Problematic areas of ISFTA

The main argument that arises by many people in Sri Lanka is that India restricting Sri Lankan exports through non- tariff barriers. According to Moramudali (2015), India has imposed a minimum floor price (the US $ 80) was imposed on 26th august 2013. Also, the article mentioned that excessive time has taken for lab testing for fresh fruits and highly perishable items. Our apparel exports are being on a Quota restriction. Also, Sri Lankan Tea and Frozen meat items have gone under a long delay due to complex testing procedures and delayed product licensing system. Some of Sri Lankan products had faced to port restrictions in India like CU wires/cables.

“Following the surge of Vanaspati imports from Sri Lanka to India, the two countries entered into negotiations in 2006 to apply a quota on Vanaspati exports due to the disruptions caused to the Indian domestic industry. The two countries initially agreed to a quota of 250,000 metric tons per year. However, in 2006, India unilaterally reduced this quota to 100,000 metric tons and canalized all Vanaspati imports from Sri Lanka through national procurement agency”(Kelegama, 2014).

According to Quotation made by Dr.Kelegama, there was a quota restriction on our exports to India.
To reap out the gains from IFTA Sri Lankan manufacturers should take advantage of Indian supply chains. But further analysis says that our manufacturers have not been linked with Indian supply chains. Also, when comparing two countries, there is a competitive trading structure prevailed in both countries. Both countries are labor-intensive countries. Both compete in the world apparel market. Having such a competitive trading structure does not guarantee that countries can gain from FTA. First of all, Sri Lanka needs to have a comprehensive self-analysis to find what are the final products that can discover low-cost inputs from the Indian market. With cheap input, providers enable to generate high value-added final products (Kelegama, S. (2014) ‘Asian Development Bank Institute’, (458)).

Analysis on Government Income and Expenditure in SriLanka (1977 to up to date)

Introduction

The Fiscal policy is central government policy which engaging with controlling government
revenue and expenditure as well as how financing budget deficit. The government can be created
income though many resources and cost arise from different activities and
categories.
Ministry of Finance is the authorized government institution which estimated the SriLanka
Annual Budget under the Minister of Finance. But it is a responsibility of Central bank of
SriLanka to determine the actual amount of government income and expenditure ending of
each year.

Classification of Revenue
According to the Central bank of SriLanka revenue can be categorized as Tax revenue, Nontax
revenue and Grants.
Tax Revenue
Tax revenue is the income that is gained by governments over taxation. Taxation is the
primary source of income for a government. Revenue may be pulling out from sources such
as individuals, public enterprises, trade, royalties on natural resources, and foreign aid.
Direct Tax: Personal Income tax, Corporate Income tax, Tax on Interest
Indirect Tax: VAT, Excise tax, Import Duties, other Indirect Taxes
Composition of Revenue in SriLanka
Revenue mainly consists of Tax, Non-Tax, and Grants. According to the various scholars'
structure of the country, income must be highly precious with tax revenue rather than the other two
elements. (Graph 01)
Regime wise Analysis of tax revenue (Graph 2)
According to the graph tax revenue of SriLanka has different fluctuations from 1977 to 2016
due to various reasons that had been taken by the relevant government for an appropriate period.

Importance of Tax
The main objective of taxation is to be resources to “finance government expenditure in a
way that is administratively feasible, equitable, and efficient” (Burgess & Stern, 1993). A
country’s tax system is one of the elements of other macroeconomic indices such as
economic growth, public debt, fiscal deficit, and inflation. Lewis (1984) argues that an
“increasing share of tax revenue in GDP is an instrumental objective of economic
development policy.” High-income countries have had rising shares of tax revenue and
government expenditures to income as they became more economically advanced.
Laffer curve concept (Graph 3)
It shows the relationship between tax rates and the amount of tax collected by the
government. According to this study, there are two tax rates which give the same amount of
revenue to a government. Not only that, policymakers should know this concept to recognize
the tax level, which offers the maximum income.

Relationship between Tax Revenue and Economic Growth
There is no direct relationship between total tax revenue and economic growth of a country.
But different types of taxes give a different kind of relationship on the growth of the economy. VAT
gives a positive impact on economic growth because of it demotivates consumption while
motivating production and investment. As well as there is a negative impact between income
tax, import tax and growth due to incensement of those taxes undermine the incentive to work,
savings, and investment. But excise tax should be paid on personal consumptions such as
liquors, alcohol, and tobacco products. Then there is no significant impact on economic
growth.

Issues in Tax Revenue in SriLanka
Low level of tax ratio (Graph 4)
Sri Lankan tax ratio has been lower than the average tax ratio of little income country since
2005 and world economic indicators suggested that the tax ratio of smaller income country must
be more significant than 16.5% to GDP.

Slow structural change of tax system (Graph 5)
Direct taxes show a significant impact on the development of a country, while indirect taxes
play an insignificant role in a developed country. But it is different in a developing country such as
a portion of the indirect taxes must be gradually decreased during their development process.
Dismal outcome even after the changes of the tax system (Graph 6)
SriLanka Tax System is mostly rich with VAT. But it has not functioned as a promising tax
system.

Remedies for Issues
Simplify the tax system, Improve the tax administration uses of new technology Reducing
corruptions by introducing a new penalty system, providing incentives to genuine tax
payers, Avoiding politically motivated tax amenities
Non-Tax Revenue
Regime wise Analysis of Non-tax revenue 1977 – 2016 (Graph 7)
Non-tax revenue consists of Profit and Dividend, Fees and Chargers, Interest Income and
Others. Non-tax revenue shows a gradual increase from 1977 to 2016.
Grants
It is a non-repayable fund or gifted by one country, often a government department,
Corporation foundation or trust. There are two types of donors which named as bilateral
donors and multilateral donors
Regime wise Analysis of Grants 1977 – 2016 (Graph 8)
.Classification of expenditure
Current expenditure
Current cost is expenditure on good and services consumed within the current year,
which needs to be made recurrently to sustain the existing of an economic condition of a
country.

Expenditure can be categorized into two types which named as Functional and economical
Classification.
• Economic Classification: Expenditure on excellent services, Interest Payments, Current
transfers and subsidies
• Functional Classification: General public services, Social service, Economic services
O other
Regime wise Analysis of Current Expenditure 1977 – 2016 (Graph 9)
There are several fluctuations occurs due to the defense expenditure continuously increase
since 2005, interest payments have changed due to market influences and pension payments
increases year by year due to the increasing number of pensioners
Capital Expenditure
Capital expenditure refers to the spending which either creates an asset or causes a
reduction in the liabilities of the government.
Regime wise Analysis of Capital Expenditure 1977 – 2016 (Graph 10)
Several fluctuations occur due to continuation of selected projects from 2005 to 2015 and
after 2015 there is a significant decline due to slowdown public investment.

