Economic

Condition – Sri
Lanka

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Table of Contents
1. Introduction...................................................................................................................3
1.1 Financial Institutions.............................................................................................3
1.2 Economic Sectors..................................................................................................3
1.2.1 Tourism............................................................................................................4
1.2.2 Tea Industry.....................................................................................................4
1.2.3 Apparel and Textile Industry..........................................................................4
1.2.4 Agriculture.......................................................................................................4
1.3 Global Economic Relations...................................................................................4
1.3.1 Credit Rating and Commercial Borrowing....................................................5
1.3.2 Foreign Assistance.........................................................................................5
2. Economic Indicators.....................................................................................................6
2.1 Gross Domestic Product (GDP)............................................................................6
2.2 Gross national Product (GNP)..............................................................................8
2.3 Human Development Index (HDI)..........................................................................9
2.4 Gini Coefficient.....................................................................................................11
2.5 Foreign Direct Investments.................................................................................14
2.6 Inflation.................................................................................................................16
3. Conclusion...................................................................................................................19
4. Bibliography................................................................................................................20

Submitted By

Swapneel Shetkar

12169

Section C

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1. Introduction

With an economy of $39.6 billion (2008 estimate) ($91.87 billion PPP estimate), and a per
capita GDP of about $4,300 (PPP), Sri Lanka has mostly had strong growth rates in recent
years.

The main economic sectors of the country are tourism, tea export, apparel, textile, rice
production and other agricultural products. In addition to these economic sectors, overseas
employment contributes highly in foreign exchange, most of them from the middle-east.

In 1977, Colombo abandoned statist economic policies and its import substitution trade policy
for market-oriented policies and export-oriented trade. Sri Lanka's most dynamic industries
now are food processing, textiles and apparel, food and beverages, telecommunications, and
insurance and banking. By 1996 plantation crops made up only 20% of exports (compared
with 93% in 1970), while textiles and garments accounted for 63%. GDP grew at an annual
average rate of 5.5% throughout the 1990s until a drought and a deteriorating security
situation lowered growth to 3.8% in 1996. The economy rebounded in 1997-98 with growth of
6.4% and 4.7% - but slowed to 3.7% in 1999. For the next round of reforms, the central bank
of Sri Lanka recommends that Colombo expand market mechanisms in non-plantation
agriculture, dismantle the government's monopoly on wheat imports, and promote more
competition in the financial sector. A continuing cloud over the economy is the fighting
between the Government of Sri Lanka and the LTTE, which has cost 65,000 lives in the past
15 years.

1.1 Financial Institutions

The Central Bank of Sri Lanka is the monetary authority of Sri Lanka was established in
1950. The Central Bank is responsible for the conduct of monetary policy in the country
and also has the supervisory powers over the financial system.

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 The Colombo Stock Exchange (CSE) is the main stock exchange in Sri Lanka. It is one
of the most modern exchanges in South Asia, providing a fully automated trading
platform. The vision of the CSE is to contribute to the wealth of the nation by creating
value through securities. The headquarters of the CSE have been located at the World
Trade Centre Towers in Colombo since 1995 and it also has branches across the country
in Kandy, Matara, Kurunegala and Negombo

1.2Economic Sectors
1.2.1 Tourism

Tourism is one of the main industries in Sri Lanka. Major tourist attractions are
focused around the islands famous beaches located in the southern and
eastern parts of the country, ancient heritage sites located in the interior of the
country and lush green resorts located in the mountainous regions of the
country.

The 2004 Indian Ocean Tsunami and the past civil war have reduced the tourist
arrivals, however the International media reports published about the
improvements in industry of January 2008 by 0.6%, March 2008 by 8.6% when
compared to the figures of 2007.

1.2.2 Tea Industry

The tea industry is one of the main foreign exchange gaining industry in Sri
Lanka also became the world's leading exporter in 1995 shared 23% of the total
export higher than Kenya shared 22%. The central highlands of the country, low
temperature climate throughout the year, annual rainfall and the level of humidity
are more favourable geographical factors for production in high quality tea.

Recently, Sri Lanka has become one of the countries exporting fair trade tea to
the UK and other countries. It is reckoned that such projects could reduce rural
poverty.

