In the 19th and 20th centuries, Sri Lanka became a plantation economy, famous for its production and export of cinnamon, rubber and Ceylon tea, which remains a trademark national export. The development of modern ports under British rule raised the strategic importance of the island as a centre of trade. During World War II, the island hosted important military installations and Allied forces. However, the plantation economy aggravated poverty and economic inequality. From 1948 to 1977 socialism strongly influenced the government's economic policies. Colonial plantations were dismantled, industries were nationalised and a welfare state established. While the standard of living and literacy improved significantly, the nation's economy suffered from inefficiency, slow growth and lack of foreign investment.
From 1977 the UNP government began incorporating privatisation, deregulation and promotion of private enterprise. While the production and export of tea, rubber, coffee, sugar and other agricultural commodities remains important, the nation has moved steadily towards an industrialised economy with the development of food processing, textiles, telecommunications and finance. By 1996 plantation crops made up only 20% of export, and further declined to 16.8% in 2005 (compared with 93% in 1970), while textiles and garments have reached 63%. The GDP grew at an average annual rate of 5.5% during the early 1990s, until a drought and a deteriorating security situation lowered growth to 3.8% in 1996. The economy rebounded in 1997-2000, with average growth of 5.3%. The year of 2001 saw the first recession in the country's history, as a result of power shortages, budgetary problems, the global slowdown, and continuing civil strife. Signs of recovery appeared after the 2002 ceasefire. The Colombo Stock Exchange reported the highest growth in the world for 2003, and today Sri Lanka has the highest per capita income in South Asia.
Sri Lanka, with an income per head of US$1,350, still lags behind some of its neighbours including Maldives and Mauritius but is ahead of its giant neighbour India. Its economy grew by an average of 5% during the 1990s during the 'War for Peace' era. According to the Sri Lankan central bank statistics, the economy was estimated to have grown by 7% last year, although inflation had reached 20%. It should be noted that Sri Lanka's central bank statistics have been called into question over allegations of political interference and institutional decay. Parts of Sri Lanka, particularly the South and East coasts, were devastated by the 2004 Asian Tsunami. The economy was briefly buoyed by an influx of foreign aid and tourists, but this was disrupted with the reemergence of the civil war resulting in increased lawlessness in the country and a sharp decline in tourism.
Economy - overview
In 1977, Colombo abandoned statist economic policies and its import substitution trade policy for more market-oriented policies, export-oriented trade, and encouragement of foreign investment. Recent changes in government, however, have brought some policy reversals. Currently, the ruling Sri Lanka Freedom Party has a more statist economic approach, which seeks to reduce poverty by steering investment to disadvantaged areas, developing small and medium enterprises, promoting agriculture, and expanding the already enormous civil service. The government has halted privatisations. Although suffering a brutal civil war that began in 1983, Sri Lanka saw GDP growth average 4.5% in the last 10 years with the exception of a recession in 2001. In late December 2004, a major tsunami took about 31,000 lives, left more than 6,300 missing and 443,000 displaced, and destroyed an estimated $1.5 billion worth of property. Government spending and reconstruction drove growth to more than 7% in 2006 but reduced agriculture output probably slowed growth to about 6% in 2007. Government spending and loose monetary policy drove inflation to nearly 16% in 2007. Sri Lanka's most dynamic sectors now are food processing, textiles and apparel, food and beverages, port construction, telecommunications, and insurance and banking. In 2006, plantation crops made up only about 15% of exports (compared with more than 90% in 1970), while textiles and garments accounted for more than 60%. About 800,000 Sri Lankans work abroad, 90% of them in the Middle East. They send home more than $1 billion a year. The struggle by the Tamil Tigers of the north and east for an independent homeland continues to cast a shadow over the economy.
See more information on the next page... (next)