Insufficient spending area
Spending on health and education are law relative to another middle-income country
Government expenditure on education fell to 1.4 percent from 2.9 percent during the period
2005 to 2012. As well as health expenditure fell down to 1.1 percent from 1.9 since 2007
to 2012. (Graph 11)
Not only that, when SriLanka comparing with other middle-income countries, it has the
lowest position among them with the respected year 2015. (Graph 12)
Social Transfer did not keep pace with GDP Growth
The total amount of transfer payments has increased in its absolute term, but it is not paced with
the growth of GDP. (Graph 13 and 14)

POLICY IMPLICATIONS OF ETCA AGREEMENT TO PROTECT SRI LANKA

Introduction

The proposed Indo Sri Lanka, Economic, and Technology Cooperation Agreement has been criticized by most of the intellectuals, including professors, doctors, lecturers, and specialists in various field. But still, the government not hear their voices and not answer to the questions they raised. Since no one knows the real terms and conditions of the proposed ETCA agreement. If the ETCA agreement practically come into operation, the following policies must be implemented to get the benefits from that agreement and protect Sri Lankan economy also.

1. Sri Lanka government should be given the definition for each profession and name the particular qualifications for each profession

Sri Lanka doesn’t have a definition for most of the profession. As an example, who is an information technology specialist? Since after signing ETCA agreement, anyone can come as a professional even though he or she does not possess the particular academic qualifications, professional qualifications, and experiences in that field. Therefore, the government should publish the definition with required academic and professional skills for each area.

2. The government should assess the employment deficiencies in each field and limit the number of visas issuing Indian professionals accordingly

According to the department of census and statistics of Sri Lanka and ministry of labor and employment of India Sri Lanka unemployment is 422446 (4.7%) and India unemployment was 48.26 MN (4.9%) in 2015. If the Sri Lankan government allow them to freely move here, it will negatively impact the unemployment of Sri Lanka as explain in the economic impact section of the report. Therefore, the government should asses the employment deficiencies in each sector and limited the number of visas issuing to Indians accordingly in each year.

3. Appoint an authority or people who get the credibility for the transparency of the agreement

Recently peoples and many professionals talks against ETCA agreement and they are conducting seminars, discussions, conferences regarding this agreement to carry on their opinion to the people. But still, the government not a response to them or do not try to reject their views or publish real terms and conditions of the agreement. That means the government does not hear the voices of people and professional. Since there is a dominant problem regarding the transparency of this agreement. On the other hand, the people who create and sign the deal may leave from their positions within a short period (Including ministers) but the impact of the agreement may long period. That’s why we should establish authority or appoint the persons who get the credibility of the transparency of the agreement.

4. Establish a sound industry policy which coincident with trade policy

When looking at the Indo Sri Lanka free trade agreement and import and export figures with India, we are maintaining sizeable negative trade balance with India. Even though we have entered a few trade agreement with the world, we have failed to promote our trade and promote our exports to the world. The main reason behind this situation is our production not expand to meet a sufficient amount of shipping to get benefits from those trade agreements. Therefore, we should increase our production to get the benefits from trading. Otherwise after signing the ETCA agreement, with what we are going to the Indian market and how we compete with Indian products in the Indian market. That’s why we need a sound industry policy which coincident with trade agreements to increase our production, make a pleasant environment for research and innovation.

5. Making a domestic system for solving problems arising in the agreement which has the consent of India without going to arbitration.

Domestic law system cannot provide provisions for the disputes raise between countries when trade under international trade agreement due to the states have to subjected to terms and conditions of the world trade organization. Therefore, the disputes can be solved going to the arbitration operates under WTO. Usually, the winning party determined by the which party has the most influencing power to the world. We don’t have such ability when compared with India. Since we should try to establish a domestic system which has the consent of India to solve the problems before going to the arbitration
.
6. The agreement should be analyzed further engaging specialist in each field and analyze pre-trade agreement’s performance and issues

7. Stablish minimum wage policy for the professionals which has the feasibility
Due to the movement of Indians to Sri Lanka labor supply will increase. Therefore, it forces to decrease the wage rate within Sri Lanka. Since the government should take actions to stabilize the wage rate.

8. Take actions to impose the cultural barriers to protect Sri Lankan culture

Indians are one of the nations who mostly believe fictitious and fabulous things in the world. As the Sri Lankans, their some cultural habits and activities cannot be recommended. We should protect our culture from their culture. Since after signing ETCA agreement government should impose cultural barriers to protect our culture from them.

GLOBALIZATION & ITS IMPACT WITH STATISTICAL EVIDENCE

Introduction

We are unable to find a universal definition for the term of Globalization. But everyone should
know the scientific definition of globalization because it is affected by everyone in the world.
Human behavior also influenced by the process of globalization.

“Globalization as a state of the world involving networks of interdependence at multi –
continental distances with multiple economic/financial, political, national security,
environmental, social/cultural, markets and individuals” (Friedman and Keohane)
There is a lot of definitions available for the globalization. The world is narrowing the
the geographical distance between societies through the process of globalization.
Effectiveness of the globalization depends on the two policies. They are whether the country is
opened to the world and barriers to trade for the capital, goods, and services. A country which
opened to the world and there are lower barriers for money, products, and services to flow,
Globalization will useful in that country. Efforts on reducing broader tariffs and other restrictions
on the movement of goods and services, establishing a rule-based system on trade to help the
process grow faster by World Trade Organization and General Agreement on Tariff and Trade.
There are a lot of benefits that can be gain from globalization. Preliminary can be mention three main
benefits. First one is the globalization offers access to a large market. Secondly, it increases
competitions among countries, and thirdly it facilitates technology and knowledge to countries.

Globalization in Sri Lanka

Before 1977 Sri Lanka experienced self – sufficient economic system which categorizes as a
mercantilism international trade policy. In that time Sri Lanka was a leading global trading
country at a hub in the Indian Ocean. During this period, Sri Lanka was influenced to shift to export and import. During the 1970-1977 period, the average annual economic growth rate is less
than 3% also the country experiences high unemployment in that period. In 1972 Sri Lanka
experienced a 24% highest unemployment level and during the period from 1970to 1977 average
unemployment rate was17%. In 1977 Sri Lankan economy disregarded the self – sufficient
economic system. The export and import economy has both advantages and disadvantages.
However, Sri Lanka continuously earned a deficit trade balance. Sri Lanka introduced an open
a market economy with trade and FDI liberalization in 1977 and became the most open economy
in South Asia.