1.2.3 Apparel and Textile Industry

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 The apparel industry of the country which producing high quality ready made
garments and the main exporters are USA and Europe. There are about 900
factories throughout country serves world’s leading fashion designing companies.

1.2.4 Agriculture

The agricultural sector of the country which producing domestic consumption

such as rice, coconut and grain also a part of the culture since 2500 years. The
tea industry which existing since 1867 is not a part of this sector of agriculture, it
is mainly focusing on export market rather than domestic use in the country.
Ganja or cannabis is mostly grown for the needs of Ayurveda, the indigenous
medicine of Sri Lanka.

1.3Global Economic Relations

Exports to the United States, Sri Lanka's most important market, were valued at $1.8
billion in 2002, or 38% of total exports. For many years, the United States has been Sri
Lanka's biggest market for garments, taking more than 63% of the country's total garment
exports. India is Sri Lanka's largest supplier, with exports of $835 million in 2002. Japan,
traditionally Sri Lanka's largest supplier, was its fourth-largest in 2002 with exports of
$355 million. Other leading suppliers include Hong Kong, Singapore, Taiwan, and South
Korea. The United States is the 10th-largest supplier to Sri Lanka; U.S. exports amounted
to $218 million in 2002, according to Central Bank trade data—U.S. Customs data places
U.S. exports to Sri Lanka at $166 million in 2002. Wheat accounted for 14% of U.S.
exports to Sri Lanka in 2002, down from the previous year.

1.3.1 Credit Rating and Commercial Borrowing

Sri Lanka had applied for credit ratings from international agencies in its efforts
to apply for loans from international markets in 2005 after the election of
Mahinda Rajapakse as president. Standard and Poor's has rated Sri Lanka a
"B+" speculative rating, four grades below investment grade. Fitch has rated
Sri Lanka with "BB-" which is three grades below investment grade. Standard
and Poor's maintains Sri Lanka is constrained by providing widespread

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 subsidies, a bloated public sector, transfers to loss-making state enterprises,
and high interest local and international burdens. Standard and Poor's
estimates public sector debt has reached 95 % of GDP, in comparison to CIA
estimates of 89 % of GDP. Sri Lanka in mid-2007 sought to borrow $500
million from international markets to shore up the deteriorating exchange rate
and reduce pressure on repayment of the domestic debt market

1.3.2 Foreign Assistance

Sri Lanka is highly dependent on foreign assistance, and several high-profile

assistance projects were launched in 2003. The most significant of these
resulted from an aid conference in Tokyo in June 2003; pledges at the summit,
which included representatives from the International Monetary Fund, World
Bank, Asian Development Bank, Japan, the European Union and the United
States totalled $4.5 billion.

2. Economic Indicators

2.1 Gross Domestic Product (GDP)

The gross domestic product (GDP) or gross domestic income (GDI) is a basic
measure of a country's overall economic performance. It is the market value of all final
goods and services made within the borders of a country in a year.

The GDP of a country as per the expenditure method is given by

GDP = private consumption + gross investment + government spending + (exports − imports)

The GDP details of Sri Lanka from the year 1987 to 2007 are given in table 2.11.
It can be seen that the GDP of Sri Lanka has increased from 25.206 Billion Dollars in
1987 to 100.591 Billion Dollars in 2007. The GDP has shown a constant rate of increase
through the years.
The GDP data given is based on the Purchasing Power Parity (PPP). The PPP theory
uses the long term equilibrium exchange rates of two currencies to equate their

1 Source: International Monetary Fund (www.imf.org)

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purchasing power. In this case the two currencies are the Sri Lankan Rupee and the US
Dollar. The theory states that, in ideally efficient markets, identical goods should have
only one price.
The theory can be explained in the following way, suppose 1 Dollar spent in India can
buy 10 apples, when the same dollar is spent in the United States it may be able to buy
one apple i.e. the worth of one dollar in India is 10 times more in India than in the United
States. Now suppose in India, 10 apples can be bought for Rs. 50. Therefore, the PPP of
India with comparison to the US can be said to be 1:8.
In the same way comparisons have been made between Sri Lankan Rupee and US
Dollar to get the GDP.

