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.

Sri Lankan export and import overview (1948 to 1977)

Introduction

During the first decade after independence in 1948, Sri Lanka (commonly called Ceylon until
1972) continued to remain an open trading nation with only relatively minor trade or exchange
Rate restrictions and liberal domestic policies. In 1977 Sri Lanka started to open the economy
after following Import Substitution Industry (ISI) policies before 1977 with the expectations
of the rapid development of the country.
Sri Lanka’s economy is basically a primary one dominated by agriculture with the attainment
of political independence in 1948, government-initiated active step to develop the industrial
sector in the Sri Lankan economy. That period was identified as Industrialization. This has a six-year plan from 1948 to 1953. It indicates the industrial development and to diversify the
economy and to reduce the dependence of the country on imports. For that, a series of major
manufacturing industries were selected for investigation and development.
During the 1948-1955 period, Sri Lanka experienced the free trade era. Favorable balance of
payment appeared due to the Korean War boom in 1951/52 and tea boom in 1954/55 was the major
Reasons that lead Sri Lanka for liberalized trade policies. However the favorable balance of
payment situation was not continued until the end of the 1950s and country marked the beginning
of the closed economy in 1956.
Import Substitution Industrialization 1956 to 1965.
As a result of deterioration of the balance of payment situation and the new government in 1956,
Mr. S.W.R.D Bandaranayke’s Sri Lankan Freedom Party won power, then the country began
to import industrial substitution strategy (ISI) in 1956. Here government engaged in preparing a
comprehensive plan of development for the island’s economy covering both public and private
sectors. A long term perspective plan covering ten years was formulated, and the import
substitution strategy was included in the program. The government realized that, as in many developing
countries, the only viable strategy of economic development was “import substitution.” It
means the production of anything should develop domestically. It was a primary objective of this
plan. It had long term plan also. It was a possibility of the expansion of manufactured exports,
but this was an objective to be achieved as an outgrowth of import-substitution industrialization,
not as an integral part of an industrialization strategy.
Starting with the 1957/58 budget, a tendency towards using the tariff policy as a tool for
promoting import substitution, by imposing protective tariffs on selected industrial products
and lowering taxes on capital equipment. Also, this policy restricted quantitative imports. In
January 1961, for the first time, a system of import control with individual licensing and
allocation of quotas to importers was introduced for several- semi-essential consumer items. By
the end of 1964, for all practical purposes, Sri Lanka had turned into what can be called a “closed
economy.” Since limited trade liberalization attempts were taken place in the first half of the 1960s,
the period from 1965 to 1970 period is considered as a partial liberalization. However, this
strategy was reaching a crisis point by the mid-1960s.because of this crisis situation there was
a growing recognition by the policymakers that increased emphasis should be placed on export
development.

Export-Oriented Industrialization 1965-1989

The policy measures taken for the promotion of export included setting up of import duty rebate
scheme for manufactured goods export in December 1964, introduction of an import
entitlement scheme for selected minor exports, in 1966, devaluation of the rupee in 1967, and
the introduction of a Dual Exchange Rate System with a premium exchange rate for non-traditional exports in 1968. The white paper on foreign investment, issued in 1966, aimed at
attracting foreign investment to production for exports. However from 1965 to 1969
The Government placed a greater emphasis on the agricultural sector than the industrial sector. The policy
emphasis on export promotion continued well into the 1970s with the new government that
came to power in May 1970. In fact, the onset of the oil crisis in 1973 with its attendant balance of
payment pressure and the increasing debt- servicing burden.
The industrial policy of the new government of Mrs. Sirimawo Bandaranayke’s period
emphasis more support for export-oriented industries. The creation of new export sector based
on industrial production was a crucial element in the five-year plan of 1972-1977. Other than that
the five-year plan introduced promotion of export-oriented foreign direct investment was
reaffirmed and further production and tax incentives. This indicates an attempt to move away
from the earliest used policy called import substitution industrialization. To encourage exports
government was taken several steps. They were
• There were several newly introduced fiscal incentives, including an eight-year tax
holiday on export profits of approved exporting ventures. (Tax concession)
• Provide easy access to the foreign market
• Provide opportunities to bring experiences in many complex facts of product
development and international marketing.
• Relaxed foreign exchange restrictions on the remittance of dividends, interest, and profit
originating in such ventures.
The export promotion Secretariat was established in 1972 to function as an institute for directing
and coordinating the export development effort of the country. Here because of the rapid growth of
the export sector led to a severe foreign exchange crisis which restricted the availability of imported
raw materials and capital goods. By the mid-seventies, total earnings from manufactured
exports covered only 6 % of the requirements of the overall import of the industrial sector. As a result,
industrial growth had become increasingly dependent on the foreign exchange earnings of
traditional exports which were themselves suffering from both instability and stagnation.

