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Friday, October 6, 2017

Economic Policies and Strategies of Sri Lanka



Background before 1977

In 1970, United Left Front (ULF) was elected for power, and they followed “Socialist Economic Policies.” Focusing on the welfare of society. A five-year plan (1972-1976) was introduced and the objectives of the project were accomplished through import substitution in Agriculture and industry by imposing import restrictions. However, the project was not successful due to agricultural production was affected by continuous drought during the plan period, the oil crisis in 1973 and the worldwide grain shortage.

Liberalization of the Economy (1977 – 1994)

The UNP government headed by President J.R Jayewardene assumed the office in 1977. They were handed over a stagnated economy with the problems of shortage of foreign exchange, the delicate balance of payment situation, and lower GDP growth rate in the marketplace. The new government focused on market-oriented and outward-looking Economic policies. The main characteristic of the economic reforms initiated in 1977 was the stimulation of the private sector economic activities by setting up a liberalized financial system in Sri Lanka. Role of the government was concentrated on large scale development projects to build up the infrastructure facilities required for private sector investments. Primary policy measures are undertaken were;
1.      Unification of the exchange rate and adoption of a floating exchange rate system with an effective devaluation carried out in 1977.
2.      Restructuring import tariffs and quantitative restrictions to reduce import controls and import duty rates and ending license requirements and state monopoly for most types of imports.
3.      Adaptation of Export Oriented Industrialization (EOI strategy) instead of Import Substitution Industrialization (ISI strategy).
4.      Replacement of food subsidies with a food stamp scheme for the benefit of lower-income Groups reflecting social policy.
5.      Partial liberalization of the financial market, with interest rate reforms.
6.      Implementation of export promotion policy to achieve a higher economic Growth through export promotion. Specific incentives such as exemptions of import of intermediate and capital goods from import duties and infrastructural facilities were granted.

Impact of the Liberalization Policies.

The outcomes of policy reforms were positive until the mid-1980s. After 1985 the economic growth rate was declining as the ethnic conflict rose and affected negatively to the economic activities. (Table 01)

1.      Increase in foreign trade as a result of liberalization. (Table 02)

2.      Investment the rate increased substantially after the policy reforms due to significant public investment program. (Table 03)

3.      Changes In government revenue structure could be observed. In 1977, import duty revenue was 4% of total government revenue while it was 13% in 1978. Export duty revenue grew up to 36% of total government revenue in the period of 1977- 1980.

The second wave of Liberalization (1989 – 1994)

The change in The government in 1989 retained the power with UNP. Therefore, no substantial difference in the economic policy followed in 1977. A separate Ministry of Policy Planning and Implementation was established in 1989. An agreement was signed with the IMF to introduce economic reforms which included privatization and poverty alleviation in the policy agenda.
1.      Privatization Was formally announced as a state policy with the objectives of reducing the fiscal burden and improving the efficiency of public enterprises.
2.      Main poverty alleviation program, which reflected the social policy was “Janasaviya.” The objective of the program was to enable poor people to establish a mode of income.
3.      When it comes to the industrial policy is focused on decentralization of locating industries in rural areas.  “200 Garment Factory Program” and “Karmanthapura” are the significant programs undertaken.
4.      A high-interest rate policy was adopted to bring down the inflation rate to a single-digit figure. (Kelegama and Dunham, 1994)
5.      Liberalization Of exchange controls on the current account of the balance of payments.
6.      The Elimination of export duties, a further devaluation of rupee to promote export-led growth.
7.      Introduction of a four-band tariff.

Policy Measures under Kumaratunga Government (1994 – 2001)

After the the assassination of the President Premadasa, People’s Alliance; a coalition of left-oriented political parties assumed the office headed by Chandrika Kumaratunga focused on market-friendly policies and private sector involved economic Development.
1.      Extensive Privatization Program.
The government continued with privatization and privatized entities such as the plantations, telecommunications, Air Lanka, gas, insurance, National Development Bank.

2.      Continued on Trade Liberalization.
Government liberalized trade further by decreasing tariffs. It also reduced corporate taxation to 15% and provided incentives for garment industries.