Year GDP
1987 25.206
1988 26.77
1989 28.422
1990 31.349
1991 33.938
1992 36.212
1993 39.604
1994 42.711
1995 45.982
1996 48.635
1997 52.608
1998 55.692
1999 58.927
2000 63.824
2001 64.345
2002 68.087
2003 73.639
2004 79.656

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 2005 86.004
2006 93.036
2007 100.591

Table 2.1 GDP details of Sri lanka

Fig 2.1 GDP of Sri Lanka (1987 - 2007)

Source: International Monetary Fund (www.imf.org)

2.2 Gross national Product (GNP)

Gross National Product. GNP is the total value of all final goods and services produced within
a nation in a particular year, plus income earned by its citizens(including income of those
located abroad), minus income of non-residents located in that country. Basically, GNP
measures the value of goods and services that the country's citizens produced regardless of
their location. GNP is one measure of the economic condition of a country, under
the assumption that a higher GNP leads to a higher quality of living, all other things being
equal.

As per the definition,

GNP = private consumption + gross investment + government spending + (exports − imports)

+{income of the citizens of the country(including those residing abroad)-income of all the non
residents residing in the country}
Therefore,
GNP = GDP + {income of the citizens of the country (including those residing abroad)-
income of all the non residents residing in the country}

The GNP of Sri Lanka is given below

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 From the figure above, we can conclude that the GNP of Sri lanka has been increasing over
the years.

Also the GDP of Sri Lanka has also been increasing over the time period.

“GDP can be contrasted with gross national product (GNP, or gross national
income, GNI). The difference is that GDP defines its scope according to location, while GNP
defines its scope according to ownership. GDP is product produced within a country's
borders; GNP is product produced by enterprises owned by a country's citizens. The two
would be the same if all of the productive enterprises in a country were owned by its own
citizens, but foreign ownership makes GDP and GNP non-identical. Production within a
country's borders, but by an enterprise owned by somebody outside the country, counts as
part of its GDP but not its GNP; on the other hand, production by an enterprise located
outside the country, but owned by one of its citizens, counts as part of its GNP but not its
GDP.”2

2 En.wikipedia.org

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For e.g. The GNP of Sri Lanka is the GDP, plus sum of all companies owned by Sri Lankans
outside Sri Lanka less the total income of all the companies in Sri Lanka, which are owned by
non Sri Lankans.

The GDP of a country should ideally be lesser than the GNP. But for the years we can see
that the GDP of Sri Lanka is greater than the GNP. This may be because the income
generated by companies based in Sri Lanka but operated by non residents is more than that
of Sri Lankan companies based outside Sri Lanka.

2.3 Human Development Index (HDI)

Each year since 1990 the Human Development Report has published the human
development index (HDI) which looks beyond GDP to a broader definition of well-being.

The HDI provides a composite measure of three dimensions of human development: living a
long and healthy life (measured by life expectancy),
being educated (measured by adult literacy and gross enrolment in education) and having a
decent standard of living (measured by purchasing power parity, PPP, income).

The index is not in any sense a comprehensive measure of human development. It does not,
for example, include important indicators such as gender or income inequality nor more
difficult to measure concepts like respect for human rights and political freedoms. What it
does provide is a broadened prism for viewing human progress and the complex relationship
between income and well-being.

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 Of the components of the HDI, only income and gross enrolment are somewhat responsive to
short term policy changes. For that reason, it is important to examine changes in the human
development index over time. The human development index trends tell an important story in
that respect. Between 1980 and 2007 Sri Lanka's HDI rose by 0.58% annually from 0.649 to
0.759 today. HDI scores in all regions have increased progressively over the years (Figure 1)
although all have experienced periods of slower growth or even reversals.3

The data of Sri Lanka for HDI and GDP is given on the next page. The HDI of Sri Lanka has
shown a positive correlation with the GDP. This may be attributed to the fact that as the GDP
of a country increases, the standard of living of the people of that country also increases. i.e
an increase in the GDP of a country implies that the people of the country have more money
in hand for spending. This implies that there is more demand for goods in the country. The
increased demand leads the manufacturer to increase the supply, which in turn generates
employment opportunities.