Liberalization
Because of the issues mentioned above, the new government which came to power in 1977 gave
way to a liberalized economic environment whose aim was to promote export orientation along
With efficient import substitution. Trade liberalization movement towards free trade through
the reduction of tariffs and non-tariffs barriers is a significant force behind the globalization.
Export and import sector
Sri Lanka has a long term history of foreign trade. According to the various historical
sources in Sri Lanka like chronicles, inscriptions, and other archaeological findings, Sri Lanka
was a leading trade center in the ancient world. Location of Sri Lankan island in the Indian Ocean was a critical reason for its high success in maritime trading activities, and Sri Lanka was situated at
the middle of the maritime Silk Road from China to Europe.

Export
Export is a function of international trade where goods and services produced in one country
are shipped to another state for the future sale or trade. Total exports can be classified as,
Agricultural production, industrial production, and mineral production and others. (See appendix
01)
In between 1950 to 1977 we can see a small decreasing trend in agricultural production and in
industrial production and mineral production both of that productions had an increasing trend. In
the export sector, the agrarian sector had the primary contributed industry for exports. From that
agricultural sector, Tea, Rubber, and Coconut are the main crops exported by dealers.
In Sri Lankan export composition there was no considerable change in between 1948 to
1977. In the period of independence, tea, rubber, and coconut gave a significant contribution to
the export income. It was about 89% of the total export income. After 25 years ago also Sri
Lanka gained a higher income from the three crops. It was about 76% of the total export income.
Therefore the composition of export in Sri Lankan economy has no considerable change in
between 1948 to 1977. (See Appendix 2)

Imports
Import is goods and services bought one country to another country. Both in 1948 and in-between period and also in 1977 the Necessary goods were imported in Sri Lanka. Rice,
Sugar, Wheat flour is the main imported necessary goods. In 1948 the contribution of these
three essential goods were 38% of the total amount of imports. In 1974 it was 39 %.
In between 1948 to 1977, consumer goods import amount was increased, and intermediate
goods also increased the import amount. In investment goods, there cannot identify any
increasing or decreasing trend. It had a slight change between 1948 to 1977. When
the contribution of the import mentioned above goods consider as a percentage change can see a,
there was a reduced rate in consumer good and investment goods although it had increased as
an amount. But in intermediate goods, the percentage change was increased relative to the
amount we considered earlier. (See Appendix 03)
Trade balance
The balance of trade compares the value of a country’s exports of goods and services against
its imports. When exports are higher than imports, that’s a trade surplus. Most nations view
that as a favorable trade balance. But Sri Lanka has trade deficit since an extended period. In
between considered periods, there was a trade balance surplus in the initial period. But in
later stages, although some periods had a trade surplus, the overall view was the trade deficit. (See
Appendix 04)
When considering overall performances of the export and import structure in Sri Lanka in between
1948 to 1977 period, there was no considerable change in the composition of exports
and imports. Although Sri Lanka used several policies in the period of 1948-1977
regarding the exports and imports, at last with the liberalization, Sri Lankan economy tried
to increase the performance of the export-oriented Industrialization to overcome the issues
related to the balance of trade.