3.      Monetary Policy.
The high-interest rates that prevailed were reversed in 1997 and Central Bank reduced Statutory Reserve Requirement several times.

4.      Industrial Policy.
The industrial policy of the government was focused on private sector involved export promotion policy. The government focused on increasing the international competitiveness of the industries through technological improvement and efficiency improvement... In 1995, an industrial policy framework was announced, which gave the main emphasize on promoting private sector involved export industries. The industries who are adopting new technology to enhance their productivity were given import tax concessions and incentives through the 1996 budget proposal.

Policy Measures under Wickramasinghe Government (2002- 2004)

The UNP government launched a program for fiscal consolidation and structural reforms aimed at further economic growth and poverty reduction under the policy framework of “Regaining Sri Lanka” which focused on accelerating economic growth with the Involvement of the private sector. Policy measures were taken under Fiscal Consolidation to reduce the budget deficit to 5% of GDP, selective expenditure cuts( freezing public sector hiring), the introduction of Dual rate VAT system on behalf of Food and Services tax and National Security Levy. Establishment of Public Utility Commission of Sri Lanka and adjusting petroleum and electricity prices regularly are undertaken.

Policy Measures under Rajapakse Government (2005- 2015)

Although Leadership changed in 2005 the economic policies remained in the liberal financial framework while giving grater emphasize on domestic agriculture and infrastructure development. The government has recognized the importance of the private sector and public projects through private, civil partnership. (Henegedara, 2009) According to “Bright Future” policy program for 2011-2016 macro-economic development was focused on forming five hubs, i.e. commercial, knowledge, energy, air and aquatic centers with the view of becoming a miracle of Asia in 2016. Main characteristics of economic policy are;
1.      Privatization was rejected in the economic policy. (Athukorala and Jayasuriya, 2012)
2.      Greater state control of the economy.
Government economic policies have deviated towards greater state control of the economy through activities of government taking over the previously privatized entities such as Insurance Corporation, Sri Lanka Air Lines and Shell gas and the enactment of legislation to takeover underutilized and underperforming enterprises.

3.      Food self-sufficiency.
The government emphasized a policy of greater focus on import substitution in food which has led to several development projects such as “Api Wawamu Rata Nagamu,” “Divi Nagumo” and “Hada Bima.” The Hadabima is the cultivation of vegetable a project involving armed forces while the Divi Neguma program focused on establishing 1,000,000 household economic units.

4.      Infrastructure Development.
The role of the government is to implement major infrastructure projects in the areas of economic, social, and financial infrastructure. It involves highways, education, health, and communication projects that strengthen production efficiency and eliminate regional disparities. The development strategy has not only focused on infrastructure development but also equitable access to such infrastructure. (Central Bank, 2010)


Conclusion.

Economic policies adapted after 1977 in Sri Lanka under different regimes was under the broad wings of liberal policies. Even though the main focus is on export-led strategy, there were weaknesses like inadequate domestic value addition and lack of export diversification. With the ethnic conflict over 3 decades, economic development has been hindered. Apart from that lack of focus on policies in areas like tourism, technological the advancement could be observed.




Appendices

Table 1: Economic Growth Rate 1977-1987
Year
Annual Growth Rate (%)
1977
4.19
1978
8.23
1979
6.32
1980
5.81
1981
5.78
1982
5.07
1983
4.96
1984
5.05
1985
4.96
1986
4.28
1987
1.45
Source: Central Bank of Sri Lanka

Table 2: Trade Dependency in Sri Lanka from 1970 -1994
Time Period
Trade Dependency Ratio
1970-1977
32.75
1978-1984
70.30
1985-1988
59.00
1989-1994
66.86




Source: Central Bank of Sri Lanka


Table 3: Capital Formation in Sri Lanka from 1977- 1985 (% of GDP)
Year
Private Sector
Public Sector
Gross Domestic Capital Formation
1977
9.35
5.10
14.45
1978
13.67
6.38
20.05
1979
18.67
7.15
25.82
1980
25.22
8.55
33.77
1981
23.06
4.71
27.77
1982
25.78
4.98
30.76
1983
26.88
5.77
32.65

Source: Central Bank of Sri Lanka

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