14 cooray

Annual Research Journal of SLSAJ (2011), Vol. 11, pp. 100 - 117

MACROECONOMIC PERFORMANCE OF SRI LANKA SINCE 2000 N. S. Cooray

Abstract The Economy of Sri Lanka had under gone immense hardship due to prolonged conflict.

Despite the damage caused by the quarter century conflict since 1983, the economy has performed quite well though far from fulfilling its potential. This paper attempts to examine the performance of the economy taking four major economic indicators which include: (a) Overall economic growth, (b) Price stability, (c) External sector performance, and (d) Fiscal operation, savings and investment since 2000. The paper provides some historical data also with a view to endeavor historical perspective. Based on the performances in the last decade it is possible for the country to achieve high growth potentials in the coming years if the current government implements a package of economic policies back by appropriate foreign policy to create a conducive and inclusive domestic climate in the minds of international and domestic community.

Key words: Development, economic performance, Sri Lanka

INTRODUCTION I am very pleased to be here with you and

Lanka has had a devastating impact on

honored to be invited to deliver this key

the economy and social fabric of the

note lecture on a topic relevant and close

country. All peace loving Sri Lankans

to many of us here today. Needless to

were

mention, the prolonged conflict in Sri

eradication

…………………………………………......

resplendent land in May 2009. Despite

Received 24 October 2011

the damage caused by the quarter century

Accepted 27 October 2011

conflict since 1983, the economy has

N. S. Cooray

performed quite well though far from

Associate Professor, IRP/IPSP Faculty,

fulfilling its potential. Currently, there is

International University of Japan, Japan

an absolute peace and a booming

cooray@iuj.ac.jp

economy in Sri Lanka.

100

jubilant of

over

the

terrorism

complete from

the

N. S. Cooray

“Mahinda

In my lecture today, I will focus on

Chintanaya”

(meaning

four major economic aspects to measure

Mahinda Vision), as it highlighted in its

the macroeconomic performance of the

parliamentary budget speeches, expects

Sri Lankan Economy since 2000. The

the economy to grow at an annual

four dimensions include: (a) Overall

average of between 8.5-9.5 per cent in the

economic growth, (b) Price stability, (c)

years to come (Central Bank of Sri Lanka,

External sector performance, and (d)

2011, p. 19).

Fiscal operation, savings and investment.

The

last

decade

(covering

Even though my main focus will be on

2000-2009 period) recorded 5.0 per cent

the first decade of the 21st century, I will

growth showing a small decline from the

provide some historical data with a view

growth rate of 5.3 in the nineties. The

to endeavor historical perspective.

growth rates remained consistent and unchanged at about 4 per cent in the

OVERALL ECONOMIC GROWTH

1960s, 1970s, and 1980s while the lowest

Economists believe that economic growth

growth rate of 3.4 per cent was recorded

is the most vital indicator to measure the

in the 1950s (Table 1). The introduction

performance

Sri

of neo-liberal policies in 1977 aimed to

Lanka’s US$50 billion economy grew by

accelerate long-run growth; “contrary to

8 per cent in the first half of 2011 with

expectation” it did not facilitate high

growth estimated to be around 8.5 per

growth performance in the following

cent for the whole year. In 2010, the

decade

economy recorded a remarkable growth

(Sarvananthan, 2005, p. 25). It is worth

of 8.0 per cent, the highest annual rate of

mentioning that the last decade’s growth

growth recorded in the last three decades.

rate would have been higher at 5.7 than

This number exceeds by far the average

5.0 per cent without the negative growth

annual growth of 4.9 per cent recorded

of 1.5 per cent recorded in 2001. This

since the introduction of liberal economic

negative growth was caused by several

policies in 1977. Prior to 2010, the

such factors as the political unrest that

country has recorded higher economic

prevailed in the country (particularly the

growth of 8.2 per cent in 1968 and 1978.

terrorist

The

international airport), prolonged drought

current

of

any

economy.

government

under

the

101

(Lakshman,

attack

at

2010,

the

p.

338)

Katunayaka

Macroeconomic performance of Sri Lanka since 2000

and subsequent power cuts, the terrorist

unfavourable commodity and oil prices

attack on World Trade Centre and

that began in 2007 and the global

subsequent global recession. Having

financial crisis from September 2008

recovered in 2002 from the negative

(Institute of Policy Studies of Sri Lanka

growth in the previous year, the economy

(IPS), 2010, p. 9). A pattern of increased

continued to grow gradually reaching 7.7

growth was exhibited in the second half

per cent growth in 2007. However,

of the last decade implying that the

situation changed since then due to

country is heading into a high growth era.

