SRI LANKA

Democratic Socialist Republic of Sri Lanka

Sri Lanka Prajathanthrika Samajavadi

Janarajaya

COUNTRY OVERVIEW

LOCATION AND SIZE.

Sri Lanka is an island nation-state in the Indian Ocean. It is located 880 kilometers (547 miles) north of the equator, off the southern tip of India, and has a maximum length of 432 kilometers (268 miles) and a maximum width of 224 kilometers (139 miles). The island has an area of 65,610 square kilometers (25,332 square miles) and a total coastline of 1,700 kilometers (1,056 miles). Sri Lanka is slightly larger than West Virginia. Its capital, Colombo, lies on the country's western coast.

POPULATION.

Sri Lanka's population was estimated at 19.24 million in 2000, indicating growth of 11.5 percent compared with the 1991 population of 17.25 million. Sri Lanka has the slowest-growing population in southern Asia—estimated at 0.9 percent yearly—and its population is projected to increase to 23.55 million by the year 2025. The density of Sri Lanka's population is fairly high, at 280 persons per square kilometer (725 per square mile). In 2000 the birth rate was estimated at 16.8 per 1,000 people and the death rate at 6.4 per 1,000 people. The majority of Sri Lanka's people live in the rural sector (67 percent), in urban areas (22 percent), and on plantation estates (11 percent). The infant mortality rate (16.5 per 1,000) and overall death rate are low for a developing country, and the average life expectancy (69 years for men and 73 years for women) is the highest in southern Asia. The low fertility rate and high life expectancy has led to a larger increase in the older population than the younger population. It took most western countries 45 to 135 years for their elderly population to double, while in Sri Lanka this process is expected to take only 2 decades. Sri Lanka is expected to have the third oldest population in Asia in 2025. The rising burden of maintaining an aged population could exert considerable restraints on the government's fiscal resources, and the need to provide retirement support income and health care will have serious consequences on the economy as a whole during the next 2 decades.

An important characteristic of the Sri Lankan population is its ethnic and cultural diversity. Approximately 74 percent of the population are Sinhalese, 12.6 percent are Sri Lankan Tamils, 5.5 percent Indian Tamils, 5 percent Muslims, and the remainder consists of Burghers, Malays, and others (2.9 percent). Among the ethnic groups, the Sinhalese were the earliest inhabitants of Sri Lanka and are descendants of the first colonists who occupied the island during the 5th century B.C. Most of them are Buddhist, and speak a language called Sinhala, derived from several Indo-Aryan languages. The Sri Lankan Tamils are the descendants of the early Dravidian invaders from southern India. They are predominantly Hindu and speak Tamil, one of the major Dravidian languages of southern India. Indian Tamils are the descendants of laborers brought by the British planters in the 19th century to work on plantations. The Muslims are the descendants of early Arab traders who settled in SriLanka during the 10th century. The Burghers are the descendants of the Portuguese, Dutch, and British who occupied the island from the 16th to the mid-20th century. The Burghers are predominantly Christian and speak English as their first language.

OVERVIEW OF ECONOMY

Sri Lanka is a developing economy based largely on agriculture, services, and light industry. Agriculture accounts for approximately 21 percent of the gross domestic product (GDP) and employs 38 percent of the workforce. Agricultural output is divided between cash crops from plantation agriculture and food crops from subsistence agriculture. Cash crops—namely tea, rubber, and coconuts—are largely grown on plantations. Rice is the principal food crop and the main livelihood for over 70 percent of Sri Lanka's rural population. Manufacturing industries account for approximately 19 percent of the gross domestic product and employ about 17 percent of the workforce. Chief manufactures include textiles, ceramics, petroleum products, vegetable oils, fertilizers, and cement. The service sector is the largest of the Sri Lanka economy, employing 45 percent of the workforce and contributing roughly 60 percent of GDP. Tourism, banking, finance, and retail trade are the major components of the service sector.

The country is endowed with many natural resources. It has an equatorial climate with a high average rainfall. The land is fertile and suitable for growing a variety of crops, and one-third of the land is arable. Rivers cascading from the central hill country provide energy to generate hydropower, the major source of electricity in Sri Lanka. The country also has rich fishing resources. Sri Lanka's mineral resources include titanium ore, graphite, kaolin, and gemstones. It also has large deposits of unexploited iron ore.

Foreign trade is an important segment of the Sri Lankan economy. Major imports include petroleum, consumables, machinery and capital equipment, motor vehicles, and various manufactured goods. Major exports include garments, tea, rubber, coconut products, foodstuffs, gems, and jewelry. Sri Lanka is the largest exporter of black tea in the world and the third largest producer of natural rubber. A variety of gemstones, for which Sri Lanka is world famous, are also exported. Significant quantities of high-grade graphite, for which Sri Lanka is a world leader, are also exported. The industrialized countries taken together as a group accounted for 75 percent of Sri Lanka's total exports in 1999 and the United States is the largest single buyer of Sri Lanka's exports, with 39 percent in 1999. Other major export markets are the United Kingdom, Germany, Japan, Russia (tea), China (rubber), India, and the Middle East. In terms of imports, Japan is the single largest exporter to Sri Lanka. Motor vehicles, spare parts, and woven fabrics are the major items imported from Japan. India is the second largest exporter, followed by Singapore, South Korea, Taiwan, the United Kingdom, and the United States.