Exchange Rate and Currency Depreciation with Reasons in Sri Lanka (1977 to up to date)

Introduction

The exchange rate is a rate of exchanging a unit of foreign currency with the domestic currency unit.  Depreciation and devaluation are two different concepts. Depreciation is the adjustment of the exchange rate so that more of yours currency is needed to exchange for a unit of foreign currency (Bandara, 2007) Devaluation is the different concept from depreciation. Devaluation is decreased the value of the particular currency under the fixed exchange rate. The Opposite side of the devaluation is considered as revaluation
Managed floating rate system
Managed floating is a concept that lies between fixed exchange rate system and floating exchange rate system. It avoids both appreciation and depreciation of the exchange rate by selling and buying the domestic currencies in foreign exchange market to control the fluctuations in the exchange rate. It is not the clean float and basically it is decided based on the control of the central bank in foreign market unless demand and supply of the market. It is a combination of favorable features of both fixed exchange rate system and free floating system. According to that, central bank intervenes to control the fluctuation of exchange rate in the short run, while it is decided based on the demand and supply in the long run. It is implemented from 1977 to 2001.

Free-floating rate system

On 23 of January 2001, Sri Lanka shifted from managed floating system to free-floating exchange system. According to this central bank avoids from preannouncing the exchange rate. Instead of that CB intervenes in foreign exchange market by selling and buying foreign currency at or near market prices due to the strong need of maintaining a large stock of foreign reserves.

Evaluation of Sri Lankan Foreign Exchange rates after 1977

Managed floating exchange regime (1977-2000)

The dual exchange rate system was abolished in November 1977, and both rates, namely the official rate and premium rate, were unified at Rs 16 per US dollar. Unification of the exchange rate on November 16, 1977, resulted in a devaluation of the rupee by 44.6% against the US dollar and 45.5% against the pound with the purpose of export competitiveness. The rupee was devalued from 8.41 rupees per US dollar in 1977 to 15.61 rupees per US dollar in 1978. The massive devaluation of the rupee resulted in a sharp increase in the remittances sent by Sri Lankans living abroad. (Athukorala and Jayasuriya, 1994).The worker remittances increased from 190 million rupees in 1977 to 610 million rupees in 1978.
1977 introduced a managed floating system, and Central bank made a discussion with all other commercial banks and determines the future buying and selling rate based on the demand and supply of the foreign exchange rate. According to that decision, the exchange rates of six main currencies (Dollar, Pound, Mark, Frank, and Indian Rupees) and commercial bank have right to decide the exchange rate of other currencies based on the cross exchange rate. In November 1982, the Central bank made significant changes regarding the exchange rate. Such as cancelling the meeting which decided the buying and selling rate of exchange rate at the central bank and determined the buying and selling rate of only Dollars, Central bank limited the use of Dollar when in foreign transactions with the Commercial bank, commercial bank received right to determine the foreign exchange rate based on the demand and supply of the foreign currency. Purpose of the Central bank for the above changes is limited to intervention in the foreign exchange market. In 1990 Central bank of Sri Lanka stopped the preannouncing of buying and selling rate of US dollars. Instead of that, they introduced a daily system for deciding buying and selling rate at the beginning of transactions. Aims of presenting conventional operation are protecting the competitiveness of domestic export in the foreign market and giving a stable position for international trade. After July in 1997, there was some financial crisis, especially in the East Asian countries due that an unstable condition in foreign exchange market prevailed in those countries. Sri Lankan rupee is depreciated against US $ by   7.5% because of the impact to the price of the rubber production of Sri Lanka and industries like the garment industry and commodity export industries the revenue fell far below the expected targets. Also, financial hardship faced by South Korea, Malaysia, and Hong Kong a fall in foreign investment in Sri Lanka too, is expected. Depreciation of Sri Lankan rupee is relatively low when compared with the domestic currency of some of the countries in that region depreciated against the US Dollar. However as a south Asian country Sri Lanka was less affected during that period due to Capital transactions were limited since restrictions were imposed against the operations of capital account in balance of payment, favorable aspects of foreign assets, ability to bear the foreign debts and continuous depreciation of Sri Lankan Rupee under the managed floating rate system. Due to the above reasons, Sri Lanka was able to avoid the unfavorable effects from the decline of competitiveness of export and save a considerable amount of outflow of capital temporarily resulted for lower depreciation against US Dollar. In 2000, due to the rapid rises in petroleum prices and military expenditure resulted in increasing the deficit of the balance of payment and decline of foreign assets. (Appendix 1) Therefore Central bank had to amend the margin in exchange rate frequently. From 30 th June 2000, the margin of exchange rate extended from 2% to 5% and devalued the average amount by 4% to give flexibility to Sri Lankan rupee in the foreign exchange market. The margin of the exchange rate is extended in all time when depreciates the rupee value. It is difficult to maintain the managed floating exchange rate system since the continuous increase of the deficit of the balance of payment and further expectation of depreciation of Sri Lankan rupee. The balance of the payment problem of the country was not entirely solved by the rupee depreciation in 2000. Therefore there is a need for a new exchange rate system.