Table 1: Doubling Per Capita Income, 1960-2014 Year

1960

1975

1991

2004

2008

2011

2012

2013

2014

Per Capita Income

142

281

547

1,062

2,014

2,794

3,200

3,660

4,190

-

15

16

13

4

-

-

-

-

in US$ No. of Years to Double (approximately)

Source: (Central Bank of Sri Lanka, 2011, p. 31), Note: Data from 2011 onward are projected values As a result of relatively better

However, according to the World Bank

economic performance in recent years the

classification

per capita income, in nominal terms, has

categorized as a low middle income

increased from Rs. 68,102 (US$899) in

country1. As growth potentials improved

2000 to Rs. 271,259 (US$ 2,399) in 2010.

since 2009, government expects the per

The per capita income was Rs. 397

capita income to double by 2015 (Table

(US$120) in 1948.

1).

Moreover, “Sri

Sri

Lanka

is

still

Lanka was upgraded to middle-income status on the list of Poverty Reduction

1

and Growth Trust (PRGT) eligible

groups are as follows; low income (less

countries, in January 2010 by the

than US dollars 995); low-middle income

International

(IMF)

(US dollars 996 - 3,945); upper-middle

(Central Bank of Sri Lanka, 2011, p. 3).

income (US dollars 3,946 - 12,195); and

Monetary

Fund

The World Bank classification of income

high income (US dollars 12,196 or more).

102

N. S. Cooray

The sluggish or stagnant growth,

It is important to examine the

coupled with the deterioration in the

sectoral shares and contributions to the

country’s security situation after 1983,

growth of GDP, as it provides insight on

aggravated some problems and delayed

the relative importance of the three

the country’s take-off. In the absence of

sectors

prolonged war, Sri Lanka would have

services) of the economy. There has been

achieved a higher growth and higher

a structural transformation of the Sri

living standards. Since the independence

Lankan economy over the last six

in 1948, the economy grew at an average

decades and the sectoral contributions to

annual rate of 4.4 per cent with

total GDP have also shifted reflecting this

commendable achievements in the social

structural change. In 2010, the growth

sector (Lakshman & Tisdell, 2000, p.

contribution of the agriculture (with a

5)(Alailima, 2000, p. 41). This growth

share of 11.9 per cent of GDP), industry

rate was higher than that of all South

(with a share of 28.7 per cent of GDP),

Asian neighbours with the exception of

and services (with a share of 59.3 per

Pakistan. However, it was lower than that

cent of GDP) account for 10.5 per cent,

of many East Asian and Southeast Asian

30.1 per cent, and 59.4 per cent,

countries. In 1960, Sri Lanka’s Human

respectively. The data relating to sectoral

Development Index (HDI) was only

growth rates reveal that the service and

lower than that of Japan and Singapore.

industrial sectors have sustained an

Despite the civil conflict, HDI has

upward trend over the decades while

improved further in the last decades. For

growth in agricultural sector experienced

example it increased by 0.8 per cent

a lower growth which implied a lower

annually from 0.513 in 1980 to 0.658 in

productivity (Table 2). It is worth

2010, which positioned the country in a

mentioning that the shares of services and

rank of 91 out of 169 countries with

industry exceeded that of agriculture in

comparable data. The HDI of South Asia

1957 and 1993 respectively, showing

as a region rose from 0.315 in 1980 to

great transformation of the economy.

0.516 in 2010, placing Sri Lanka above

Prior to 1993, the share of industrial

the regional average.

sector exceeded the share of agriculture

(agriculture,

industry

and

temporarily for few years but sustained

103

Macroeconomic performance of Sri Lanka since 2000

increased of industrial sector occurred in

an insignificant role in the economy or

1993. A drop in both share of and

livelihood of many citizens of the

contribution to growth by agriculture

country.

does not mean at all that the sector plays

Table 2: Annual average GDP growth and sectoral shares, 1950-2010 (%) Sectoral Share and (growth) GDP (Constant

GDP

Rs. Millions)