During the first phase(Period from 1977 to 1982 ) of Globalization, the Sri Lankan economy
experienced high economic growth and low unemployment by achieving internal balance. But in
the second phase (Period from 1983 to 1994) inflation was high, and also the very high
unemployment was recorded. After the year of 1994 Sri Lankan economy is facing a lot of
economic problems. But globalization process provided many opportunities to Sri Lanka by
the side of education, infrastructure, technology, etc.

Globalization Index

KOF Globalization index is a primary index for measuring globalization. This introduced in 2002.
This index covers the economic, social, and political dimensions of globalization. There are three
dimensions used in this index. They are Economic, Social, and Political globalization.
The dimensions of KOF index are described as follows,

❖ Economic globalization
There are two dimensions in the Economic Globalization. First one is Actual economic flow it
includes foreign direct investment stock as a percentage of GDP, Portfolio investment, and data
on trade provided by the World Bank. The second one is restrictions to trade and capital using hidden
import barriers, mean tariff rates, taxes on international trade, and capital account restrictions.
❖ Social Globalization
KOF index classifies social globalization in three categories. First one is data on personal
contacts. It includes telephone traffic, transfers, international tourism, foreign population, and
international letters. Second sub-index of information flow is measured the potential influx of ideas
and images. It includes several Internet, television, and newspaper users. Third sub-index is
data on cultural proximity. It provides several McDonald’s Restaurants, Number of Ikea, and
trade in books.
❖ Political globalization
To find the degree of political globalization their Number of embassies in-country,
membership in international organizations, participation in U.N. Security council mission and
several treaties.

Impact of Globalization to Sri Lanka

Tourism Industry

Tourism is one of the growing industry in Sri Lanka. It provides many job opportunities to Sri
Lankan people. The reasons for the growth of the tourism industry are rising global incomes, increasing
leisure time, a rising world population; fall in real transport, reduced travel time, and
globalization. The tourism industry is heavily influenced by economic and political stability and as
well as by terrorist threats. As an example in Sri Lanka, tourist arrival is declined in the past war
period. 182,620 in 1987 but in 1982 tourist arrival is 407,230. But 1983 started a civil war, and it
affected the reduction of tourism arrivals to 182,630. In 1990 recorded tourism arrivals are
297,888 and started to increase tourism arrivals at a stable level with small fluctuations. But after
the 2009 tourism arrivals are increased rapidly with the end of civil war in 2009. That peaceful
situation affects the global tourism attraction to Sri Lanka. Government promotes the
tourism sector by promoting the industry using advertising.

Trade Balance

With the liberalization in 1977 exports and imports are increased by a considerable amount. It is
improved the balance of trade in Sri Lanka. In the year 1977 US $ 86.31 Million trade surplus
shows in Sri Lankan economy. Also, this indicates an increasing pattern of export and import. Imports
are growing fast than exports. Sri Lankan economy experiences a growing trend of trade
deficit. Because of interrelationship and interdependency among countries in the world got an
opportunity for trading with other countries as a result of globalization. Sri Lanka signed the first
bilateral agreement was ISFTA. Sri Lanka has entered into several trade agreements such as,
South Asian Free Trade Agreement (SAFTA), Asia-Pacific Trade Agreement (APTA), Indo-Sri
Lanka Free Trade Agreement (ISFTA), Pakistan -Sri Lanka Free Trade Agreement (PSFTA).

Unemployment

Before 1977 in Sri Lanka recorded a high unemployment rate but after the liberalization that
impacts to the globalization unemployment in Sri Lanka declined gradually. For example, expand
of the tourism industry, garment industry, etc. Because of the foreign employment, Sri Lankan
unemployment level is reduced as a result of globalization.

Foreign Employment

With the liberalization, the Sri Lankan economy was opened to the world. Labor migration is
a moment of people from one country to another with the purpose of unemployment. Globalization
brought all countries more closely to each other in the world. It created many opportunities for Sri
Lankan people who are seeking to get knowledge, job opportunities, and educational
opportunities. Because of that, labor migration is increased with globalization. Sri Lanka is a significant labor-sending country in Asia. Globalization helped to improve foreign employment
departure year by year because it grew the interrelationship between Sri Lanka and other
countries in the world, and it allowed increasing the demand for Sri Lankan labor
force. Foreign employment from 1988 to 2007 female overseas work is more significant than a male
international job. In 2016 total departure for the external job is 242,930.

Foreign Direct Investment

During the British Colonial period from 1815 to 1918the UK was the primary source of foreign
direct investment in Sri Lanka. British FDIs forecasted to the development of infrastructure
facilities that were required for their investment in the plantation sector of the country. After achieving independence in 1948, Sri Lanka followed different changes until 1977. FDI flows
negligible as a percentage of gross domestic capital formation until the late 1970s. Foreign direct
investment during the period from 1970 to 1977 was the only US $ 0.5 Million. And it was around
only 0.2% Gross Domestic Capital Formation. With introducing liberalization policy in 1977
there was a rapid increase in FDI because of the global attraction to Sri Lanka.
Because of the civil war started from the year 1983, the upward trend of FDI trend was disrupted.
With the end of the civil war in 2009, Sri Lankan foreign direct investment was grown rapidly.

Unemployment and causes in Sri Lanka Economy (1977 to up to date)

Background of unemployment in Sri Lanka after 1977

After 1977, Sri Lanka has moved towards liberalization and reformed the economy into a
country which will gain maximum benefits from globalization. This reformation has profoundly
affected Sri Lankan employment, unemployment, and underemployment. According to
A.G.W. Nanayakkara, unemployment consists of persons who are without work, currently
available for work, actively seeking for work for pay or self-employment. As another definition,
according to the Central bank’s series of Consumer Finance Survey (CFS), persons in
unemployment contains those who had no work during the reference period but are
actively seeking employment or available for work, if action is found. (L.L.Gunaratne, 1993).
After the reformation in 1977, until 1990s unemployment among male was higher than 50%
(Table 1). But after 1990 this has changed, and around 50% of unemployed were females
(Figure 1). The main reason for this higher unemployment among female may be because many females refuse to work far away from their residences (Nanayakkara, 2004).
Many research findings say that many females are not very flexible with the number of hours
they have to work in the workplace; especially overtime activities. And many organizations
still refuse to hire female as employees due to the child baring role and the endless chores
she has to perform due to the patriarchal role in the family. The unemployment rate among
females who have G.C.E (O/L) and above educational qualifications is about 11.25%
(Statistics, 2015). Which means many unemployed females are educated. Due to that, they are
very selective of the job and waiting for the right position, and that takes a lot of time. Due to
these reasons unemployment of female is high in the country.