Floating exchange rate regime (2001- up to now)

With the introduced of the floating exchange rate system has led to minimization of the probability of outflow of official foreign reserves. If the central bank followed the crawling band system further, it would have led to an unstable situation in exchange and financial market by out flowing the official foreign reserves. Because of the introduced of the free-floating exchange rate rupee is depreciated by 11.3% against the US dollar, by 8.8% against the sterling pound and 6.7% against Euro. Due to the introduction of the free-floating exchange system, there was a huge fluctuation in the financial market of Sri Lanka. Within few hours buying price of Dollar has moved from Rs 84.75 to Rs 85 and selling price of dollar shifted from Rs 85.25 to Rs 89. As a result of  right of commercial bank to decide the exchange rate based on demand and supply there were a number of exchange rates for dollars and Sri Lankan Rupee at the same time. (Appendix 2).However Sri Lankan rupee has depreciated in few amounts when compare with the other countries. For Instance, in January 1999, there was a 40% of depreciation in Riyal on the first day of free-floating exchange. There was a 16% of depreciation in Indian rupees at the first day of floating exchange system. 31% for Korean won in 1997 and 28% for Sweden corner in 1992. (Ramasinghe, 2007). Even though there is depreciation in Sri Lankan Rupee in first two days after implementing the floating exchange system instantly it has appreciated in the third day. Reasons for the settlement of instability after introducing the floating exchange system are the following actions taken by the central bank. The beginning of the December in 2004, there was a huge fluctuation in exchange rate because of massive amount of deficit in the balance of payment. The exchange rate depreciated up to the rupee 105.47 per US dollar in 17th December. However due the expectation regarding the foreign aids receiving because of tsunami the exchange rate appreciate up to Rs 104.61 per US dollar in 31st December. In 2005 exchange rate is revalued up to the certain extent due to the foreign aids received because of tsunami. Country got the large no of foreign currency inflows and received the debt moratorium from the lenders. In 2010 the exchange rate was appreciated due the  .The budget 2012 proposed to devalue the exchange rate by 3% bypassing the mandate of the Central bank of Sri Lanka. Soon after the CBSL stopped intervention to foreign exchange market and subsequently depreciated by 12% during the year 2012.

