermediate items, such as crude
oil and refined petroleum (accounting for 25 per cent
of imports). Two main concerns dominate the export
sector; namely the inadequate product diversification
and the market concentration of exports mostly in the
US and EU.
Currently, Sri Lanka benefits from two regional
trading arrangements: the South Asia Free Trade
Agreement (SAFTA) and the Asia Pacific Trade
Agreement (APTA). However, Sri Lankan exports are
yet to gain more market access in regional markets, as
facilitated by these two agreements.
Sri Lanka has an FTA with India that has been in
operation since 2000. Sri Lankan exports to India
have increased from 1 per cent of its overall exports in
1999, to nearly 6 per cent in 2012. Sri Lanka also has
an FTA with Pakistan that has been in operation since
2005, which has increased the number of products
exported by Sri Lanka to Pakistan. Both these FTAs
have provided duty free access to 8,200 products
from Sri Lanka and have been more effective than the
regional trading arrangements. An FTA with China is
currently under negotiation and is expected to come
into operation in early 2014, while an FTA with Japan
is also being discussed.
Sri Lanka needs a boost from more Foreign Direct
Investment (FDI), which currently accounts for 1.3
per cent of the GDP. The Sri Lankan government is
offering a plethora of incentives to attract more FDI into
the country in order to promote overall investment, and
to the industrial sector in particular. With the existing
and proposed FTAs, Sri Lanka provides easy access to
the growing Asian markets for FDI.
Recent FDI sources include the Shangri-La and
ITC Hotel groups, Dabur food products, and Renuka
Sugar. Several foreign companies have also made
forays in to oil exploration during the last decade, as
the off-shore basins in North-Western Sri Lanka are
believed to have potential oil and gas reserves. The
Petroleum Resources Development Secretariat is
currently coordinating the oil exploration exercise in
these locations with a number of foreign companies.
One company in particular, has invested over US$20
million in to the exploration exercise. According to the
available reports, there is a good chance of extracting
oil in another two to three years.
Bridging the infrastructure deficit
Around the mid-2000s, 50 per cent of the nation’s
GDP was concentrated in the Western province, and
connectivity in the country was not up to standard.
A concerted effort was made during the post-2005
period to maintain capital expenditure of the budget at
6 per cent of GDP in order to improve the country’s
infrastructure. In addition to the earlier mentioned
ports, road connectivity, island-wide electrification,
urban development, etc, received high priority. Two
expressways have already made travel easier, over 90
per cent of the population has access to electricity, and
the middle class population has become beneficiaries of
better urban facilities.
The Northern and Eastern provinces are
experiencing targeted infrastructure development
drives under two specific government programmes,
with a special allocation of funds. Railways lines
and housing reconstruction is rapidly taking place
in the region, hand-in-hand with the resettlement
programmes.
With the infrastructure development activities
taking place in the country, Sri Lanka’s ‘Doing
Business’ indicators published by the World Bank, and
the ‘Competitiveness’ ranking by the World Economic
Forum, have shown improvements in recent years.
Challenges
While benefitting from high growth, the Sri Lankan
economy faces major challenges. The growth in recent
years, which was based on a debt-financed consumption
and investment drive, has resulted in some overheating
of the economy. This is reflected in the large external
current account deficit of 6.5 per cent of GDP, and in
the public debt per GDP rate hovering at around 80
per cent.
Stabilisation policies were thus put into operation in
2012 to address the growing current account imbalance
and related problems. However, Sri Lanka remains at
‘BB-’ sovereign credit rating by Fitch as there is a need
to combine these policies with structural adjustment
policies to address the issues relevant to the real sector
of the economy to enhance the level of exports. The
2013 Budget, which will be presented to Parliament
in the third week of November, will address some of
these challenges and announce new policy measures to
drive the economy forward. Although growth slowed
in 2012 to 6.4 per cent, the prospects for the economy
look promising.
The rising socio-economic prosperity in Sri Lanka,
if fostered skillfully and inclusively with progressive
public policies, has the potential to spur economic
dynamism, innovation and social progress, and place
the country on firmer ground as it makes a decisive
F
transition into a middle-income economy.
FIRST
Today, Sri
Lanka’s GDP
amounts to
approximately
US$59 billion,
and its per
capita income
is US$2,923
– the latter
being the
second
highest in
South Asia
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