Sri Lanka is a mixed economy, in which both the private sector and the state sector engage in the production process. Foreign investments are encouraged and several free zones have been established. The country's banking system is well developed, so that both foreign and local banks function in the economy. Sri Lanka is committed to a free market ideology and has one of the most liberal foreign trade regimes in the world. This contrasts greatly to what the Sri Lankan economy looked like during the first 3 decades after the country gained independence fromGreat Britain in 1948. The economy that evolved in Sri Lanka under British rule was predominantly oriented towards agriculture, with plantation agriculture being the major contributor to the nation's growth. The 3 plantation crops—tea, rubber, and coconuts—accounted for 30 percent of the gross domestic product in 1948 and the bulk of the output was exported. Manufacturing was an insignificant activity in the economy. Banking and commerce were, for the most part, only used to support plantation agriculture. Nearly all foreign exchange earnings were derived from the plantations. The country depended on imports for nearly three-fourths of its food requirements and almost all of its manufactured goods.

The Sri Lankan economy has since become highly diversified; it has rapidly growing manufacturing and service sectors, agricultural activities have been modernized, and the country is nearly self-sufficient in rice production. The significance of the 3 major export crops (tea, rubber, and coconuts) as the main source of export earnings has fallen (from 90 percent in the 1950s to 16 percent in 1999) and the significance of manufacturing has risen (from 1 percent of exports in 1950 to 60 percent in 1999). These changes in the structure of the Sri Lankan economy are a result of varying economic policy measures adopted by the government since independence. Development strategies that shaped the Sri Lankan economy over the last 5 decades may be distinguished under 2 eras: the first era covering the period between 1948-76, and the second era during the post-1977 period.

During the first era, development policy focused on achieving the objectives of equity and economic growth. The instruments adopted to achieve economic growth were aimed at import substitution industrialization, both in manufacturing and foodstuffs. The key measures used to achieve this growth strategy were the imposition of various restrictions on imports, and the encouragement of domestic production. Extensive social welfare programs such as price subsidies on food, statutory price controls on consumer goods , and the provision of free education and health services were the instruments used to achieve greater equity. The welfare programs achieved significant improvements in the area of human development, including lower mortality rates, increased life expectancy, and high literacy rates. However, high welfare expenditures restrained the nation's capital growth and ability to invest, slowing economic growth and causing high unemployment and low wages. During the 1951-1976 period, per capita gross domestic product grew only at an average of 0.2 percent per year. The achievements of the import substitution policies were even less noticeable, except in the production of rice and subsidiary food crops. With a worsening trade balance crisis, most newly established industries operated well below capacity due to a shortage of imported goods. This, coupled with increased government participation in industrial development, hindered industrial growth and the ability to remain commercially viable. The continued government intervention in all spheres of economic life reached its climax at the end of the first policy era.

The second era of Sri Lankan economic development (post-1977) marked a shift towards a free market economy. The strategy aimed at liberalizing the economy from excessive government controls and it chose the private sector as the engine of growth. Policies were designed to accelerate economic growth by stimulating private investment through various incentives and also to increase the country's foreign earnings by promoting export-oriented economic activities. The liberalization policies, pursued under the watchful eye and participation of the International Monetary Fund and the World Bank, met with success at the beginning. Stimulated by enhanced levels of foreign aid and investment, the economy was successful, recording real growth rates of about 6 percent per year until 1986. During the following 5 years, however, there was a marked deceleration of growth caused mainly by the disruptive effects of the ethnic conflict on economic activities. Gross domestic product grew at an annual average of 2.7 percent between 1986-1989, and at an annual average of 5 percent between 1990-2000. During the second era, the level of income in the economy grew significantly with per capita gross domestic product more than doubling (from US$382 in 1975 to US$802 by 2000).

The transition to a free market economy based on a liberalized trade and exchange rate regime has brought benefits to the Sri Lankan economy. Unemployment, a problem for decades, has reduced significantly, and remains at historically low levels (8 percent in 2000). Nonetheless, the high levels of inflation , fueled by the sharp deterioration of the Sri Lankan currency, combined with the mounting cost of civil war has raised the cost of living to very high levels. The soaring cost of living has made many Sri Lankans struggle to satisfy their basic needs. Over 45 percent of the population depends on benefits under the income supplement programs initiated by the government. The balance of payments problem remains unresolved. The persistent trade deficit has led to increased reliance on foreign aid to meet the country's import requirements, leading to an inevitably mounting foreign debt . Foreign debt as a percentage of the gross domestic product, which accounted for 21 percent in 1975, grew to 75 percent in 1994, and amounted to 59 percent in 1999.

POLITICS, GOVERNMENT, AND TAXATION

When Sri Lanka obtained its independence from Britain in 1948 it had an educated electorate conscious of its voting rights and the concept of majority rule. The judiciary was respected and the rule of law was well established. The political party system was also established with the United National Party (UNP) as the foremost party of the time. Sri Lanka also had a written constitution incorporating some of the principles of the British Westminster system of government. There is a unicameral Parliament with 225 members elected to 6-year terms. The president is popularly elected to a 6-year term and is the chief executive.

