NATIONAL INSTITUTE OF BUSINESS MANAGEMENT

Advanced Diploma in Business Management 20.1P

Course Code ADBM 20.1P

Course Title

Submission Date on 31st of January 2021

Type of Assignment Individual Assignment

Name of the Student Yohan Nilanga Rajapakse

Student ID COADBM201P-049

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Introduction
Economic growth refers to an ability of an economy to increase its productive capacity
through which it becomes more capable of producing additional units of goods and services.
The growth or development of a country can be measured through various economic
indicators such as GDP, CPI, PPI, Inflation, Labor Market, etc.

The Macro economy is an aggregate picture of an entire economic environment, such as the
economy of a country. It includes data on proprietary activities, including consumer
spending and hiring rates of employees by private sector businesses. Compiling this data
into averages and analyzing them helps determine the economy’s overall financial health.

Over a long period of time, the unsustainable and low level of economic growth in
developing countries is producing difficulties for policy makers, professionals and
Government. Sri Lanka being a developing country or lower middle income country, we will
be discussing the current state of Sri Lankan economy through below mentioned variables.

01. Economic Output (GDP)

02. Unemployment Rate
03. Inflation Rate
04. Exchange Rate
05. International Trade

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Economy of Sri Lanka
Sri Lanka officially the Democratic Socialist Republic of Sri Lanka, is an island country in
South Asia, located in the Indian Ocean southwest of the Bay of Bengal and southeast of the
Arabian Sea. Its legislative capital is Sri Jayawardenepura Kotte while Colombo is its largest
city and center of commerce. They use Sri Lankan Rupee as currency and have a population
of 21,670,000 (2018).

Sri Lanka’s current constitution stipulates it as a republic and unitary states governed by a
semi-presidential system. It has had a long history of international engagement, as a
founding member of South Asian Association for Regional Cooperation (SAARC), and a
member of the United Nations, the Commonwealth of Nations, the G77, and the Non-
Aligned Movement. Along with the Maldives, Sri Lanka is one of only two South Asian
countries rated “High” on the Human Development Index (HDI)
Sri Lanka is a developing economy based largely on agriculture, services, and light industry.
Agriculture accounts for approximately 21% of the gross domestic product (GDP) and
employs 38% of the workforce. Manufacturing industries account for approximately 19% of
the gross domestic product and employ about 17% 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% of the workforce and
contributing roughly 60% of GDP. Tourism, banking, finance, and retail trade are the major
components of the service sector. Sri Lanka is committed to a free market ideology and has
one of the most liberal foreign trade regimes in the world.

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Economic output (Gross Domestic Production-GDP)
GDP is the total monetary or market value of all the finished goods and services produced
within a country’s borders in a specific time period. As a broad measure of overall domestic
production, it functions as a comprehensive scorecard of the country’s economic health.

Through GDP is usually calculated on an annual basis, it can be calculated on a quarterly

basis as well. Though it has limitation, GDP is a key tool to guide policymakers, investors,
and businesses in strategic decision making.

Year 2014 2015 2016 2017 2018 2019

GDP in USD (billion) (Nominal) 79.36 80.6 82.4 88.02 88.9 84.01

GDP per capita in USD 3,819.25 3,843.78 3,886.29 4,104.63 4,102.48 3,853.08

GDP growth (real) 5.0% 5.0% 4.5% 3.4% 3.2% 2.3%

Let’s take a look at the Sri Lankan GDP over 5 years.