Growth

Period 1950 - 1959

Agriculture

Industry

Services

3.1

38.8

17.3

43.8

1960 - 1969

319,020

4.7

36.17 (4)

17.24 (6)

46.61 (4)

1970 - 1979

487,304

3.9

28.97 (3)

26.08 (4)

44.95 (5)

1980 - 1989

782,999

4.3

27.24 (2)

27.02 (4)

45.74 (5)

1990 - 1999

1,220,602

5.2

23.65 (3)

26.36 (7)

50.0 (6)

2000 - 2009

1,944,844

5.0

14.71 (3)

28.72 (5)

56.54 (6)

2000

1,598,348

6.0

19.9 (2)

27.3 (8)

52.8 (7)

2001

1,573,647

-1.5

20.1 (-3)

26.8 (-2)

53.1 (-1)

2002

1,636,037

4.0

20.5 (3)

26.3 (1)

53.2 (6)

2003

1,733,222

5.9

13.2 (2)

28.4 (5)

58.3 (8)

2004

1,827,597

5.4

12.5 (0)

28.6 (5)

58.8 (7)

2005

1,941,671

6.2

11.8 (2)

30.2 (8)

58 (6)

2006

2,090,548

7.7

11.3 (6)

30.6 (8)

58 (8)

2007

2,232,656

6.8

11.7 (3)

29.9 (8)

58.4 (7)

2008

2,365,500

6.0

13.4 (8)

29.4 (6)

57.2 (6)

2009

2,449,214

3.5

12.7 (3)

29.7 (4)

57.6 (3)

2010

2,645,432

8.0

12.8 (5)

29.4 (0)

57.8 (12)

Source: Compiled by the author using the data from the Central Bank of Sri Lanka, Annual Report 2011.

Notes: (a) GDP growth for the 1950s accounts to period of 1951 to 1959 (b) The values for GDP constant are taken from the World Development Indicators, World Development Bank.

104

N. S. Cooray

The growth can be explained by

many financial crises. The inflation

investment or gross capital formation of

variability is a good indicator to measure

the country. The GDP percentage share

the

of investment for the last decade was

maintenance of price stability (or low

25.3 which illustrates little improvement

inflation) of a country is regarded as one

from 24.9 for the nineties. However, the

of the main macroeconomic policy

last year’s investment share of 27.8 is a

objectives of the Central Bank of Sri

remarkable improvement made after the

Lanka, as inflation is costly and hinders

military victory. The investment climate

the country’s high growth potential. It is

has improved due to the prevailing peace

true that with regards to high inflation

in the country and one can expect an

there has been a debate on the growth

increasing investment trend and higher

implications of inflation (Nicholas, 2008,

growth prospects in the coming years.

p. 163). However this debate has been

macroeconomic

stability.

The

based on ideological predilections and circumstantial evidence.

PRICE STABILITY Macroeconomic stability is a necessary

In

Sri

Lanka,

there

are

four

condition for high economic growth.

indicators to measure the price stability,

Inflation

stable

namely, Colombo Consumer Price Index

creating

(CCPI), Greater Colombo Consumer

uncertainty in an economy. There are two

Price Index (GCPI), Wholesale Price

main channels through which uncertainty

Index (WPI) and the Implicit Gross

weakens

macroeconomic

a

environment

can affect growth (Fischer, 1993, p. 488)

Domestic Product Deflator (GDPD). Data

(Bruno & Easterly, 1998, p. 3) (Little,

pertaining to these four indexes are given

Cooper, Corden, & Rajapatirana, 1993).

First,

an

unstable

in Table 3, together with some other

macroeconomic

related data. Officially the CCPI is used

environment reduces the efficiency of the

as the indicator of inflation while the

price mechanism. Second, uncertainty

GDPD, which is implicit in national

reduces the rate of investment as

accounts statistics and has the widest

investors are reluctant to invest at times of

elevated

risk.

coverage, is also used as an alternative

Macroeconomic

instability in the domestic economy also

indicator. The WPI is used as a measure

leads to capital flights as seen during

of price movements in the primary market. The estimation of GCPI started in

105

Macroeconomic performance of Sri Lanka since 2000

The rate of inflation in Sri Lanka

1989 by the Central Bank of Sri Lanka with

the

objective

of

having

was lower than that of many developing

a

countries during the period from 1948 to

comprehensive consumer price indicator.