Replacing the fixed exchange rate with a managed floating exchange rate with the purpose of export-led growth in 1977. But that did not happen due to the two main reasons namely reasons related with exports and reasons related with budget deficit. Excessive budget deficit contracted domestic saving and ultimately it is impact for the balance of payment. When compare the Sri Lankan export with few South Asian and East Asian countries it can be noticed that there is a significant improvement in Bangladesh and Vietnam. (Appendix 3). Sri Lankan export sector has continued to rely on low value-added exports mainly garments. However, when compared with East Asian countries, they have utilized the export-led growth with the high-income category including technology, innovation, and science. They have changed their export commodity from agricultural product to human-computer interaction product. Also Sri Lanka missed the opportunity to engage in global product sharing. The main export of the Sri Lanka is textile and garment. When compare the clothing exports from 1980 to 2010 from South Asian countries in 1980 clothing exports contribution from Bangladesh  and Sri Lanka was US $ 2 million  and  US $ 109 million respectively. However the Sri Lankan clothing exports in 2010 is lower than the Bangladesh. (Appendix4). When compare the textile export from 1980 to 2010 from south Asian countries it can be noticed that there is a considerable difference between Sri Lanka and Bangladesh.(Appendix 5). Bangladesh has become one of the leading exporters in the textile and garment industry shifting from non-value added (textile) to value-added exports (garment).these economic conditions resulted in expansion of trade deficits which necessitated continuous depreciation of the rupee.
Conclusion
There are two main exchanged regimes after 1977, namely managed floating exchange rate system and free-floating exchange rate system. Because of the various reasons most of the time rupee value is depreciated rather than appreciation. Even though there is a continuous depreciation of Sri Lankan rupee with the intention of export-led growth exports of Sri Lanka is still backward when compared with other South Asian and East Asian countries.

Income Disparity and Poverty Alleviation Analysis

Introduction

Amartya Sen, Nobel prize winner of the economics, he said that the main objective of The development is to enhance human freedoms. The process of evolution can increase the human capabilities, skills, knowledge, attitudes and improve the human lives and not the richness of the economy which is an only area of it.

 What is Poverty?

Poverty Is not a lack of money. Simply debt is the lack of basic needs. Ex. Food, shelter, water. Amartya Sen said that poverty is not a lack of funds. It is not having the capability to get one's full potential as a human being. Debt is a multidimensional concept. It relates to the many sections of the economy. There are education, health, infrastructure, employment, etc. (Appendix 01)

Types of poverty

There are two kinds of debt,

1.      Absolute poverty

2.      Relative poverty

Ø  Absolute poverty relates to the lack of basic needs in a considerable period in the economy. Ex: food, clean water, and housing.

Ø  Relative poverty occurs when people in a country do not enjoy a certain minimum level of living standards as compared to the rest of the population and so would change from state to Country or sometimes within the same country. Ex: A family can be considered as a sick family if they cannot get vacations, cannot buy gifts for children, relations to festival season, and cannot send their children to higher education such as a university.

What is the income disparity?

Income includes the sum of wages, salaries, interest on the savings account, dividends, rent, profit, and other forms of earnings received in a specific period. Income disparity is the unequal distribution of household income or individual income in an economy or the gap between the wealthy and needy persons in the marketplace. (Appendix 02)

What is the difference between income disparity and poverty?

Ex: In a land where everyone lives in muddy huts. They haven’t income disparity. But they suffer from poverty. There is no clear linkage between debt and income disparity. Reducing poverty doesn’t lead to reduce income disparity, and reducing income disparity doesn’t go to directly alleviate poverty.  In some cases, people suffer from income disparity in life, sometimes they also live in poverty. Some countries that have higher income disparity often have many people live in poverty.

We can measure poverty, only one person. We can say that a person living in poverty. Inequality requires multiple people and measure different between those persons. But we wouldn't know that a person is living difference.

What are the factors that cause poverty?

Most analysts Were agreed that there is no single section to affect poverty. Because Poverty is the multidimensional concept.

