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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