The UNP was in power for 8 years until it lost the 1956 election to Sirimavo Bandaranaike. His Sri Lanka Freedom Party (SLFP)-led coalition swept into power on the promise to make Sinhala the national language. This created disquiet among minorities, especially among Tamils. Tamil leaders opposed the introduction of Sinhala as the official language because they wanted to speak Tamil; their opposition soon led to violence. The seeds of the separatist war in Sri Lanka can be traced to incidents that occurred in 1958. But the conflict grew into a large-scale military confrontation only after 1983, when a group of Liberation Tigers of Tamil Elam (LTTE) followers ambushed Sinhalese troops. The LTTE, who are the Tamil protagonists of the war, have used terrorist methods to finance and promote their cause. They have assassinated moderate Tamil leaders, including President Premadasa, and several Sri Lankan ministers and party leaders. They also killed Indian prime minister Rajiv Gandhi because he withdrew his support of the LTTE.

Another serious problem was the emergence of a Sinhalese youth revolutionary party called the JVP, which staged an armed insurrection in 1971, lasting for 2 years and followed by 3 years of sporadic outbursts. The JVP resurrected itself in the late 1980s with a subtle form of urban terrorism, but it was brought under control by a ruthless program of suppression by the government. Both the LTTE and the JVP have been serious impediments to steady economic growth in Sri Lanka. However, Sri Lanka has been endowed with a very strong democratic tradition which has managed to survive these major conflicts, even during periods of poor economic management.

The 2 dominant parties during 50 years of independence have been the UNP (conservative) and the SLFP ( socialist -left, and more recently center-left). The 2 political parties have alternated in positions of power for half a century, with the UNP heading the government from 1948 to 1956, 1965 to 1970, and 1977 to 1994. An SLFP-led coalition government was in power from 1956 to 1965, 1970 to 1977, and since 1994 as a coalition called the Peoples Alliance (PA).

The Sri Lankan government epitomizes a classic democratic 2-party political system in operation. The UNP regimes during the period 1948 to 1970 placed emphasis on private sector participation with several ongoing subsidized programs such as free education, free health care, village land settlement, and colonization. The SLFP regimes continued the welfare programs and moved increasingly to public ownership and nationalization with limited private sector participation. In the early and the mid-1970s, they placed strict restrictions on imports and currency movement.

In 1977 the UNP government came into power and decided to run an open economy with few restrictions. The private sector became the main engine of growth. The rupee was devalued by 46 percent from its former artificial value. This immediately stimulated growth and received the backing and financial support of the World Bank. This UNP government lasted for 17 years. When the SLFP-led coalition known as the Peoples Alliance was elected to government in 1994, it accepted the importance of this open market economy as a positive growth strategy for the country.

A short time before the end of the first term of the Peoples Alliance in 2000, the LTTE attempted to assassinate the president of Sri Lanka, Chandrika Bandaranaike Kumarathunga. The bomb caused damage to one eye but she survived, and her party was elected for a second term. The PA has had a very difficult period in government because of the financial and political pressures generated by the escalation of the armed conflict with the LTTE. The election itself generated a degree of conflict never experienced before in Sri Lankan politics, but democracy survived as it had in every one of the elections held after 1948.

TAXATION AND REVENUE.

The major source of government revenue in Sri Lanka is taxes (86 percent). However, unlike the United States, the contribution of income taxes to government revenue is negligible, at 13 percent, while indirect taxes dominate government revenue. There are 3 major sources of indirect taxes: the goods and services tax (GST), excise tax , and the national security levy (NSL). The GST is a recent addition to the tax system (introduced in April 1998), replacing the business turnover tax. The GST is levied on a value-added basis at a uniform rate of 12.5 percent with full credit given to all inputs. GST revenue accounted for 26 percent of the total tax revenues in 2000. An excise tax, which contributed 23 percent of the total tax revenue during the same period, is levied mainly on liquor, tobacco, petroleum, and motor vehicles. The third important source of government revenue, the NSL, was initially introduced as an interim measure to finance the rising cost of war in the north and the east. It has become an important contributor to national tax revenue, contributing 17.5 percent. The NSL is levied at a rate of 6.5 percent. Taxes on international trade account for 16 percent of the total tax revenue. With the liberalization of trade and restructuring of the tariff regime, which began in the late 1980s, revenue from taxes on foreign trade has been declining.

The personal income tax (PIT) rate in Sri Lanka has 4 brackets, ranging from 10 percent to 35 percent. The PIT's contribution to the government tax revenue is small (about 1 percent of gross domestic product) and is lower than most other countries. The economy's high dependence on subsistence agriculture, low levels of income and tax compliance, and inefficient tax administration are the key contributors to low levels of PIT revenue. The corporate income tax (CIT) in Sri Lanka of 35 percent (flat rate) is relatively modest and is similar to the rates in other Asian economies. However, the CIT tax yield in Sri Lanka is quite low, as many firms are offered tax incentives to encourage investment.

INFRASTRUCTURE, POWER, AND COMMUNICATIONS

Sri Lanka has a well-developed transport system, including a road network of approximately 100,000 kilometers (62,140 miles). A rail network consisting of about 1,944 kilometers (1,208 miles) of tracks links Colombo with the rest of the country. Road networks are under severe strain due to the rapid increase in the number of vehicles since the 1980s. The number of registered vehicles nearly tripled from 478,000 in the mid-1980s to 1.38 million in 2000, generating severe traffic congestion. With a rising number of vehicles, and the need for a more efficient road network to facilitate the movements of goods and services, the government is actively engaged in improving, rehabilitating, and extending the existing network.