The price indicators including the

1966. However, the country experienced

CCPI (1952=100), which represents the

moderately high inflation for the period

consumption basket of low income

from 1967 to 1976. With the introduction

households in the Colombo Municipality,

of open economic policies in 1977, this

the WPI (1974=100), which represents

moderate trend was changed to 12.5 per

price behavior of whole sale market, and

cent rate of inflation for the period from

the GDPD (1996=100), recorded as high

1977 to 1996. The highest inflation rate

as 10.8, 10.8, and 11.9 per cent,

recorded so far was 26.1 per cent in 1980.

respectively. Again the rate of inflation,

Inflation in Sri Lanka from the 1950s

based on the above three indicators and

until 1977 was lower than that of some

the new CCPI (which represents urban

industrialized countries, a number of

households within the Colombo district),

developing countries, and every other

increased to double digit levels during the

South Asian country. However, with the

period 2005-2008 (Table 3). However,

introduction of open economic policies in

inflation remained at a lower rate of 3.4

1977, this lower trend was reversed.

per cent in 2009 and 5.9 per cent in 2010.

Inflation rates of 0.7 per cent in the 1950s,

The relatively lower and stable inflation

and 2.2 per cent in the 1960s were the

during the last two years, in contrast to

lowest among all the decades and perhaps

the double-digit inflation for the period of

lower than that of many developing

2005-2008, was very commendable. The

countries. The country managed to

low rate of inflation was “mainly due to

maintain

improved domestic supply conditions,

single-digit

supportive fiscal policies aided by the

decades with even negatives rate of

adjustment

and

inflation for some years. However, the

to administered

country experienced a moderately high

prices as well as the prudent monetary

inflation of 6.9 per cent (still at

policy stance of the Central Bank�

single-digit level) in the 1970s. With the

(Central Bank of Sri Lanka, 2011, p. 7).

introduction of open economic policies in

downward

in

import

revisions

duties

106

the

inflation

level

during

figure these

at two

N. S. Cooray

1977, this moderate trend has changed

while the whole decade of 1980 recorded

since then. The highest inflation rate

the highest rate of 12.8 per cent.

recorded so far was 26.1 per cent in 1980

Table 3: Price behavior of Sri Lanka, 1950 - 2010 (annual average) Annual Average Price Change Period

CCPI

CCPI

WPI

(1952=100)

(2002=100)

(1974=100)

GDPD (1996=100) 1950 - 59

0.7

1960 - 69

2.2

1970 - 79

6.9

11.6

11.9

1980 - 89

12.8

12.9

11.5

1990 - 99

11.3

9.5

10.2

2000 - 09

10.8

10.8

9.9

2000

6.2

1.7

6.7

2001

14.2

11.7

12.4

2002

9.6

10.7

8.4

2003

6.3

3.1

5.1

2004

7.6

9.0

12.5

8.8

2005

11.6

11.0

11.5

10.4

2006

13.7

10.0

11.7

11.3

2007

17.5

15.8

24.4

14.0

2008

22.6

24.9

16.3

2009

3.4

-4.2

5.9

2010

5.9

11.2

7.3

Source: Compiled by the author using the data from the Central Bank of Sri Lanka, Annual Report 2010

Several external and internal factors

The determinants of inflation in Sri

contributed to surging inflation in the last

Lanka

decade. The magnitude of the influence

categories, i.e. (1) structural factors, (2)

of these factors varies in different years.

policy changes, and (3) external shocks

107

can

be

divided

into

three

Macroeconomic performance of Sri Lanka since 2000

(Karunaratne & Bandara, 2000, p. 209).

measuring

The rapid increase in money supply due

transactions in the current account include

to heavy government reliance on the

receipts and payments for the country's

Central Bank for deficit financing, huge

exports and imports of goods and

government expenditure on war and other

services, income, and private and official

infrastructure

financial transfers.

projects,

import

price

the

performance.