Underemployment of different age groups takes different significance. In the year the 1990s, the
highest unemployment rate was reported among the age group of 15-19 (Table 2). But the
unemployment percentage of the age group of 15-19 has been gradually decreasing since
2000. At the age of 15-19, many people are students and sit for the G.C.E. (O/L) and G.C.E.
(A/L) Examinations. Therefore, many of them are considered economically inactive. Out of
all the students who sit for the G.C.E (O/L) examination, only about 40% will get qualified to
sit for the G.C.E (A/L). This means most of the people who are in the age group of 15-19 will
enter into the labor market to find jobs. But due to their lack of education, lack of skills and
practical knowledge, many of them fail to find a job. Because of that, the unemployment rate
in this age group is high. Even after the age of 19, there is a high unemployment rate recorded
in the 1990s (Table 2). It is around 30%. In the 1990s the reason for this issue was, even many
students fail to gain university entrance after G.C.E. (A/L) they somehow continued their
higher studies in various streams and did not consider in entering into the labor force until
the age of around 24. Since 2000, the same reason can be applied. But the percentage rates
are slightly lower than that of in the 1990s, and it is around 15% (Table 2). Since 2000 the
education and employment trend had a different direction. Students who have not gained
university entrance have started gaining many other professional qualifications while being
an employee. This is why the unemployment rate has decreased since 2000 for the age group
of 20-29. The primary reason for youth unemployment also lies with this age group. People
who enter higher education at the age of 20-24, enter into the labor market, after
completing higher studies, at the age of 25-29. In the current era, many job opportunities’
Required period is below 25year. While companies are hiring employees, many suitable
candidates are still studying. This has become one of the crucial reasons why they were
unable to gain employment, especially in private companies (Nanayakkara 2004). According to
many surveys, another reason for this youth unemployment in the private sector is the lack of
knowledge in English communication. Many private companies require English as an essential
requirement.

As shown in table 4, the highest unemployment rate is recorded under the G.C.E (A/L &
Above) category. As Guaratne and Herath (1993) say, the unemployment in the 1980s was very
lower among those who had a deficient level of education and a higher level of education. The
reason is at that time, people who had a more moderate level of education were not able to be very
selective about the job, and grabbed the very first opportunity they had to earn
money. The primary issue of unemployment by education that is discussed by Guarantee and
Herath (1993) is that a large number of dropouts with secondary or post-secondary levels
of education and the difficulties faced by these individuals in obtaining employment. By that
time, the number of dropouts has been increased due to the increase in educational
opportunities. Those students were with some academic training but with less practical
training. That has become a barrier, and due to that, they were unable to be employed.
Table 4 shows the unemployment rate by education level from the year 1990-2015. The highest
unemployment rate is reported under the highest level of education. However, out of all the
unemployed persons, more than 40% are people who were only educated up to grade 10
(Nanayakkara 2004). Therefore, the policymakers should not only pay attention to the job
creation targeting the youth with higher education qualities but also the child who does not
have the G.C.E (O/L) qualification.

Overall Unemployment Trend in Sri Lanka After liberalization, and the reasons for the
reduction of unemployment

After the economic policy reformation, the trend of unemployment shows a downward
pattern (Figure 2) which indicates that unemployment has been reduced. Even though the rate
of unemployment has decreased in the 1990s, it was higher than 10%. Only after 1998, the country
was able to maintain the unemployment rate below 10% (Table 1). The reduction of this rate was
a result of many programs undertaken by the government after the liberalization.
The first program undertaken by the government to reduce unemployment is the Export
Processing Zone (EPZ) in 1978 in Katunayake, Biyagama, and Koggala. By the end of the year
1992 the total direct employment created by EPZ is more than 77,000 (Saravanandan, 2004).
In 1992, 200 export-oriented garment factories program was introduced. By that, well-organized factories were set up in the rural area. In that year the highest foreign exchange
earner was the garment industry, and out of all the employed people 33% of them were from
the textile and garment industry (Saravanandan, 2004).
In 1995 as a continuation of the EPZ a new step was taken, and that is called the ‘New
Industrialization strategy for Sri Lanka’. Under this step, five new export processing zones
and one industrial park was established. This has also highly contributed to the reduction of
unemployment.
Another main development program which contributed to the reduction of unemployment in
Sri Lanka is the Mahaweli Development Program. By achieving the primary purpose of the
whole program; make irrigation facilities for cultivation in the dry zone, the Mahaweli program
was able to increase the agricultural sector production. Due to that, many people who were
unemployed in the dry region became employed, and the overall unemployment of the country
decreased.
There are more reasons other than projects undertaken by the government, such as foreign
employment. Labor migration has started in the 1980s with the liberalization (Saravanandan,
2004). By the end of the year 2015 there, about 1 million people working in foreign countries and
foreign departures in that year is more than 260,000. Another reason for the decrease in
unemployment is recruitment into armed forces due to prolonged hostilities during the 1980s
(Saravanandan, 2004). Around 240,000 people were recruited to armed forces due to this
reason (Saravanandan, 2004).

Under-Employment
“Underemployment” exists when a person’s employment is inadequate, about
specified norms or alternative employment, account being taken of his occupational skill
(training and working experience)” (Statistics, 2006). Estimation of underemployment is
difficult due to the visibility issues. Visible underemployment can be determined by
comparing the number of days that a person actually worked, with the number of days that
the person was willing and able to work. If the number of days the person actually worked is
less than that of willing and able to work, visible underemployment exists (L.L.Gunaratne,
1993). According to Gunaratne & Herath (1993), in the 1980s out of all the people, who were
considered as employed, around 40% were underemployed. This means that at the 1980s around
50% of the labor force (10% unemployment and 40% underemployment) was not fully
contributing to the economy. In the 1990s the average underemployment rate is around 21.7%
and in 2000s it is around 21.6% (Karunaratne, [no date]). According to Karunaratne, the
behavior of underemployment is affected by many factors, and out of the 50% of the
reasons were the nature of work, reduction in economic activity, off-season activity.

Causes for unemployment
By considering all the factors, there are several reasons for unemployment in Sri Lanka. One
is that from the very beginning to up to date, the Sri Lankan education system has not been
modified according to the needs of the labor market. The skills that the person gain from the
system mismatches with what the market needs. Another one is that lack of job
opportunities for the educated youth, which can highly contribute to proper economic growth.
(Due to the age when they complete their university education, lack of skills in English
language, private sector reluctance to hire graduates over the misconception that they are very
radical, etc.).