Sri Lanka has 14 airfields, the largest of which is the Katunayake International Airport, the principal gateway to Sri Lanka. The country is serviced by 32 airlines, both domestic and foreign, and the national carrier, SriLankan Airlines, handles about 56 percent of international passengers to and from Sri Lanka. It has scheduled operations to 35 destinations in 26 countries covering Australia, the Indian subcontinent, the Far East, Europe, and the Middle East. The Sri Lanka Ports Authority (SLPA) is responsible for operating the ports. The SLPA operates 4 major ports in Colombo, Galle (in the south), Trincomalee (in the east), and Kankasanturai (in the north). In addition, limited shipping facilities are provided by the Ceylon Shipping Corporation and by several private sector shipping companies. A major restructuring of the cargo handling facilities in Colombo port is now taking place in conjunction with the British PNO company.

Hydropower is the major source of electricity, accounting for 66 percent of the nation's electricity supply. One of the main sources of hydropower is the gigantic Mahaweli Scheme, which has harnessed the flow of Sri Lanka's longest river in several stages. The remainder is generated through thermal power (34 percent) and most recently, wind power. Electricity generation and distribution has traditionally been a government monopoly . However, the private sector has become much more involved in power generation during the past decades.

Telecommunications is the fastest growing sector in the country. During the first half of 2000, the telecommunications sector grew by 11 percent. Sri Lanka Telecom Ltd. (SLT) is the major supplier; its network provided 44,228 new telephone connections during the first half of 2000, with total network subscriptions of 621,394. The demand for telephones is growing much faster than supply: at the end of June 2000, there were 246,560 applicants on the waiting list. To meet rising demand the SLT is expanding its capacity with assistance from international donors. In addition to the SLT subscriber network, there are 4 cellular phone operators with a subscription of 307,027. Other service providers include wireless local loop telephones (2 operators with 101,093 subscribers), data communication services such as Internet and e-mail (15 operators with 32,633 subscribers), and public phones (6 operators with 7,491 public phone booths).

ECONOMIC SECTORS

The changing structure of the economy mirrored in the relative contribution of the key industrial sectors reflect the country's potential to realize substantial growth. It also reflects the transition of the agriculture-dominated economy to a more diversified one with growing industrial and modern service sectors. In 1950, agriculture accounted for half the gross domestic product and by the year 2000, its significance was reduced to one-fifth of the gross domestic product. The contribution of industry more than doubled from about 11 percent to 19 percent while the service sector expanded significantly from 39 percent to 60 percent during the same period. Sri Lanka is rich in resources, both natural and human. It has several unexploited mineral resources (such as iron ore) and underexploited mineral and fisheries resources with substantial potential for future growth. Another area with substantial growth potential is tourism, which is interrupted by the prolonged civil unrest in the economy.

AGRICULTURE

Agriculture is the most important sector of the Sri Lankan economy. Even though its contribution to the gross domestic product declined substantially during the past 3 decades (from 30 percent in 1970 to 21 percent in 2000), it is the most important source of employment for the majority of the Sri Lankan workforce. Approximately 38 percent of the total labor force was engaged in agriculture in 1999. In the subsistence sector, rice is the main crop and farming rice is the most important economic activity for the majority of the people living in rural areas. During the last 5 decades the rice sector grew rapidly and output more than tripled, reaching the highest ever output of 2.9 million metric tons in 1999. Increases in the area under cultivation, and improved productivity due to the modernization of agriculture are the main reasons for an increase in production. The rehabilitation of Sri Lanka's extensive ancient irrigation network and massive new investment in construction and maintenance of irrigation infrastructure led to a large increase in the area under rice cultivation. Between 1960-2000, the area used to grow rice increased 6 times to 546,249 hectares. The modernization of farming methods, such as the use of high-yielding seeds, tractors, and chemical fertilizers also led to increased productivity in the rice sector. Between 1960-1999, rice yield per hectare doubled from 1,877 kilograms to 3,672 kilograms. In addition to rice, various other food crops are produced for local consumption. They include yams, pulses, grains, vegetables, and fruits. Most of these crops are cultivated in family gardens, except for potatoes and sugar. Sugar cane is cultivated in the dry zone, and Sri Lanka produces only 15 percent of what it consumes domestically.

The major plantation crops of tea, rubber, and coconuts continue to figure prominently in the economy of Sri Lanka; however, the contribution of these commercial crops to gross domestic product declined from 11.5 percent in 1970 to 5 percent in 2000. Tea, the prominent crop of the plantation sector, grows in many parts of the wet zone, and in particular in the central hill country. Sri Lanka is famous for its high quality black tea, and is the largest supplier in the world. In 1999, 269.3 million kilograms of tea (95 percent of total tea production) was exported, earning US$621 million in foreign exchange. The United Kingdom, Russia, and the Middle East are the major export markets.

The second major commercial crop is rubber, growing in the ridge and valley country of the wet zone interior. Of 159,000 hectares under cultivation, about 80 percent was being tapped (harvested) and in 1999, 96.6 million kilograms of rubber were produced. A sizable proportion of rubber production is used in the domestic manufacturing sector (56 percent in 1999) and the remainder is exported. In 1999 export earnings amounted to US$33 million. China is traditionally the major buyer of Sri Lankan rubber. The performance of this sector has been subject to instability due to unfavorable movements in world prices. Competition from synthetic rubber producers has caused rubber prices to drop. However, with rising petroleum prices (the major ingredient for synthetic rubber) there is a chance for world rubber prices to improve.