The

increases, coupled with the continuing

In Sri Lanka, both the exports and

depreciation of the Sri Lankan Rupee

imports as a per cent of GDP have gone

caused significant inflation (Lakshman

down to 25.8 and 35.9 in the last decades

and Nicholas 1991).

from 27.7 and 37.7 in the nineties, respectively. The decline in exports and

EXTERNAL

imports were of quite similar magnitudes

SECTOR

PERFORMANCE

and therefore resulted in no major

The Balance of Payments account (BOP)

difference in the trade balance. The trade

summarizes a country’s transactions with

balance in the last decade was -10.1 per

the rest of the world. One can assess the

cent of GDP while it was -10.0 in the

performance of the external sector of a

nineties. Double-digit negative trade

country by examining the behavioral

balance was recorded for most of the

patterns and the magnitude of the

recent years since 2004. However, the

components or individual accounts of the

current

BOP. The BOP has three components:

improvements registering -3.5 per cent of

The Current Account, the Capital Account

GDP in the last decade compared with

and the Monetary Sector or Official

-4.8 in the previous decade due to

Settlements. The current account balance

increased inflow of foreign remittances.

and the capital account balance should

The second half of the recent decade

normally

to

remarked an undesirable situation in the

inaccuracies in data collection and

both trade and current account balances.

processing they tend to differ. For this

Deficit in the current account balance

reason, the account shows a statistical

shows relatively low against the trade

discrepancy. Among the three, the current

balance mainly because of transfers, of

account of the BOP is what matters in

which worker remittance constitutes the

be

equal,

but

due

108

account

balance

showed

N. S. Cooray

major

share.

Because

of

peaceful

responsible for the high ratio of total

situation after the war, the inflow of

trade to GDP which indicated a high

remittances increased and the upward

degree of openness during that time.

trend may further continue in the years to

However, in response to the deterioration

come.

of terms of trade and an unfavourable

There was a surplus in the current

trend in imports, an economic policy

and trade account balances at the time of

regime

which

independence. The trade balance was

substitution

favourable with a surplus of 3.2 per cent

introduced in the late 1950s. As a

of GDP for the 1948-56 period and,

consequence the period from 1960 to

excluding 1977, has been at a deficit ever

1977, except

since. The positive balance in 1977 was a

liberalization in the late 1960s, was

remarkable achievement, after a long

characterized by an inward looking trade

period of deficits. In the face of open

regime. This resulted in a declining trend

economic policies, the deficit widened

in the share of trade which reached 37.7

continuously and reached double digit in

per cent of GDP and 0.07 of world trade

the 1980s, 1990s, and during the last

in 1977. The lowest trade share was

decade. The highest deficit of 24.5 was

recorded in the 1970s. The economic

recorded in 1980. The overall balance

policy

behaved unfavorably, going down to 0.9

marked the beginning of a new phase

per cent of GDP in the last decade while

which emphasized the export promotion

the figure for the nineties was 1.5 per

industrialization strategy.

reforms

emphasized

import

industrialization

the

phase of

introduced

in

was

partial

1977

Gross official external assets in 2010

cent (Table 4).

In the last decade, the total trade

and 2009 were sufficient to finance 7.7

(exports and imports) as a per cent of

and 8.3 months of imports, respectively.

GDP has gone down to 61.7 from 65.4 in

External assets in 1948-49 were enough

the nineties. In 1950, the total trade was

to pay for almost one year of imports.

about 70.6 per cent and the total trade as

Since the tea boom of 1954-55, these favourable trends have gradually been

a percentage of the world trade was about

reversed. External debt shows remarkable

0.49 per cent. The open trade regime that

improvements in recent years. External

prevailed in the 1950s was partly

109

Macroeconomic performance of Sri Lanka since 2000

debt as a per cent of GDP declined to

Lanka’s foreign debt has increased

41.1 in the last decade from 50.6 per cent

rapidly since 1977, climbing to 73.6 per

of GDP in the nineties. However, the debt

cent of GDP in 1989 from 3.2 per cent in

service ratio shows no improvements

1950. However, it declined to 36.1 in

despite improvements in the total external

2010. The following table shows selected

debt. Because of a heavy investment

components of Sri Lanka’s BOP for the

programme that was financed mainly by

period of 1950-2010.

foreign aid and commercial credit, Sri

Table 4: Balance of payments accounts, 1950-2010 (% of GDP)