GDP in
Years HDI Billion
Dollars
1980 0.649 13.631
1985 0.67 22.665
1990 0.683 31.349
1995 0.696 45.982
2000 0.729 63.824
2005 0.752 86.004
2006 0.755 93.036
2007 0.759 100.591

Table 2.3.1 HDI and GDP data of Sri Lanka

HDI of Sri Lanka from 1980 to 2007

3 http://hdrstats.undp.org/en/countries/country_fact_sheets/cty_fs_LKA.html

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2.4 Gini Coefficient

The Gini coefficient is a measure of statistical dispersion developed by

the Italian statistician Corrado Gini and published in his 1912 paper "Variability and
Mutability" (Italian: Variabilità e mutabilità). It is commonly used as a measure of
inequality of income or wealth.

The Gini Coefficient of a country can be defined as the difference between the rich and
the poor of that country i.e. the gini Coefficient is used to measure the income inequality
in a society.

The Gini Coefficient has a value between zero and one. Sometimes it is also multilplied
by 100, so that the Gini Coefficient has values between 0 and 100.

The higher the Gini Coefficient, the higher is the income inequality in the society.

The Gini coefficient is usually defined mathematically based on the Lorenz curve (below).
It can be thought of as the ratio of the area that lies between the line of equality and the
Lorenz curve (marked 'A' in the diagram) over the total area under the line of equality
(marked 'A' and 'B' in the diagram); i.e., G=A/(A+B).

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Source: Wikipedia

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When used as a measure of income inequality, the most unequal society will be one in
which a single person receives 100% of the total income and the remaining people
receive none (G=1); and the most equal society will be one in which every person
receives the same percentage of the total income (G=0).

The Gini Coefficient Data for Sri Lanka is given below.

Year Gini Coefficient GDP

1995 0.344 45.982
73.639
2003 0.361
2006 0.48 93.036

Source: www.statistics.gov.lk

From the data given in the table, we can assume that as the GDP of Sri lanka has
increased, the income is more unequally divided between the rich and the poor. This can
be reflected through the fact that the Gini Coefficient has increased from 1995 to 2005.
The Gini Coefficient of Sri Lanka is still good compared to other countries. The country
with the best Gini Coefficient is Switzerland with a Gini Coefficient of 0.281, while the
worst is Namibia with a Gini Coefficient of 0.707.

Therefore we can conclude that the income in Sri Lanka was more favourably divided in
1995 than in 2006, although it is more favourably divided than most of the countries
which is a good thing.

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2.5 Foreign Direct Investments
Foreign direct investment (FDI) is a measure of foreign ownership of
productive assets, such as factories, mines and land. Increasing foreign
investment can be used as one measure of growing economic globalization.

When another country invests in a country, for e.g. if India has invested in Sri
Lanka for 1.2 million, than Sri Lanka’s FDI inflow is said to be 1.2 million. On
the other hand if Sri lanka has invested in some other country for 1 million, Sri
Lanka’s FDI outflow is said to be 1 Million.

A foreign direct investor may be any one of the following: An individual, a public or a
private company, a group of related individuals, a government body etc..

A productive investment in a country can be called a foreign direct investment when a

person from outside that country acquires a 10% stake in a company by any one of
the following means:

• by incorporating a wholly owned subsidiary or company

• by acquiring shares in an associated enterprise

• through a merger or an acquisition of an unrelated enterprise

• participating in an equity joint venture with another investor or

enterprise

The incentives for a foreign direct investment may be in the form a a lower
corporate tax rate, Special Economic Zones, free land or land subsidies etc.

The FDI Data for Sri Lanka is given in table 2.5.1

It can be seen from the data that the foreign direct investments in Sri Lanka shows
sudden increases in the years 2001 – 2003 and again from 2005 to 2006. These
were periods of economic stability in Sri Lanka due to which firms outside Sri lanka
responded positively for investing in Sri Lanka.

The inward investments in Sri Lanka were mainly in the sectors of power and energy,
ports, telecommunications and manufacturing

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 FDI in million GDP in
Years
dollars billion dollars
2001 90 64.345
2002 200 68.087
2003 230 73.639
2004 230 79.656
2005 280 86.004
2006 490 93.036

Table 2.5.1 FDI in Sri Lanka

Source: Fdi.net

FDI in Sri Lanka

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2.3 Inflation

In economics, inflation is a rise in the general level of prices of goods and services in
an economy over a period of time.[1] When the price level rises, each unit of currency
buys fewer goods and services; consequently, inflation is also an erosion in
the purchasing power of money – a loss of real value in the internal medium of
exchange and unit of account in the economy. A chief measure of price inflation is
the inflation rate, the annualized percentage change in a general price
index (normally the Consumer Price Index) over time.[

The Consumer Price Index measures prices of a selection of goods and services
purchased by a "typical consumer".The inflation rate is the percentage rate of change
of a price index over time.