The third commercial crop, coconuts, is grown mainly in the hinterland of the western seaboard. Production in 1999 accounted for 2,828 million nuts, the highest output since 1986. Coconut (mainly coconut milk) is a major ingredient used in food preparation in Sri Lanka, and nearly 65 percent of the output is consumed locally. The remainder is exported in the form of kernel products (desiccated coconut, coconut oil, copra), coconut cream, and coconut milk powder. In 1999, kernel products generated US$129 million in foreign exchange.

Forestry and fishing are less important components of the economy. Forests in the dry zone were cleared for settlement and agriculture early on. Unsustainable agricultural practices such as chena cultivation and logging resulted in land degradation and a reduction in the size of forest reserves. The country has abundant fishing resources, with an exclusive economic zone covering over 500,000 square kilometers (193,050 miles), a coastline of about 1,700 kilometers (1,056 miles), and a massive network of inland water reservoirs suitable for fish farming. However, this potential has not yet been exploited. Most marine fishing is concentrated in coastal areas, which account for about 12 percent of the exclusive economic zone. Total fish production in 1999 was estimated at 280 thousand metric tons, and the contribution of this activity to gross domestic product was about 3 percent in 1999. Fishing is a traditional livelihood for people living in coastal areas: in 1999 about 145,000 people were employed in fishing activities. A slow-growing sector, fish production increased at an annual average of only about 3 percent between 1992 and 1999. Poor production is mainly due to a lack of technical knowledge and equipment.

The livestock sector in Sri Lanka is small, consisting mainly of the dairy and the poultry subsections. Unlike in the United States, where dairy production takes place on large farms, in Sri Lanka dairy farming is a small-scale domestic activity. Total milk production in 1999 accounted for 342 million liters, sufficient only to meet about one-fourth of local needs. The remainder is imported in the form of powdered milk (in 1999, 54,000 metric tons of milk powder was imported). An important development in the livestock sector was the rapid increase in the poultry production. In 1999 approximately 57 million metric tons of poultry meat was produced, increasingly becoming a common source of animal protein in Sri Lanka.

INDUSTRY

INDUSTRY.

Manufacturing accounts for 16 percent of the gross domestic product and employs nearly 400,000 people. The textile industry is the largest of Sri Lanka's industries, contributing 63 percent to industrial sector growth (1999). Other major manufacturing industries include processed diamonds, food and beverages, light engineering, chemicals, petroleum, rubber and plastics, and machinery and equipment. The manufacturing sector that evolved under the import substitution development strategy in the 1960s to cater mainly to the domestic market has transformed into a sector catering to the foreign market. Much of the industrial output is exported and it is the single major export earner in the economy (in 1999, industrial exports accounted for 54 percent of total export earnings). This remarkable achievement is attributable to the policy reforms introduced during the post-1977 period. Under the reforms, the private sector was encouraged to participate in export-oriented industries through various incentives, and several free zones were established. This resulted in a significant inflow of foreign investment; the private sector emerged as the major contributor to industrial output. Overall, market-oriented policy reforms introduced during the post-1977 period have led to far-reaching changes in the structure and performance of the manufacturing sector.

MINING.

Mining is a minor economic activity contributing about 2 percent of the gross domestic product (1999). The country's mineral extraction industries include the mining of gemstones and graphite; excavation of beach sands containing ilmenite and monazite; and quarrying quartz sand, clay, and salt. Gem mining is traditionally the most important activity, producing high value gem-stones such as sapphire, ruby, and topaz, and a variety of semiprecious stones, most of which are exported. Sri Lanka leads the world in high-grade graphite mining.

SERVICES

TRADE.

Wholesale and retail trade, the largest sub-category in the service sector, accounts for about 21 percent of the gross domestic product (1999) and employs about 22 percent of the workforce (2000). With the lifting of import controls and the government monopoly in the importation and distribution of essential consumer goods during the post-1977 period, the trade sector expanded rapidly. Domestic trade accounts for half the value of the trade sector. Increased participation by foreign firms in domestic trade in Sri Lanka is a relatively recent phenomenon, with international food franchises such as McDonald's and Pizza Hut in operation. Numerous small outlets including street stalls serve the retail trade, and in the major cities there are large shopping centers and supermarkets.

FINANCIAL SERVICES.

Banking, insurance, and real estate accounted for 8 percent of gross domestic product in 2000. This sector expanded rapidly following the 1977 policy reforms that dismantled the virtual government monopoly in the insurance industry and lifted the restrictions in the banking industry. The increased incentives for the private sector led to the emergence of several new insurance companies and banks. A total of 6 new local banks were established and 11 foreign banks opened branches. The banking system consists of 11 local and 16 foreign banks. Two development finance institutions and several merchant and investment banks are also active participants in the financial markets in Sri Lanka. In addition, 22 financial institutions providing credit facilities are in operation. The Sri Lankan financial system comes under the regulation of the Central Bank of Sri Lanka, which is the monetary authority of the country.

TOURISM.