Period

Trade

Current Account

Imports

Exports

Balance

Balance

Overall Balance

1950-59

30.5

27.6

-2.9

-0.4

-0.3

1960-69

24.8

21.9

-2.9

-2.7

-0.9

1970-79

21.7

17.7

-4.0

-2.0

2.2

1980-89

36.4

22.2

-14.3

-7.7

-0.6

1990-99

37.7

27.7

-10.0

-4.8

1.5

2000-09

35.9

25.8

-10.1

-3.5

0.9

1950-2010

31.2

23.0

-8.2

-3.5

0.5

2000

44.1

33.3

-10.8

-6.4

-3.1

2001

37.9

30.6

-7.3

-1.4

1.4

2002

36.9

28.4

-8.5

-1.4

2.0

2003

35.3

27.2

-8.1

-0.4

2.7

2004

38.7

27.9

-10.9

-3.1

-1.0

2005

36.3

26.0

-10.3

-2.7

2.1

2006

36.3

24.3

-11.9

-5.3

0.7

2007

34.9

23.6

-11.3

-4.3

1.6

2008

34.6

19.9

-14.7

-9.5

-3.4

2009

24.3

16.8

-7.4

-0.5

6.5

2010

27.3

16.8

-10.5

-2.9

1.9

Source: Compiled by the author using the data from the Central Bank of Sri Lanka, Annual Report 2011.

110

N. S. Cooray

Notes: Exports and imports for the 1950s is only for 1959 FISCAL OPERATIONS, SAVINGS

heavy investment on the accelerated

AND INVESTMENT

Mahaveli Project. The budget deficit

The performance of government fiscal

reached its peak of 19.2 per cent in 1980

operations can be measured by looking at

and the second highest of 12.7 per cent

the

the

recorded in 1989 and by July 1989, the

components of overall fiscal operations

size of the deficit signalled the need to

such as revenue, expenditure, deficit, or

introduce

surplus of the government budget. In

programme.

2010, the budget deficit decreased to 7.9

stabilization programme had, as its major

per cent from 9.9 per cent deficit

objective, the reduction of the deficit.

recorded for 2009. This is in contrast to

Consequently, the deficit fell to single

the stringent deficit target of 5 per cent

digit level since then except for 2001. As

by 2011 set forth by the government in

discussed earlier, the economic situation

order

successive

of the country in 2001 was quite especial

instalments of an IMF loan (Institute of

as GDP recorded a negative growth of

Policy Studies of Sri Lanka (IPS), 2010,

1.5 per cent due to a prolonged drought

p. 15). The average figure of 8.1 per cent

and

for 2000-09 is bit higher than 7.9 and 7.2

conditions created by the terrorist attack

recorded for the 1990s and 1950-2010,

on the World Trade Centre. The effort

respectively. The government, however,

towards deficit reduction became the

has managed to keep the budget deficit at

most evident it had been since the

single digit levels for the last two decades,

beginning of the privatisation process in

except 10.4 recorded in 2001, despite

1991.

behavioural

to

patterns

qualify it

for

of

heavy expenditure on defence which

a

strong The

unfavourable

stabilization

resulting

global

July

economic

Government revenue, both the tax

escalated since 1983 (Table 5).

and non-tax, was 14.9 per cent of GDP in

The average annual budget deficit

2010,

the

lowest

recorded

since

for the period 1950-2010 (with grants)

independence in 1948. Moreover, the

was 7.2 per cent of GDP. Since 1978 up

revenue for the last decade was 16.3 per

until 1983, the budget deficit reached an

cent. This shows a drastic change and

unsustainable two digit level due to

again was the lowest among all the

111

Macroeconomic performance of Sri Lanka since 2000

decades since independence. The revenue

defense. The expenditure rose from an

of 14.9 per cent in the last year marks a

average of 24.6 per cent in the 1950s to

drastic and persistent decline from the

an average of 34.0 per cent in the 1980’s

rate of 17.2 recorded in 2000. As shown

(Table 5). Nearly 6.4 per cent of current

revenue

expenditure is allocated for personal

exhibited no significant compositional

emoluments and pension payments to

changes since independence up until the

government

beginning of the 1990s. One of the most

payments on government debt have also

significant changes in the tax structure

been a major reason for the high

has

from

expenditure that accounted for 6 per cent

international trade-oriented taxes towards

in 1996. The share of interest payments

domestic

enhanced

to GDP was 0.6 per cent for the period of

significance of this source of taxation is

1948-53 and 6.0 per cent for the period of

attributed

of

1991-96. By 1997, this figure had

commodities for turnover tax and the

increased to 6.2 per cent of GDP.

impact

Transfer payments and subsidies, a

in

the

government

table,

been

a

structural

taxes.

to

of

a

shift

The

reclassification

defense

levy.