1.      History of the country

2.      Civil War and political conflicts of the country

3.      Gender inequality

4.      Natural disaster

5.      Lack of education, training, and skills

6.      Overpopulation

7.      Unemployment

Measurements of poverty (Appendix 03)                                          

Absolute poverty measurements

1.      Poverty line- The lowest incomes level that minimum standard of living for an individual. If someone below the official poverty line, that person cannot fulfill their basic needs. Therefore that person considered as a most miserable person. Using the headcount ratio, we can define the poverty line. (Appendix 04)

2.      Human Development Index

The Human Development Index (HDI) was introduced by the United Nations development Program in 1997. The HDI measures the three primary dimensions. There are along and healthy life, knowledge, and lack of essential services.

             Relative poverty measurements

1.      Lorenz curve

Lorenz curve was introduced by American economist Max Lorenz in 1995. The Lorenz curve explains the graphical representation of the income disparity in the economy. If the near the perfect equality line, income disparity is decreasing. If the deviation from the ideal equality line, income disparity is increasing. (Appendix 05)

2.      Gini coefficient

Gini coefficient used to measure the inequality of income and wealth in the country. If the Gini coefficient is equal to zero, there is perfect equality. Everyone has the same income in the economy.

(Appendix 06)

Poverty Alleviation

Poverty cannot be stopped entirely. The main objective of the Poverty alleviation is to increase the quality of life for poorest people in the country. It involves the tools which reducing poverty such as education, economic development, health, and income redistribution.

What are poverty alleviation methods?

Ø  Increasing Supply of basic needs. Ex: clean water, food, and shelter

Ø  Increasing the health care facilities

Ø  Giving quality education

Ø  Providing skills and training programs

Ø  Income redistribution

Ø  Increasing personal income for low-income people

Major poverty alleviation programs in Sri Lanka

·         The Janasaviya programme.

This program was introduced in October 1989 of the Premadasa’s government (UNP). The primary objective of the Janasawiya poverty alleviation program was to transform impoverished households into sustainable economic units through increase cash and credit facilities.

How it was implemented? Each poor family received a monthly grant per months. The Samurdhi program was launched in 1995, replacing the Janasawiya program. Several factors affect the declining Janasawiya program.

Ø  Characteristics of political actors: Janasawiya program which was introduced by the supporters Who was close to the president Premadasa. Therefor created a political situation to measure the poverty alleviation.

·         The Samurdhi program

Samurdhi means prosperity, the Samurdhi program was started in 1995 as the national poverty reduction program and according to the central bank of Sri Lanka. Today nearly 1.6 million families are covered. The vision is prosperous Sri Lanka with minimized poverty. The Samurdhi programs are divided into six major areas. There are Social welfare, social, insurance, infrastructure development, microcredit, income generation, and socio-cultural development.

No of the beneficiary family has declined in the recent year. However, the overall budget for the Samurdhi program has increased in the last year. (Appendix 07) But there are lots of advantages to this Samurdhi program. This program includes several strategies to alleviate poverty. Ex: social security’s funds provide for reducing risks for life cycle events such as death, marriage, illness, childbirth. And under this Samurdhi program contain the individual subprograms. There are Samurdhi housing, rural infrastructure, and Samurdhi bank. However According to changing the political parties to improve the beneficiary families. Due to the poor targeting who really felt poverty unable to receive the benefit.

·         Divineguma national program

Divineguma national program is the latest poverty alleviation program introduced by the Mahinda Rajapaksha Government. The mission of this program is to establish 2.5million healthy and economically empowered household units, covering all the villages in the Sri Lanka. The Divineguma program includes activities such as the cultivation of fruits, vegetables and home gardening.

·         Gamidiriya community development and live hood improvement

Program

This program was initiated in 2004. Gamidiriya has funding received from the World Bank for 12 years. This program includes several poverty alleviation tools. There are establishing buildings, community infrastructure development, and livelihood development.