Tourism is an important activity with potential for growth. The country known as the paradise in the Indian Ocean offers a diversity of environments and tourist attractions, from tropical beaches and arid lands to lush forests, tea plantations, and a rich archaeological heritage. Promotion of tourism in Sri Lanka began in the late 1960s with the establishment of the Ceylon Tourist Board. Between 1976 and 1982, the number of tourist arrivals grew rapidly at an annual average rate of almost 24 percent, reaching a peak of 407,230 before declining to 337,342 in 1983 as a result of the civil unrest in the country. As the political violence in the country intensified, international tourist arrivals continued to fluctuate with a general trend of decline. Tourist arrivals increased to 436,440 in 1999. Tourism generates US$275 million in foreign exchange annually and employs approximately 87,600 workers. The majority of tourists to Sri Lanka come from Western Europe (65 percent), Asia (26 percent), and North America (5 percent).

INTERNATIONAL TRADE

One feature of the Sri Lankan economy, both in the past and present, is the high dependency on foreign trade. The country's dependency on trade, measured by the

Trade Dependency Ratio (TDR), defined as the ratio of the sum of exports and imports to gross domestic product, stood at 66 in 1999 compared with a TDR of 33 for the period 1970-1977. In 2000 exports stood at US$5.2 billion while imports stood at US$6.1 billion. The changing degree of trade dependency evident in the post-liberalization era has been accompanied by significant changes in the structure of Sri Lankan foreign trade. The dominance of tea, rubber, and coconuts, which accounted for 74 percent of the total exports in 1977, had fallen to 21 percent in 1999. Industrial exports have become the major contributor to export earnings with their share rising from 14 percent to 76 percent during the same period. Of industrial exports, textiles and garments are the leading sub-category, contributing 68 percent to total industrial exports in 1999. The balance consisted of machinery and equipment (6 percent), rubber-based products (5 percent), travel goods and processed diamonds (4 percent each), petroleum products and footwear (2 percent each), crustaceans and mollusks and ceramic products (1 percent each), and other industrial products (7 percent). Despite the changes in the structure of exports, tea continues to be the leading export with a share of 65 percent of total agricultural exports while textiles dominate the industrial exports with a share of 67 percent of the total industrial exports.

Intermediate goods dominate Sri Lanka's imports (51 percent of total imports), followed by investment goods (27 percent), and consumer goods (21 percent). This is in contrast to the composition of imports in the pre-liberalization era, which was dominated by consumer goods (50 percent of total imports in 1977), followed by intermediate goods (36 percent), and investment goods (12 percent). Rice, flour, and sugar dominated consumer goods in the past, accounting for 80 percent of total consumer goods imported. Their significance, however, fell to 21 percent in 1999. This changing structure of imports reflects the new economic environment resulting from the economic reforms introduced in 1977. The improvement in the domestic supply of rice and other food items helped to limit food imports. The expansion in the industrial sector resulted in higher imports of intermediate goods. Developments in infrastructure facilities, construction and the transport sector, combined with increased use of advanced technology, increased the import of investment goods.

The destination of Sri Lankan foreign trade also has changed. The United States has become the single most important trading partner, and has continued to be the largest single buyer of Sri Lanka's exports (accounting for 39 percent of exports in 1999). Garment exports accounted for 74 percent of total exports in 1999. The United Kingdom accounted for 13 percent, while Germany accounted for 5 percent of Sri Lanka's exports. On average, one-third of the Sri Lankan imports come from the industrial countries. Japan is the largest source of imports to Sri Lanka, with 10 percent in 1999. Motor vehicles, spare parts, and woven fabrics are the major items imported from Japan. India is the second largest exporter (with 9 percent), followed by Hong Kong and Singapore (8 percent each), South Korea (6 percent), Taiwan, the United Kingdom, and the United States. Wheat, gold, agricultural equipment, and textiles are among the major items imported from the United Kingdom, while wheat accounted for 31 percent of imports from the United States. Textiles, tools and accessories for the garment industry, and fruits are the other major items imported from the United States.

Sri Lanka's trade with the rest of the world has changed in terms of composition, direction, and volume. However, the country has not been able to solve its fundamental problem, the unfavorable trade balance. As exports continued to grow, so did imports. Despite the persistent unfavorable trade balance, the country has managed to maintain its import levels with foreign assistance, capital flows, and an important and growing source of foreign exchange: remittances by Sri Lankan migrant workers in the Middle East. Prior to 1977 policy reforms, the fortunes of Sri Lankan exports depended primarily on the movements of world prices for the 3 major export commodities. While the export sector has diversified, the dependence on trade has also increased markedly. As the country's trade relations with industrialized countries rises, the Sri Lankan economy is vulnerable not only to changes in price levels of the major exports, but also to fluctuations in the levels of economic activity in industrialized countries.

MONEY

With the liberalization of the foreign exchange rate regime in 1977, which changed from a fixed exchange rate regime to a flexible one, the value of the Sri Lankan currency has continued to fall against major currencies. The Sri Lanka rupee (R) which was 16.5 per U.S. dollar

in 1980 fell to R40 per dollar by 1990, and collapsed to R85 in 2001. With the high dependence on imports, the falling value of the currency means that the prices of imports continue to rise, pushing up domestic inflation.

Sri Lanka has an active stock market, the Colombo Stock Exchange (CSE), the origin of which dates back to the 19th century. Share trading in Sri Lanka began in 1886 when the Colombo Brokers Association commenced the trading of shares in limited liability companies. Share trading grew since then and Colombo had a very active share market throughout the 20th century except during the 1960s and 1970s where a spate of nationalization, including the insurance companies and plantations, effectively reduced the trading to insignificant proportions. This decline was short lived, and the stock market recovered quickly following the policy reforms introduced in the latter part of 1970s, which created free and open market ideals where the private sector was given the key role in economic activities. Today the exchange has 238 companies listed with a market capitalization of approximately 10 percent of gross domestic product.