Some suggestions to overcome the unemployment problem:
As for the youth unemployment due to age mismatch, universities should enroll students as
soon as the G.C.E (A/L) examination ends. Skill development education should be given to
the students from the very beginning, and the skill development strategies should be modified
according to the demand in the market. Industries that create a significant number of job
opportunities, such as the High-tech industry, should be encouraged. The youth who wish to be
self-employed in agriculture or non-agriculture sector should be supported by providing the
infrastructure facilities and providing them credit facilities which can be easily obtained.
As a conclusion, the Sri Lankan economy is gradually decreasing the unemployment rate after
the open economy policy adoption. But still, the frustration due to unemployment has not
been reduced but slightly increased. What Sri Lanka has is not the problem of lack of job
opportunities, but the lack of creation of candidates who are suitable to grab the opportunity.
What the economy should do is, to improve the skills and capabilities within the people while
creating job opportunities.

Unemployment and Causes in Sri Lankan Economy (1948 to 1977)

Unemployment and Causes in Sri Lankan Economy (1948 to 1977)

Right away after independence, even though the surge of unemployment was one of the
major issues in Sri Lanka, it was not distinguished as a factual crisis (Gunaratne & Herath,
1993). However, today’s unemployment rate in Sri Lanka is at the natural level of
unemployment, regardless of the issues of computing the rate.1
Not only in the era that this paper discussed but at the moment also unemployment must be
reduced because of many reasons. Mainly,
• Cost to the individuals
• Damage to the country
Because of the influence on the people’s usual consumption level and savings level,
unemployment definitely changes over their standard of living. Similarly, the extended period
of unemployment can be caused by the destruction of skills of individuals, which ultimately lead
to prolonging unemployment in an economy. When an individual lost his/her job, without doubt,
it affects the mental health of the person.
When the unemployed proportion of an economy increases the economic cost of
unemployment will be higher, which is incurred by the states. At the same time, governments
are no longer be able to collect the same level of taxes due to those extended expenditures.
Eventually, that will also be a burden to the public.
Hence the regimes which were control at this period tried to reduce unemployment with
many movements. The first unemployment rate could be found is in 1953 which was 16.6 percent from the total labor force.2 Since then the numbers computed were undersized, there was
no capability to calculate a rate as understood today. As mentioned earlier the unemployment
problem was not concerned as a significant issue under that level of social development (Lakshman,
1997).
For the consequences of the unemployment rates during the period of 1948 – 1977, the variance
of the definition involved. For instance, in 1953, people who worked for their families, but
receive no payments are excluded from the definition of unemployment while in 1963, that
proportion was included. Likewise, in 1979 the percentage of the students who are attending
school was excluded from the definition of unemployment. But in 1973, that proportion was
included in the unemployed persons, and that leads to a reduction of the unemployed persons
in 1979 and comparatively 1973’s unemployed percentage was higher. (Appendix 7)
In the 1950s, rapid population growth, the diffusion of the formal education system and
relatively reduced rate of economic growth were the main reasons for the increase of

1 The ILO definition of unemployment covers people who are: out of work, want a job, have actively sought work in the
previous four weeks and are available to start work within the next fortnight; or out of work and have accepted a job that they
are waiting to start in the next fortnight.
Unemployment Rate in Sri Lanka 4.1% in January 2017
2 The labor force is the sum of persons in employment plus persons in unemployment. Together these two groups of the
population represent the current supply of labor for the production of goods and services taking place in a country through
market transactions in exchange for remuneration.

 UNP3 political regime was in power in the period from 1950 – 1955 and
the initial endeavor for reducing unemployment was found in a report of a “World Bank
Mission”, published in 1953. Though it was not precisely referred to the unemployment issue, it
had a particular effect on joblessness since it got deeds to the reduction of rapid population growth
by Family Planning. A paper called “The Six-Year Programme of Investment” was published
in 1955 as a continuation of the Mission, yet again the foremost emphasis was to reduce the
prompt population swelling.
From 1956 – 1964 period MEP4 political regime came into the power and in 1959, the first
the inclusive development program, “The Ten-Year Plan (1959-1968)” was published which,
The primary motivation was the issue of unemployment. Nonetheless, the direct emphasis of this
the plan was the higher employment, and there was a sub-objective to maintain a higher growth rate
which ultimately drawn to a lesser unemployment rate.

• Forming the education policy adjusted to the growth in employment opportunities in
numerous segments of the economy.
• Industrialization, primarily focusing on a small scale and cottage industries which were a
reliable method to attract the country’s rising labor force.
Though the main focus of the Plan was employment, there was no chance to execute it because
of the changes in government. Subsequently, there was a series of Short Term Implementation
Programs which was called as “STIP” under the fundamental Ten Year Plan, with some
adjustments. Thus, in the period of 1953 to 1963, it has been generated 448,000 new jobs which
the unemployment rate was decreased down to 13.8 percent. (Appendix 1 & Appendix 2)
In 1965 the UNP party again came to power, but there are no movements mentioned
for reduction of unemployment during the regime from 1965 to 1969.
In 1970 the new political party came into power, SLFP5 and in 1971 insurrection, the
unemployment issue was demonstrated, particularly the youth unemployment, as the
The government was unable to address the problem in the same way as The Ten Year Plan. So the
the result was “The Five Year Plan (1972-1976)” circulated in 1971 which was the main objective
was to reduce youth unemployment.

• Highlight on the expansion and modernization of agriculture.
• Development and diversification of the export sector and particular industrialization
with prominence on labor-intensive techniques of production.
In my opinion, the government aimed the young generation in the country to engage in the
agriculture sector as they emphasized in the expansion of that sector. In the same time, one of their
primary intentions was to develop the labor-intensive techniques of production, which will hire
the effort of the young persons, ultimately lead to the reduction of younger unemployment.
3 United National Party
4 Mahajna Eksath Peramuna
5 Sri Lanka Freedom Party