Another

employees.

of

goods

Interest

significant change in the tax base is the

subgroup

and

services

declining trend in the taxes on external

expenditures, decreased in line with the

trade which reflects the impact of the

government adjustment policy stance of

elimination of export taxes and gradual

eliminating all subsidies. The Capital

reduction of import duties. Non tax

expenditure which was about 15.8 per

revenue has remained unchanged for the

cent of GDP for the period of 1978-87

period of last 60-year.

declined to 8.4 per cent for the period of

On the expenditure side, total

1988-96. It was only 3.1 per cent in 1997.

expenditure declined to 22.9 per cent of

This decline was entirely due to the

GDP in 2010 from 24.9 in 2009. The

massive reduction in capital expenditure

figure of 24.4 per cent recorded for the

on

last decade is the lowest among all the

expenditure

decades since 1950. A sustained decline

enterprises may decrease further because

showed in the last three decades,

of ongoing privatization and stabilization

notwithstanding the heavy expenditure on

programmes.

112

public

enterprises.

The

capital

incurred

by

public

N. S. Cooray

Table 5: Government Fiscal operations, savings and investment and debt, 1950-2010 (% of GDP) Revenu

Expend

Overall

Inves

Savin

I&S

Domest

Foreign

Total

e

iture

Deficit

tment

gs

Gap

ic Debt

Debt

Debt

Period 1950 1959

21.7

24.6

-2.9

12.1

13.4

-1.3

19.4

4.4

23.8

22.1

28.1

-6.0

15.3

12.0

3.3

42.9

9.8

52.6

22.1

29.3

-7.1

17.5

13.2

4.3

43.3

21.3

64.5

22.7

34.0

-11.3

26.2

15.5

10.7

41.6

44.2

85.8

20.7

28.6

-7.9

24.9

19.6

5.3

43.6

50.6

94.3

2009

16.3

24.4

-8.1

25.3

21.6

3.8

53.1

41.1

94.2

1950-2010

20.8

28.1

-7.2

20.3

16.5

3.8

40.7

28.7

69.4

2000

17.2

26.7

-9.5

28.0

21.5

6.5

53.8

43.1

96.9

2001

17.0

27.5

-10.4

22.0

20.3

1.7

58.0

45.3

103.3

2002

17.0

25.4

-8.5

21.2

19.5

1.7

60.0

45.6

105.6

2003

15.6

22.9

-7.3

22.0

21.5

0.5

56.0

46.3

102.3

2004

15.3

22.8

-7.5

25.3

22.0

3.3

54.7

47.6

102.3

2005

16.8

23.8

-7.0

26.8

23.8

3.0

51.6

39.0

90.6

2006

17.3

24.3

-7.0

28.0

22.3

5.7

50.4

37.5

87.9

2007

16.6

23.5

-6.9

28.0

23.3

4.7

47.9

37.1

85.0

2008

15.6

22.6

-7.0

27.6

17.8

9.8

48.6

32.8

81.4

2009

15.0

24.9

-9.9

24.4

23.7

0.7

49.7

36.5

86.2

2010

14.9

22.9

-7.9

27.8

24.7

3.1

45.8

36.1

81.9

1960 1969 1970 1979 1980 1989 1990 1999 2000 -

Source: Compiled by the author using the data from the Central Bank of Sri Lanka, Annual Report 2010

113

Macroeconomic performance of Sri Lanka since 2000

leading

Investment increased to 25.3 per

to

larger

accumulation

of

government debt.

cent of GDP in the last decade from 24.9 in the 1990s. Investment as a percentage of GDP in 2010 increased to 27.8 per

CONCLUDING REMARKS

cent from 24.4 per cent in 2009. The

Sri Lanka is aiming to be a “Wonder of

recovery

Asia� achieving high economic growth

resulted

in

widening

the

and development in the coming years.

national savings and investment gap to

The structural change of the service

3.1 per cent of GDP (Central Bank of Sri

sector of the economy has positive

Lanka, 2011, p. 7). There was a huge

indications and promising aspirations to

savings and investment gap of 10.7 per

help the country to achieve its develop

cent in the 1980s and this gap declined to

targets (Ministry of Finance and Planning,

5.3 per cent in the 1990s and to 3.8 in the

2010, p. 26). Plans are already underway

last decade. Even though the national

to create five hubs in (a) naval and

savings ratio did show an improvement

logistics, (b) knowledge, (c) aviation, (d)

over the last six decades mainly due to

commercial, and (e) energy. All these

the decline in consumption, lack of

hubs reinforce further expansion of the

export

revenue

service sector industries. Even though the

from

growth contribution of agricultural sector

generating the relatively higher savings

to overall growth is falling, this sector

and capital formation for growth-related

needs to be properly developed and

activities.