POVERTY AND WEALTH

The wealthy, representing those engaged in commerce and industry, are largely concentrated in urban areas, while the poorest live on plantations and in rural areas. While the rich live in luxury, many urban poor live

in shanty houses with no sanitary facilities. The urban poor in Sri Lanka are found mainly in the capital, Colombo. The majority of the Sri Lankan population live in rural areas, and the major source of wealth among them is land. Landlessness and unequal distribution of land are key determinants of rural poverty. Those living on plantations are laborers with no access to land ownership or alternative employment opportunities. They live in sub-standard houses supplied by the owners of plantations. A fourth group of poor, those displaced by the continuing war in the north and east, live in various refugee camps with no access to any amenity or opportunities.

The overall degree of disparity in wealth is reflected in the distribution of incomes. The wealthiest 20 percent of the population account for over 52 percent of the nation's income while the poorest 10 percent account for only 2 percent. Disparities in wealth have risen steadily during the post-1977 period, a result of policy reforms that paved the way for more wealth generation through the increased participation of the private sector. An important byproduct of the policy reforms was the soaring inflation induced by the falling value of Sri Lankan currency, raising the cost of living of the poor disproportionately. Meeting basic needs is a struggle to the poor, because average Sri Lankans spend over 40 percent of their income on food alone. Rising poverty has led to considerable social unrest; strikes in work places and protest rallies are common occurrences. The government maintains several subsidy programs to improve the position of the poor. Over 45 percent of the population benefits from one such income supplementary program called Samurdhi. Another, the dry ration program, is aimed at helping displaced families of the north and east due to the continuing civil war. International agencies such as the World Bank and Asian Development Bank have sought to help Sri Lanka reduce poverty. Several funded projects have directly targeted the poorest segments of the population. Despite low per capita income levels, and high levels of the incidence of poverty, the quality of life in Sri Lanka is relatively high when compared with its neighbor, India.

WORKING CONDITIONS

According to the Department of Census and Statistics, the labor force in Sri Lanka is about 7 million and the total number of employed persons is 6.5 million. The unemployment rate is at around 8 percent (2000). While the overall unemployment rate is lower than in the past (which was about 15 percent in 1992), unemployment among youth is relatively high. Around 22.5 percent of the youth of age between 15 and 19 were unemployed and 15 percent in the age group 20 to 29. Of the total workforce, 66.5 percent are males and 33.5 percent are females. Women play an important role in the economic life of Sri Lanka. The largest concentration of women in professions is in the areas of teaching, nursing, and clerical work. In the plantation industry, women make up 68 percent of the workforce and, in the garment industry, about 90 percent of the workforce.

The basic minimum age for employment in Sri Lanka is 15 years, and the government has enforced laws to prevent child labor. The forced or bonded labor of children is prohibited. Despite the laws governing child labor, underage children work as street vendors and hold menial jobs in tile factories, coir-making operations,

fishing, and in domestic service. Poverty leads most of these children to work. According to a government study, about 60 percent of the employed children are secondary income earners, contributing as much as 30-40 percent of household income.

The constitution of Sri Lanka guarantees the right of workers to organize and establish labor or trade unions, except those employed by the security forces and members of the judiciary. All public and private sector employees possess the right to bargain collectively. The Department of Labor provides conciliation and arbitration services to resolve labor disputes. Although trade union freedom is substantial, it has been subject to periodic modification or curtailment during times of political strife. In Sri Lanka, there is no universal basic minimum wage, and the minimum wages differ from industry to industry. Sector-specific minimum wages are set by wage boards. There are about 39 wage boards, which set minimum wages for more than 100 occupations in industry, commerce, services, and agriculture. Remuneration tribunals also set minimum wages in some cases.

In Sri Lanka, working conditions and workers' rights are well protected by legislation. However, disruptions in the workplace are common. In recent years there were a number of labor actions such as strikes and protests. The rising cost of living has driven many workers to demand higher wages. There are instances where even those in the medical profession have gone on strike for higher wages. Because of the inability of most workers to make ends meet, many Sri Lankans seek employment abroad. The total number of Sri Lankan workers abroad was estimated to be around 788,000 in 1999, of whom nearly 90 percent are employed in the Middle East.

COUNTRY HISTORY AND ECONOMIC DEVELOPMENT

427 B.C. The legendary Sinhalese Prince Vijaya colonizes the north-central part of Sri Lanka.

250 B.C. The king of Anuradhapura, Devanpiya Tissa, embraces Buddhism.

210 B.C. Sinhala kingdom is invaded by Cholas from southern India and Elara becomes king.

161 B.C. King Dutthagamini defeats Elara and reestablishes Sinhala rule.

1055. Sinhala kingdom moves its capital to Polonnaruwa under King Vijayabahu I.

1232-1815. Sinhala kingdom moves south.

1371-1408. Dambadeniyan, Gampolan, and Kotten kingdoms.

1469-1815. Kandyan kingdom.

1521-1581. Sitawakan kingdom.