However, the Plan was a failure due to certain destructive exterior factors; absence of
dedication and mismanagement of the economy. Hence the unemployment issue remained as
the major problem as it was, and rose up to 24 percent in 1973. (Appendix 1 & Appendix 2)
Discussing the youth unemployment, by 1973 the absolute value of the total unemployed
people in Sri Lanka was 1,078,000 out of a total labor force of 4,491,000. Out of that total
unemployed group, 877,000 people were between the age group of 14-25 years (Appendix 3).
The expansion of the proportion of women arrival to the labor force, simultaneously with a
relatively higher rate of unemployment among women can be observed significantly in the era
from 1948 to 1977 (Appendix 5). As the consequences of several cultural and economic factors,
the number of women participated in the labor force was increased. In my opinion, the
increasing rate of the female population was a significant reason to the higher unemployment rate in
this era, because there was a norm in those days which women do not fit to engage in a
job since they had to perform in their day to day household activities. In general, the
breadwinners of the family were the males. Therefore the top part of the women population
was not employed at all.
On the other hand, in the period of 1948-1977, there were tremendous educational opportunities which
were resulted in a rise of the formal educational level (Appendix 6). Hence, the considerable
amount of school dropouts with secondary or post-secondary levels of education can be
observed after independence. It has led to an upsurge of the number of the school dropouts,
with some academic training but without much practical and vocational training (Gunaratne &
Herath, 1993).
It has demonstrated that in the sub-period of 1970-1973, the average growth rate of the economy
was at a very lower price which was only 3.0 percent. It has indicated as the demand side of the
labor market, and on the other hand, the labor force was up surging rapidly by this period
(Appendix 4). Obviously, this is the supply side of the labor market, and it leads to a surplus
of the supply side which was a substantial increase in the unemployment, occurred due to the higher
gap between the supply side and the demand side of the labor market.
Therefore, during the period of 1948-1977, the flying increase in unemployment was a
a consequence of not taking proper actions by the government, which was escaped by the new
the government elected in 1977 through better activities.

Inflation and Causes in Sri Lankan Economy (1977 to up to date)

Introduction

Inflation plays as an essential macroeconomic variable in any economy. Simply, inflation is
known as a continuous increase in the general price level of the economy over some time.
Inflation is determined by the gap between aggregate demand and aggregate supply. For
increase is not a once-and-for-all rise in the price level due to some extraneous circumstance
but a continuous rise due to excessive aggregate demand. (A.D.V.De S.Indraratna) Inflation
reduces the purchasing power of money. Price Stability is one of the core objectives of Central
Bank of Sri Lanka like in many other countries which indicates the degree of criticism of
inflation. Consumer Price Index, Wholesale Price Index, and GDP deflector are used as main
measures of inflation in Sri Lanka. CPI and GDPD are moved and increasing closer together.
Even WPI moves in the same direction, it is more volatile, rising, and falling more quickly.
Since it is a cost of production index which gives higher weight to internationally traded
commodities while the other two are final selling price indices. (Figure 1) There are different
types of inflation such as hyperinflation, galloping inflation, creeping inflation, suppressed, etc. Foodflation is a new kind of inflation we are experiencing in today implies with global
food prices rising, cost of living has been growing, and this has caused an increase in many food
deficits or food-importing countries including Sri Lanka. This is a kind of cost-push inflation.
(A.D.V.De S.Indraratna, 2009)

Causes of Inflation

Mainly, causes of inflation are Demand-Pull Inflation which means an increase in aggregate
demand more than the available aggregate supply in the economy and Cost-push inflation
which indicates the reduction in the supply of the economy due to a rise in input prices which
will lead to rising in total production cost.

Causes of Inflation in Sri Lankan Economy (From 1977 to up to date)

When considering inflation from 1948 to present, it shows that inflation rate has significantly
increased after introducing open economic policies in 1977 by eradicating trade barriers and
exchange controls. (Figure 2) As well as when compare Sri Lankan inflation with rest of the
world it illustrations that Sri Lanka and emerging market and developing economies have a
high inflation rate since 1980. (Figure 3) It can be analyzed different causes which had make
influences to Sri Lankan economy and have affected to the inflation rate movements of Sri
Lanka during the period 1977 to present which will be mentioned follows.

• Changes in Import and Export Prices
Changes in CCPI & GDPD over most of the post-1978 period appear to be explained mainly by corresponding changes in import and fiscally induced prices. Further WPI
has changed due to import and export price changes. (H. Nicholas, 1991) With an
increase in the value of exports will lead to an increase in exporter income, which reflects
an increase in demand in the market.
Further as import prices increase mainly non traded
factor prices, there will be a pressure on the domestic price level and will
reduce the value of the local currency. After liberalization UNP government encouraged
Direct Foreign Investment and private sector participation with new policy package
and lead to export-oriented industrialization. Figure 4 shows that CPI moves along
with an import price index. However, in the middle 1983-1986, this relation has collapsed
due to large movements in export prices, changes in administratively determined
prices and a decrease in domestic supply due to drought in 1986. It can be observed a
close relationship between WPI, the Export Price Index, and Import Price Index. (figure 5)

• Internal conflicts
The year 1983 a civil war had started in the country which had till middle 2009. Due to
this 1983-2009 period government spent on a considerable amount of war. Therefore,
inflation during this period had affected by civil war. Further, this shows a higher
inflation rate of 22.56% in the year 2008 with an increase in government spending on
military purposes. With the end in civil war 2009 inflation has reduced to 3.46%.
The country was politically boisterous during the 1988-1989 period due to JVP unrest
which remarked a two-digit inflation rate.

• Depreciation of Rupee Value
In 1977 liberalization period UNP was in power, and a system of the managed float
was adapted to determination of the exchange rate as Sri Lankan Rupee
value depreciated by 46% against US$. Since 1977 to present nearly, there is a
devaluation of rupee value with respect of dollar. This adversely impacts on import
prices which result in an increase in trade deficit since Sri Lanka is highly import
depended on the country. In 2016, around 30% of GDP was imports of goods and services
in Sri Lanka. (CBSL)

• Increase Government Debt
There is an increasing trend in government debt since 1977, which make an upward
inflationary pressure. After 1977 the government has obtained loans to finance major
infrastructure and other government projects like Mahaweli development project and
Public-Private projects like Air Lanka, Hotel Hilton, and Pelawatta Sugar Company, etc. However, Scholars has mentioned that currently Sri Lanka taking bigger loans to
repay the loan that has already taken and using the loan to finance recurrent
expenditure of the government. Therefore, it was revealed that the country will fall
into a possible debt trap unless the loans taken are used effectively in productive
investment. (Ganeshamoorthy, 2011)

• Increase in the money supply
According to monetarists’ argument, inflation occurs due to continuous expansion in
the money supply of the economy. The constant depreciation of rupee value, an increase
in exports and bank financing of government deficit make a substantial increase in
the money supply. In the year 2008, inflation had laid at a higher rate, and there was an increase
in the money supply. (Heritage money series) Further, there is an increasing trend in the money
supply of Sri Lanka during the period. (Figure 6)

• Increase in government expenditure
In recent years the government had spent significant expenses on civil war. Further, when
considering about government expenditure, Sri Lanka maintains a large government
sector with large no of employees, government institutions and ministries. Hence,
government expenditure is allocated hugely for these expenses. It is questionable
about the efficient and effectiveness of the government sector. Further, government
expenditure in Sri Lanka is more than its revenue by making negative savings.
Since past years the government has adapted primary income transfer for poverty
alleviation program and spent on subsidies.