GDP Growth rate

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4
GDP Growth rate
3

2
4
1

0
2014 2015 2016 2017 2018 2019
 In the above chart, it has shown the trend of the GDP growth of Sri Lanka from 2014
to 2019. Sri Lanka had an equal rate in 2014 and 2015 and after that there was a
decreasing growth of the GDP rate over the past 4 years.
 According to the Data from the Central Bank annual report of 2019, the GDP of Sri
Lanka was estimated to be $84 Bn. Relatively, in per capita terms, Sri Lankan GDP
was estimated at $3852. The GDP growth rate, for the year 2019, was approximately
2.3%. Despite showing steady growth rates since 2009, Sri Lankan GDP growth rate
has been quite stagnant. From 2015 to 2019, the average growth rate has been
averaging at around 3.74%. There are many reasons to which this stagnation
attributes to. The underlying issues are structural in nature. These include the
reliance on the construction sector, with high government spending to fuel post war
growth, and the reduction in this spending, post 2015, after the regime change, the
lack of growth and diversification in export sectors and external shocks such as the
Eastern Sunday attacks resulting in decline in tourism , and droughts.
 The impact of Covid-19 is set to reduce the GDP growth rates even further, due to
the reduction in consumption of services, industrial production, remittances and
tourism. For the first and Second quarters of 2020, the Sri Lankan GDP growth has
been in a constant stage of decline.
 In terms of GDP per Capita, Sri Lanka was included as an Upper Middle Income
country has of 2018. However, with the constant decline of GDP growth, and the
depreciation of the LKR, the Sri Lankan Economy was reclassified as a Lower Middle
Income Economy.

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Unemployment Rate
The unemployment rate is defined as the percentage of unemployed workers in the total
labor force. Workers are considered unemployed if they currently do not work, despite the
fact that they are able and willing to do so. The total labor force consists of all employed and
unemployed people within an economy.

The unemployment rate provides insights into the economy’s spare capacity and unused
resources. Unemployment tends to be cyclical and decreases when the economy expands as
companies contract more workers to meet growing demand. Unemployment usually
increases as economic activity slows.
The following table contains unemployment rate of Sri Lanka from 2014 to 2019.
Year 2014 2015 2016 2017 2018 2019
Rate 4.3% 4.7% 4.4% 4.2% 4.4% 4.2%

Unemployment Rate
4.8
4.7
4.6
4.5
4.4 Unemployment rate
4.3
4.2
4.1
4
 3.9 The
2014 2015 2016 2017 2018 2019

curves tend to shows a fluctuation in 6 years of reporting. Sri Lanka unemployment

rate marked its peak in 2015 with 4.7%. However Sri Lankan economy managed to
keep their unemployment rate within 4.0%-5.0% throughout the years.
 In 2019, Sri Lankan unemployment rate is at 4.2%. The unemployment rate has been
steady after 2015 where there was a large increase reporting 4.7% comparing to the
following years.
 As we all know, due to the global pandemic worldwide unemployment has been
increased. Needless to say Sri Lankan economy is also impacted to this day due to
this situation. Since the year 2020 was the most impacted year from COVID-19, I

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 believe that there will be an increase in unemployment rate in 2020. However, it can
be known for sure after the Central Bank Report 2020 is released.
 Also, according to the World Bank, COVID-19 crisis is believed to have triggered
sharp jobs and earning losses. Informal workers, which are 70% of the workforce, are
vulnerable as they lack employment protection or paid leave.


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Inflation Rate
Inflation is a quantitative measure of the rate at which the average price level of a basket of
selected goods and services in an economy increases over some period of time. It is the rise
in the general level of prices where a unit of currency effectively buys less than it did in prior
periods. Often expressed as a percentage, inflation thus indicates a decrease in the
purchasing power of a nation’s currency.

Rising prices are the root of inflation, though this can be attributed to different factors. In
the context of causes, inflation is classified into three types; Demand-pull inflation, cost-pull
inflation and built in inflation. Most commonly used inflation indexes are the Consumer
Price Index (CPI) and the Wholesale Price Index (WPI).
The table and the cart below illustrate the inflation rate of Sri Lanka from 2014 to 2019.
Year 2014 2015 2016 2017 2018 2019
Sri Lanka 2.76% 2.24% 3.99% 6.58% 4.27% 4.3%

Inflation Rate
7
6
5
4
Inflation Rate
3
2
1
0
2014 2015 2016 2017 2018 2019

 Sri Lanka has been spending so much money on developing its infrastructure and it
needed help from the International Monetary Fund. If we look at the Sri Lanka
inflation rate curve, from 2013 there had been a sudden slump to around 2% in 2015
with a rapid upturn and peak at 6.5% in 2017 and it is expected to stabilize around
the 4.9% mark over the next few years.
 The inflation rate has been quite steady, with lower volatility due to the Central Bank
has been using an inflation targeting framework. Also inflation is the change in rise in

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 price levels of an economy. Steady low inflation is considered to be the gold
standard for this.