1505. The Portuguese capture the coastal belt and rule it until the Dutch oust them.

1658. The Dutch capture coastal areas.

1659. The British regain the coastal areas, displacing the Dutch.

1660. The British are invited by the Kandyan chiefs to usurp the king, gaining control. They maintain a colony in Sri Lanka until the 20th century.

1948. Sri Lanka gains political independence from the British on 4th February.

1948. The UNP is elected in Ceylon under the leadership of D. S. Senanayake.

1956. A coalition of parties (MEP) led by S. W. R. D. Bandaranaike is elected.

1959. The SLFP leader is assassinated and his widow becomes prime minister in 1960.

1965. The UNP regains power under the leadership of Dudley Senanayake.

1971. Sri Lanka becomes a republic, but retains membership in the British Commonwealth.

1977. The UNP, under the leadership of J. R. Jayawar-dane, comes to power.

1978. Jayawardane becomes the first president of Sri Lanka. Liberalization reforms begin.

1979. Riots in response to the ambush and killing of 13 Singhalese soldiers by Tamil Tigers.

1980. Military action launched against the Tamil Tigers, with help from India.

1981. R. Premadasa becomes the second president of Sri Lanka.

1993. Premadasa's authoritarian rule ends as he becomes a victim of the LTTE.

1994. Chandrika Bandaranaike Kumaratunga and the Peoples Alliance gain political power.

2000. Kumaratunga wins a second term as president.

FUTURE TRENDS

Since independence, despite low levels of per capita income, Sri Lanka has achieved an impressive human development record, with many of Sri Lanka's social indicators comparing favorably to those of more advanced economies. The country has broken away from a public-sector -dominated, highly regulated economic system and has laid the foundation for dynamic growth based on a free market, liberalized trade and exchange rates, and deregulated foreign investment. This transition has led to rapid economic growth, a significant reduction in the level of unemployment, and a rise in the level of per capita income. However, the impressive growth of the economy evident during the 1977-1982 period has generated increasing economic inequality. The soaring inflation fueled by the deterioration of the value of the Sri Lankan currency has worsened the relative position of the poor. Despite the reduced levels of unemployment and the increased opportunities, nearly half of the population depends on government subsidies to meet their basic needs. The balance of payments, a fundamental problem of the economy that has persisted since the 1950s, has continued to worsen. Mounting foreign debt and the debt servicing obligations has added further burden to the already critical balance of payments.

The slowdown in the pace of economic growth over the last 2 decades, coupled with the rising costs of the civil war, seriously threatens the economy's ability to meet the challenges and changing socioeconomic needs of its population. With a rapidly aging population, the need for more resources to provide health care and income support will exert considerable pressure on the government's fiscal resources and the tax system during the coming decades. The solutions to most of the burning problems, and those bound to emerge in the near future, lie in the country's ability to achieve sustained levels of long-term economic growth. The continuing civil conflict poses the biggest obstacle to the country's growth prospects. The need for an immediate solution to the 18-year-old civil war is imperative. Given that the Sri Lankan economy managed to realize an average growth rate of about 5 percent during the last decade in spite of severe interruptions caused by the civil war, lasting peace would undoubtedly bring prosperity to the nation.

DEPENDENCIES

Sri Lanka has no territories or colonies.

BIBLIOGRAPHY

Central Bank of Sri Lanka. <http://www.centralbanklanka.org>.Accessed March 2000.

"Country Profile of Sri Lanka." Indian Ocean Rim Network. <http://www.iornet.org/newiornet/Srilanka.htm>. Accessed September 2001.

Department of Census and National Statistics (DCS), Sri Lanka. <http://www.statistics.gov.lk>. Accessed September 2001.

Economist Intelligence Unit. Country Profile: Sri Lanka. London: Economist Intelligence Unit, 2001.

Embassy of Sri Lanka Online. <http://users.erols.com/slembassy/index2.html>. Accessed September 2001.

Fernando, T., and R. N. Kearney. Modern Sri Lanka: A Society in Transition. New York: Syracuse University Press, 1979.

Lakshaman, W. D. Dilemmas of Development. Colombo: SriLanka Association of Economists, 1997.

Lakshaman, W. D., and C.A. Tisdell. Facets of Development of Sri Lanka since Independence. Australia: University of Queensland, 1999.

U.S. Central Intelligence Agency. World Factbook 2001. <http://www.odci.gov/cia/publications/factbook/index.html>. Accessed September 2001.

U.S. Department of State. FY 2001 Country Commercial Guide: Sri Lanka. <http://www.state.gov/www/about_state/business/com_guides/2001/sa/index.html>. Accessed September 2001.

—Sarath Divisekera

CAPITAL:

Colombo.

MONETARY UNIT:

Sri Lanka rupee (R). One rupee equals 100 cents. There are coins of 1, 2, 5, 10, 25, and 50 cents, and 1, 2, 5, and 10 rupees. There are bills of 10, 20, 50, 100, 200, 500, and 1,000 rupees.

CHIEF EXPORTS:

Textile and apparel, tea, gems and jewelry, coconut products, rubber and rubber-based products, and spices.

CHIEF IMPORTS:

Machinery and equipment, textiles, petroleum, foodstuffs.

GROSS DOMESTIC PRODUCT:

US$62.7 billion (purchasing power parity, 2000 est.).

BALANCE OF TRADE:

Exports: US$5.2 billion (f.o.b., 2000). Imports: US$6.1 billion (f.o.b., 2000).