modernized using up to date technology,

earnings

prevented

Given

and

the

other

government

the

twin

taking indigenous-traditional wisdom and

gaps,

investment-savings and import-exports, it

cultural

factors

into

consideration.

is quite difficult for the country to expand

Agriculture still provides food security

investment unless the inflow of Foreign

and livelihood to many citizens of the

Direct Investment (FDI) increases. The

country.

future outlook for FDI looks favourable

With hard earned peace since May

due to the prevailing peaceful situation.

2009, Sri Lanka has the potential to

In the absence of FDI inflow, the above

achieve its developmental targets if the

mentioned gaps have to be financed

ruling

through domestic and foreign borrowings

implements

government appropriate

makes foreign

and and

economic policies targeting the long-run

114

N. S. Cooray

interest of the country without aiming at

ranked number 183, the worst performing

only

gains.

country in the Ease of Doing Business.

Infrastructure development which is a

This index measures the regulatory

precondition

is

environment is more conducive to the

improving very fast with many more

starting and operation of a local firm. It is

projects coming up. As domestic savings

worth

alone is insufficient to cater to the huge

assessment which says “Sri Lanka’s

short-run

for

political

high

growth

investment needs, it is vitally important

noting

Heritage

Foundation’s

economic freedom score is 57.1, making

to attract foreign direct investment (FDI)

its economy the 107th freest in the 2011

for project financing. As data reveals

Index. Its score is 2.5 points higher than

government saving is negative, private

last year, reflecting major gains in trade,

saving is also low and trade balance and

monetary, and investment freedom. Sri

current accounts record negative balances.

Lanka is ranked 19th out of 41 countries

In these circumstances, the country has

in the Asia–Pacific region, and its score

only a few alternatives, such as getting more of FDI, foreign aid, and borrowing.

improvement is one of the 10 largest in the

Excessive commercial borrowings will

2011 Index 2 . Sri Lanka was in the

lead to unsustainable debt and therefore

moderate range (60-70) and also above

are far from being a plausible and

world average from 1995 to 2005. While

attractive way of development finance.

commending the recent development in

Attracting more FDI and aid needs an

the economic freedom index, according to

encouraging domestic investment climate

the same source “Sri Lanka’s economy is

which is going beyond only economics.

characterized

Building more conducive domestic

ongoing

by

political

poor

governance,

instability

that

climate in the minds of international

undermines credible reform progress, and

community

heavy reliance on foreign assistance.

needs

effort

by

the

government, private sector, and civil society groups of the country. Sri Lanka

2

is ranked 102 out of 183 economies in the

For

details

Foundation

world and ranked 3rd (next Pakistan and

see

World

Heritage

web

http://www.heritage.org/index/ranking.

Maldives) in South Asian. Singapore is

Accessed date, 23 October 2011

the top ranked economy while Chad was

115

at

Macroeconomic performance of Sri Lanka since 2000

Overall, weak reform efforts have failed

Journal of Monetary Economics , 32,

to

485-512.

stimulate

broad-based

economic

growth. The heavy presence of the state

5. Institute of Policy Studies of Sri Lanka

in the economy continues to hamper

(IPS). (2010). Growth and Stability in

private-sector development�. In terms of

Post-conflict Economic Recovery. In

corruption Sri Lankan was ranked better

Sri Lanka: State of the Economy 2010.

Colombo, Sri Lanka: Institute of Policy

and was above world average until 2004.

Currently,

however

corruption

Studies.

is

6. Karunaratne, N. D., & Bandara, Y.

perceived as widespread. The country

(2000). Inflation in Post-independence

needs to maintain the rule of law and

Sri Lanka. In W. D. Lakshman, & C. A.

other elements of social stability as these factors

affect

decisions

of

Tisdell, Sri Lanka's Development Since

both

Independence:

international and domestic investors.

Socio-Economic

Perpectives and Anlayses (pp. 210-223).

Huntington, New York: Nova Science

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