• Increase in government and private investment
In the years 1978-1998 period, the government had started several costly
infrastructure developments projects. Therefore, it affected to government budget in
a highly expansionary manner. As well as with the end of civil war in the country
government has invested in many infrastructure development projects like Maththala
Airport, Hambantota Harbor, road development project, etc. But the income receive
from these projects is doubtful whether it complies with the amount of money spent.
As well as these investments make an inflationary pressure.

• Natural Disasters
Sri Lanka is faced to mainly frequent natural disasters drought and flood. In 1978,
the mid-1980s, 1983-1986, 1988 period and recently 2016,2017 years production of
the economy had declined due to bad weather condition.
In the year 2003 inflation was 6.31 %. In December 2004 Sri Lanka faced a natural disaster
of Tsunami which leads to increase inflation rate to 7.57% in 2004 and 11.63% in
2005.

• End of civil war in 2009
End of civil war in mid-2009, which was in around three decades has made a
favorable impact on the economy. In 2009 inflation has significantly reduced to 3.46%
which was the lowest inflation recorded after more than two decades, which was
22.56% in 2008. End of civil war encourages government and private investment.

• Global Food Supply and prices
There are some world Supply shortages of agricultural commodities due to crop
failures in major producing countries due to adverse weather conditions, primarily wheat
and milk foods. As well as the diversion of primary farm products such as sugar,
maize, wheat, corn, and edible oil to bio-fuel production due to high oil prices,
whereby creating supply shortages in the world market. The impact of these factors
on inflation has been very severe for countries like Sri Lanka, which heavily depend
on imports for such items. Food prices in Sri Lanka have closely followed FAO
global food price index, which has risen sharply in 2007. (CBSL, 2008) Further, it can
be observed an increasing manner of food prices in Sri Lanka.

• Increase in Population
Increase in population has identified as a cause of inflation due to making an increase
in aggregate demand. The people of Sri Lanka has an increasing trend since 1977.
This is also another cause of inflation in Sri Lanka.

• Other Causes
In 1978-1988 period, with the movement to open economic policies in 1977,
the government changed towards export-oriented industrialization got away from the
previous, adapted Import Substitution Industrialization. It has also allowed reaching
interest rate very high levels to make easy of financing. Most price controls and
quotas were eliminated, and universal food subsidies were replaced by a targeted food
stamp scheme to benefit only the lowest income earners. It has allowed to establish
branches of foreign banks and introduced institutional facilities to encourage trade
and investment. After the expansion of the financial institutions, domestic credit has
increased considerably since the favorable condition to private investors. The policy
change in 1977 worker migration to middle east countries has risen, and due to
an increase in remittances, an inflationary pressure occurs through an increase in domestic
demand. The world oil crisis in late 1978 had affected the local price level. In 1980-
1984 essential food items such as wheat flour, bread prices, public transport fares, and
oil prices have increased. Further, the government public investment programmer, high
government capital expenditure, and high budget deficit affected to the high inflation
and 1980inflation have reached to 26.1%, which was highest after independence. In
1990 rise was 21.5% due to exchange rate depreciation in 1989, the increase in
fertilizer prices, increase in fuel prices, an upward revision of guaranteed paddy
prices. In 1991-1993 period inflation has reduced as favorable weather condition
and contractions monetary policy. In period 1994-1995 inflation remained at a
single digit due to reduction of administrated prices. Increases in world market price
of imports and drought, which has resulted in power cuts and reduction in production
fueled for the double-digit inflation rate in 1996. (W.D. Lakshman, 2000) (figure 7)

Inflation Beyond 2017
Since the 1980s CBSL has been pursuing monetary targeting as its monetary policy
framework to maintain price stability. In 2017 Central Bank has decided to
move towards a flexible inflation targeting framework in the future.

Exchange rate and currency depreciation with reasons in Sri Lanka (1948 to 1977)

Introduction

The exchange rate can be defined as the rate at which currency of one country exchanges
for a currency of another country. Simply, it is the price of one currency in terms of another
currency. For a small economy like Sri Lanka, the exchange rate is very important because it
affects the prices of exports and imports. Also, the currency depreciation happening in the
country creates several impacts on the economy. Therefore, the government should manage
the exchange rate in accordance with the economic situation of the country. Within the 6
decades after gaining political independence in 1948, Sri Lanka’s exchange rate system
has evolved from a fixed exchange rate regime to an independently floating regime with no.
of rupee depreciation. And the evolution of these exchange rate regimes including the
currency depreciation is mentioned below.

Fixed Exchange Rate Regime (1948 – 1967)

When gaining political independence in 1948, Sri Lanka had a fixed exchange rate regime
where the exchange rate was pegged to the Indian rupee. Although Sri Lanka rupee (Ceylon
rupee) was introduced as the standard unit of value in 1941 by the Currency Ordinance of
1941 its value was linked to the Indian rupee. At that period, the Indian rupee was linked to
the pound sterling like most of the colonial countries. Therefore, Sri Lanka rupee also
indirectly related to the pound sterling. During that period, the center of the banking and
financial system of the country was known as the Currency Board, and it had the sole
authority to issue and manage the currency within the state. A 100% foreign reserve was
maintained for the backing of the money.