Other widely used price indices for calculating price inflation include the following:

 Cost-of-living indices (COLI) are indices similar to the CPI which are often used
to adjust fixed incomes and contractual incomes to maintain the real value of
those incomes.

 Producer price indices (PPIs) which measures average changes in prices

received by domestic producers for their output. This differs from the CPI in that
price subsidization, profits, and taxes may cause the amount received by the
producer to differ from what the consumer paid. There is also typically a delay
between an increase in the PPI and any eventual increase in the CPI. Producer
price index measures the pressure being put on producers by the costs of their
raw materials. This could be "passed on" to consumers, or it could be absorbed
by profits, or offset by increasing productivity. In India and the United States, an
earlier version of the PPI was called the Wholesale Price Index.

 Commodity price indices, which measure the price of a selection of commodities.

In the present commodity price indices are weighted by the relative importance of
the components to the "all in" cost of an employee.

 Core price indices: because food and oil prices can change quickly due to
changes in supply and demand conditions in the food and oil markets, it can be
difficult to detect the long run trend in price levels when those prices are included.
Therefore most statistical agencies also report a measure of 'core inflation', which
removes the most volatile components (such as food and oil) from a broad price
index like the CPI. Because core inflation is less affected by short run supply and

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 demand conditions in specific markets, central banks rely on it to better measure
the inflationary impact of current monetary policy.

The inflation rates of Sri Lanka for the past 20 years is given on the next page. From
the data we can see that the inflation rates of Sri Lanka has fluctuated quite often
from the highest of 21.5% in 1990 to the lowest of 1.5% in 2003.

The inflation can go up due to either government mismanagement of policies and

also because of external factors. It can be seen that during periods of economic
stability in Sri Lanka the inflation rates are quite low. For e.g the Sri Lankan civil war
of the 1990’s may have contributed to the extremely high inflation rate of 21.6% in
1990.

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 Year Inflation
1987 7.7
1988 14
1989 11.6
1990 21.5
1991 12.2
1992 11.4
1993 11.7
1994 8.4
1995 7.7
1996 15.9
1997 9.6
1998 9.4
1999 4
2000 1.5
2001 12.1
2002 10.2
2003 2.6
2004 7.9
2005 10.6
2006 8
2007 7

Source : IMF website

Graph of Inflation from 1987 to 2007

1. Conclusion

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From the comparisons made above between the GDP, GNP, HDI, FDI and Gini coefficient of
Sri Lanka we can conclude that the Sri Lankan economy has done quite well in the recent
past.

The Gross Domestic product of Sri Lanka has increased by almost 300% from 1987. Also, the
GNP of Sri Lanka has also increased simultaneously. This shows that the Sri Lankan
economy is doing quite well.

The increase in GDP has also affected the Human Development Index (HDI) which has also
increased in the recent past. This may be attributed to the fact that the increase in GDP has
increased the standard of living of people.

FDI Inflows of Sri Lanka have also shown an increase specifically in times of political stability
in Sri Lanka. Now with the fall of the LTTE in Sri Lanka, we can expect a further rise in the
FDI inflows.

On the other hand, the increase in GDP has not been well divided between the people. The
Gini Coefficient of Sri Lanka has increased by 40 % to 0.48 from 0.344 in 1995. This shows
that the inequality gap between the rich and the poor in Sri Lanka has increased in 11 years.

The inflation rate of Sri Lanka has also been fluctuating for the past 20 years, probably
because of the Civil War which has devastated Sri Lanka

Overall, things are looking bright for the Sri Lankan economy looking at the strong increase in
GDP, GNP and other economic factors it has shown.

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2. Bibliography

1. International Monetary Fund (www.imf.org)

2. World Bank (www.worldbank.lk) (www.worldbank.org)

3. FDI.net

4. En.wikipedia.org

5. Statistics.gov.lk

6. CIA World Factbook (www.cia.gov)

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