Advantages and Disadvantages of Colonial Economy in Sri Lanka

Introduction

Colonial Sri Lanka was known as Ceylon. Sri Lanka was colonized by Portuguese (1505), Dutch (1638) and British (1796) because of its Natural and Geographical Lactation and climate and soil were well suited to the plantation.[1] From the 16^th century, some coastal areas of the country were ruled by the Portuguese, Dutch and British. After 1815 the entire nation was ruled by the British colonialists until political independence was granted in 1948. (History of Sri Lanks Towards Independence, 2008)As colony economic, Sri Lanka was more affected by British colonialists than Portuguese and Dutch.[2] Most of the actions that taken by colonialists in the colonial period to Sri Lanka such as introduced plantation agriculture built railroads, reformed administration, changed the educational system, etc. affected to the country as favorable and unfavorable.

Plantation Agriculture

The British began experimenting with plantation agriculture in the 1830s. Under that, different crops such as Coffee, Cinchona, Tea, rubber was introduced into the highland time to time and was initially a tremendous success that revolutionized the Sri Lanka economy, which was hitherto based upon subsistence agriculture. Although, previously permission was granted for farming of royal land, Under the British crown were sold to private owners. Hence, land tenure also was changed. When introducing tea crops, Tamil people were brought from south India in large numbers because the cost of Sri Lankan Tamil peoples was high and there were not enough laborers in Sri Lanka. It was a reason to best tea was grown. (Watkins)

Advantages

·         Generated the new source of income by exporting plantation product.

·         Increased the foreign direct investment inflows to Sri Lanka by foreign investors invested their money in the plantation industry. (Bandarage, 1950) (Appendix A)

·         Expanded The opportunities for trading Sri Lankan products in different foreign countries. Especially Ceylon tea had become a staple of the British market bringing great wealth to a small number of white tea planters. Crops such as tea, rubber, etc. Still, bring wealth to Sri Lanka today. (History of Sri Lanks Towards Independence, 2008)

·         A network Of roads and railroads were built in the country to the success of the plantation. It is still useful for the convenience of transportation and traveling. (Appendix B)

·         Plantation agriculture continuously contribute to a considerable part of Sri Lanka Gross Domestic Production, because of increased additional export earning sources. (Appendix C)

Disadvantages

·         The the government sold lands at a prevailing minimum upset price which was 5 shilling an Acre until 1844 and 20 shillings after that. A large proportion of land in the Island bough from the crown and resold to other parties at a huge profit margin. Most of the foreign peoples who are owners of these land still earn huge profits from this land. (Appendix A)

·         Most Sri Lankan people had disentitled their lands which did not have documentary evidence and clear many cutting forests for Plantation.

·         The Domestic production of rice fell short of the domestic demand, and rice had to be imported. (Bandarage, 1950) (Appendix D & E)

·         Because of rice was produced primarily to the domestic market, most of the people who engaged in rice cultivation lost their source of income due to reducing cultivation. (Watkins)

System of government

The colonialists brought the new and alien system of government. It had changed each governor such as Cole brook-Cameroon, Soul bury, etc. in different periods,

Advantages

·         Well-structured system of government and new laws and regulation system which suitable with modern society was introduced to the country.

·         Peoples life was more complaisant by obeying to these laws.

·         Eliminated the ruthless punishments such as beheading, impale, etc. that used by kings

Disadvantages

·         Under this the system, compulsory labor (Rajakari Kramaya) inherited from the pre-colonial The governing system in Sri Lanka was abolished and introduced different taxes on a commodity such as Capitation, cinnamon, fish, etc. Those taxes made many difficulties in native people’s life. (Cameron)

·         This system Of government is alien to the natives. Hence people had to face more punishments by violating those rules.

·         Some control Had been used to fill full their needs, such as to stop conflicts that done by people against them. Thus, some practices were unfair to native people of Sri Lanka.