On September 19, 1949, the pound sterling was devalued by 30.52% (exchange rate of the pound
sterling against the US dollar was changed from $ 4.03 to $ 2.80). Accordingly, India also
devalued its currency by the same proportion to maintain the same exchange rate
relationship with the pound sterling. As a result of that, the value of the Sri Lanka rupee was
devalued by the same proportion due to the linkage with the Indian rupee. In 1949, there was a
surplus of Rs.37 million in the trade balance of Sri Lanka. Although this amount was small
compared to the trade balance of Rs.94 million in 1948, it was a positive balance. Therefore,
this had a minor effect on the devaluation decision of Sri Lanka rupee. According to Ivor
Jennings, Britain was one of the best customers of Sri Lanka at that period. In 1948,
exports for Britain represented 32% of total trade. So, if the rupee had not been devalued,
the main exports, which are tea, rubber and coconut would be less competitive in the world
market, and the export revenue would be decreased. Another reason for the rupee devaluation
was that the foreign assets of Sri Lanka held almost in either pound sterling or Indian rupee
during that period. Therefore, if Sri Lanka did not devalue the rupee, the value of those
assets would be decreased by the sterling devaluation percentage. (Refer to Table 1)
The Central bank of Sri Lanka was established in 1950 as a replacement for the Currency
Board. Stabilization of the domestic and external values of the rupee and promoting
economic growth are the main objectives of the establishment of the Central bank. And almost
immediately after the introduction of the Central bank, Sri Lanka joined the International
Monetary Fund (IMF). Accordingly, Sri Lanka severed the long term exchange rate link with
Indian rupee and moved into an independent exchange rate policy. However, the fixed
exchange rate system was continued, and the monetary authorities believed that the fixed
exchange rate regime was essential to improve international trade and investments.
The monetary value of rupee was fixed at 0.88 grams of gold. The exchange rate was decided
as Rs.13.33 for one pound and Rs.4.77 per one US dollar. (Refer to Table 2)
From 1957 to 1966, Sri Lanka’s balance of payments was continuously deteriorated due to
the higher import expenditure compared with the export value. (Refer to Table 3) Foreign
reserves of the Central bank also significantly decreased when it comes to the end of 1960
Decade (Ramasinghe, 2007). This situation was worsened when the pound sterling was
devalued. To maintain the export competitiveness, Sri Lanka devalued the rupee by
20% on 22 November 1967 by fixing the exchange rate at Rs.14.30 per pound sterling
(Wickramasinghe, 1985). The main intention of the Central bank behind this devaluation was
to motivate the exports and increase the competitiveness of export prices and to limit imports
to a certain extent.

Dual Exchange Rate Regime (1968 – 1977)

The balance of payments problem of the country was not entirely solved by the rupee
devaluation in 1967. Therefore, a dual or a multiple exchange rate systems were introduced in
May 6, 1968, known as the Foreign Exchange Entitlement Certificate Scheme (FEEC). The main
objective of this scheme was to diversify exports and restrain the increase in imports. There
were 2 rates involved in this scheme.
1. Official rate
2. Certificate rate/ premium rate

The official rate applied to essential imports and traditional exports. And the premium
rate applied to all other commodities and imports. At the initial stage, the official rate was
fixed at Rs.14.2857 per pound sterling, and the premium rate was set at Rs.20.5714 per pound,
which was 44% above than the official price. In 1969, this rate was increased up to 55%, and
it was increased up to 65% in 1972 (Ramasinghe, 2007).

In 1971, due to the suspension of the convertibility of the US dollar into gold, the value of the
US dollar began to depreciate against the pound sterling. In Sri Lankan point of view, this
might cause to reduce the export income coming from dollar zone countries. Also, some of
the rival states of Sri Lanka in the export market had pegged their currencies to the US
dollar. Therefore, after considering these facts, Sri Lanka decided to peg the Sri Lanka rupee
to the US dollar on November 8, 1971. Accordingly, the exchange rate was set at Rs.5.95 per
US dollar. The Sri Lanka rupee-dollar rate remained unchanged due to this linkage with the US
dollar at that time. However, Sri Lanka rupee was depreciated against other major currencies
in this year. In 1971, Sri Lanka rupee showed depreciation of 5.79% against the pound
sterling (from Rs.14.2857 to Rs.15.1649). Likewise, Sri Lanka rupee depreciated against the
Deutsche mark by 10.11%, against the French franc by 5.93%, against Japanese yen by 8.33%
and against the Indian rupee by 0.73%. (Refer to Table 4)
In 1972, the United Kingdom was decided to float the pound sterling. To avoid the unfavorable
effect on exports to the sterling area and higher prices for imports, the Central bank decided
to re-peg the Sri Lanka rupee to the pound sterling on July 10, 1972. So, the exchange rate
was fixed at Rs.15.60 per British pound. However, due to this re-peg, the Sri Lanka rupee
again depreciated in 1972 against all the major currencies. It depreciated by 6.92% against
US dollar (from Rs.5.9524 to Rs.6.3953), by 2.78% against the pound sterling, by 10.11%
against Deutsche mark, by 10.88% against French franc, by 15.49% against Japanese yen and
by 3.65% against the Indian rupee. (Refer to Table 4)

Another important event occurred in 1972 was the introduction of Convertible Rupee
Account System (CRA). Although it was not exactly an exchange rate system, it was used to
motivate the non- traditional exports. By using this system, 25% of the foreign exchange
gained by the non- traditional commodities could be deposited in a convertible rupee account in the
Central bank. And the account holders had the freedom to use the balance in their minds to
engage in foreign tours or to export or import what they like.
In 1976, the linkage of the Sri Lanka rupee with the pound sterling was terminated by the
The central bank to protect the rupee from the uncertain events of the other countries.
Instead, the exchange rate of the Sri Lanka rupee was allowed to be determined relative to an
appropriately weighted basket of currencies.

Managed Floating Regime

The dual exchange rate system was abolished in November 1977, and both rates, which are
the official rate, and the premium rate were unified at Rs.16 per US dollar. A managed
floating exchange rate regime was introduced after that, and the rupee was allowed to float
according to the demand and supply conditions in the foreign exchange market. However, the
unification of the exchange rate on November 16, 1977, resulted in a devaluation of the rupee
by 44.6% against US dollar, by 45.5% against the pound sterling and by 44.8% against the Indian
rupee (Wickramasinghe, 1985).

Economic Impacts of currency depreciation

▪ Positive impact on the trade deficit of the country
When the exchange rate depreciates, the imports become more expensive for domestic
customers as they have to pay a higher rupee amount than before. Then the demand
for imports will go down. On the other hand, exports become cheaper for foreigners
as they have to pay less amount of money than before to buy our commodities. Then the
export competitiveness of the country will be improved. Therefore, people will
demand more domestically produced goods and the foreign demand for exports will
also go up. But, in a situation where the country imports essential products, the need
for those imports will not decrease even they become expensive.
▪ Increase in the rupee value of the foreign currency debt payments of the government
and the private sector.
▪ Increase in import prices will cause the prices of imported raw materials, intermediate
goods to rise. Then the final products produced by using these inputs will have a higher
cost. This will affect the general price level to go up.
▪ Because of the increased demand for exports, export-related industries will likely to
expand, and more domestic resources will be allocated to these industries.
▪ The employment opportunities in export production industries will increase.
▪ Tourist arrivals will be increased because they can get more domestic currency units
within our country for their own group of currency.