Exchange Rate
Another important variable is Exchange rate, which is the value of a nation’s currency in
terms of the currency of another nation or economic zone. According the Central Bank of Sri
Lanka it is calculated as an annual average based on monthly averages (local currency units
relative to the U.S. dollar). Sri Lanka grew substantially from 6 to 178.7 LCU per US dollars
rising at an increasing annual rate that reached a maximum of 75.94% in 1978 and then
decreased to 10.02% in 2019.

Let’s take look at the exchange rate of Sri Lanka from 2014 to 2019.

Year 2014 2015 2016 2017 2018 2019

Exchange
130.6 135.9 145.6 152.4 162.5 178.7
Rate

Change% 1.16% 4.05% 7.16% 4.72% 6.57% 10.02%

Exchange Rate
200
180
160
140
120 Exchange Rate
100
80
60
40
20
0
2014 2015 2016 2017 2018 2019

 Sri Lankan Exchange rate has been depreciating constantly. This may happened due
to the negative trade balance (Pre-Covid), lack of export diversification, lack of

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 tourism (post Covid) despite capital controls, foreigners exiting the equity market
and etc.
 These issues has led to the a junk Credit rating, based on Moodies, Fitch and S and P.
( This increases the interest rate for Sri Lankan International Sovereign Bonds , due
to the higher risk).

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International Trade (Balance of Trade)
International trade, in other words, Balance of trade is the difference between the value of a
country’s exports and the value of its imports. This is the largest component of a country’s
balance of payments. Sri Lanka exports mostly textiles and garments (40% of total exports)
and tea (17%). Others include spices, gems, coconut products, rubber and fish. Main export
partners are United States, United Kingdom, Germany, Belgium and Italy. Sri Lanka imports
petroleum, textile fabrics, foodstuffs and machinery and transportation equipment and
main import partners are India, China, Iran and Singapore.

Let’s take look at the balance of trade of Sri Lanka from 2014 to 2019.
Year 2014 2015 2016 2017 2018 2019
Balance of Trade (in
-8.12 -8.39 -8.87 -9.62 -10.34 -7.87
billion US dollars)

Balance of Trade in billion USD

0
2014 2015 2016 2017 2018 2019

-2

-4
Balance of Trade in billion USD
-6

-8

-10

-12

 As we can see, there was negative trade balance (pre-covid) in 2019 and years
before that.
 Some of the reasons that I have identified for this negative trade balance would be,
lack of export diversification, lack of finding new markets for exports. Lack of foreign

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 exchange earnings through tourism would be also a reason along with others post
COVID-19 situation. As a solution for this we can bring our attention on reliance on
crops, such as tea, rubber and coconuts which are with high price volatility.
 However, there has been an increase in service sector exports. IT BPO services are an
example. Also new industries such as Boat Building are emerging.
 Nevertheless, I have recognized that there are some lack of free trade agreements,
lack of public trust in trade agreements (opposition to the Indo Lanka and Singapore
FTAs being examples) in our international trade sector.
 Also, Government policy direction changing from an active trading country, to import
substitution and these need to be debated.

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Conclusion
As we can see, Sri Lankan Economy has faced many challenges along these years. Every
variable that we have discussed presents data to prove the fact that Sri Lankan economy has
been on a constant stage of decline. With various challenges that had been occurred over
the past few years such as Easter attack, natural disasters and worldwide pandemic
situation didn’t allowed Sri Lankan economy to emerge in those years. With tourism being a
major part of the income of the economy, the Easter attack impacted heavily on the decline
of tourism activities in Sri Lanka in 2019 and in 2020, COVID-19 health crisis is believed to
have impacted economic activities severely. However, according the World Bank, the
economy is transitioning from a predominantly rural-based economy towards a more
urbanized economy oriented around manufacturing and services. Currently, Sri Lankan
economy is struggling from the impact of COVID-19 and it will take few more years to come
back to the pre-COVID economic situation.

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