·         Colonialism caused the death of a lot of indigenous leaders and other peoples who against colonialists to the Independence of Sri Lanka. (The British In Sri Lanka)

Education

They introduced a new education system to Sri Lanka. But their syllabus was taught only in English language and mainly before expanding their Christian religion and their habits among the student. And parent had to pay more money for their children’s’ education.

Advantages

·         Peoples were able to learn modern education methods and increase English knowledge and it helped peoples to spend a better life.

·         Opened doors to deal with the entire world and get opportunities to higher education in other countries as well as earn money by working in other foreign countries.

·         The Knowledge of the English language was more comfortable to communicate with each ethnic groups in the country. (Sri Lanka Traditional and Colonial Systems, 2004)

Disadvantages

·         British admitted Sri Lankans, both Sinhalese, and Tamil, into the lower ranks of the the administration created after being educated in the British school.

·         Most students who were in poor families were unable to get an education, and they lost better job opportunities. (Sri Lanka Traditional and Colonial Systems, 2004)

Modernization and Technology advancement

In this period, Colonialists introduced new advanced technology to development in transportation, modern education, the building of railroads, health care, and medical services, exploration of natural resources[3] and different industries. They brought modernization to underdevelopment area on the island. (The British In Sri Lanka)

Advantages

·         Increased effectiveness and efficiency of this area that was introduced advance technology.

·         Building transportation infrastructures, it was saved peoples’ time which travels to another area in the country and developed trade on the island.

·         Developed the indigenous industries and peoples got different job opportunities from these industries and also they were able to acquire knowledge and learned new skills about those industries.

Disadvantages

·         Some indigenous method of that industrial area had wiped out.

·         Colonialists earned more money by using our valuable resource and we lost those opportunities and destroyed the natural forests and other natural resources in the island. (Ghosh, 2016)

·         Simplicity and cultural values of the people life.

·         Lost peoples’ job who was unable to adapt to new technology advancement.

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[1] Economic and Expansion Religion was the main Purposes of Portuguese to arrive at Sri Lanka. The Dutch period, they're main purposes were gaining a monopoly on trade, introducing Roman-Dutch Law and Explanation of their religion on the island. However, British entities have anticipated acquiring the power of economic and political in the entire country

[2]. The British attempted to reform the administration of the island by introducing their methods to reduce the ethnic tensions between the Tamils and the Sinhalese as well as the lowland Sinhalese and the highland Kandyan Sinhalese

[3] The use of new technology made exploration of natural resources such as gems, mining, Porcelain etc. easier and more efficient. And they had a good market for those natural resources especial in the European market.

Appendix

Appendix (A).

Crown Land Surveyed and Sold: Central Province, 1844-1860

	Number of lots	Extent (Acres)	Sold £	Fees £
European	750	79,172	116,293	13,648
Natives	1,514	10,471	25,796	3,702

(Bandarage, 1950)

Ownership of Cultivated Plantation Coffee Lands

	1871-1872		1880-1881
	Acres	Percent	Acres	Percent
Total	195,627	100	256,500	100
Non-European	12,642	6.4	20,352	7.9
European	182,985	93.6	236,148	92.1

(Bandarage, 1950)

Appendix (B)

Sri Lanka Railway Map

(Sri lanka Railway Map, 2011)

Appendix (C)

Tea and Rubber Contribution to GDP (National output, Expenditure, and Income, Annual Report)

Crop	Contribution to GNP (Rs. Million)	As a % of GDP
Tea	83,321	0.7
Rubber	10,643	0.3

(Central Bank of Sri Lanka, 2016)

Appendix (D)

Government Revenue from Grain Tax

Tax on Home Grown paddy	1823	1876
	£ 36,716	£ 106,325

(Bandarage, 1950)

Appendix (E)

Rice Imports to Ceylon,1837-1872

           

Period	Amount (Cwts.)	Value £’000
1837-1839	798	167
1840-1849	1689	296
1850-1859	2728	323
1860-1862	4197	1186
1870-1872	4794	1558

            (Bandarage, 1950)

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