Economic Policies and Strategies used in the Colonial Period

Portuguese Era (1505 A.D to 1658 A.D)

Trade

Even if are ca nuts, coconut, cinnamon, pepper, elephants, gems and pearls were the main commodities traded, mainly through Arabs early in the 16^th century Portuguese found Cinnamon the most important article of trade. The plant   grows wild in southwest coast of Sri Lanka.

Everyone had to deliver a fixed amount of cinnamon to Portuguese as a responsibility and was without a pay. The dried and the peeled bark is used as a condiment. Gathering, drying and peeling was carried out by the “Salagama” caste. It is estimated by Portuguese writers that in 1518 Portuguese took 1000 Bahia's of cinnamon from island and a Bahia was about 400 pounds.

It became an extremely lucrative trade for Portuguese fetching many times its original purchase price in Sri Lanka when sold in Cochin or Ormuz and even when sold in Lisbon. The price was kept artificially high by Portuguese and increased a thousand fold during 16^th century.

Dutch era (1656 A.D to 1796 A.D)

Cinnamon

The ditched monopolized and administered trading, particularly in cinnamon, more efficiently and ruthlessly than Portuguese.

A cinnamon Department or “Mahabadde” was organized for peeling and delivery of the cinnamon by all men belonging to the Salagama Caste. A fixed amount had to be delivered (without payment) by each man as part of his obligatory caste service. Dutch also tightened up the procedures by keeping accurate records of all the Salagama men and inflicting heavy punishments for absenteeism or any other minor wrong doing. A pittance was paid for any other additional weight of cinnamon delivered. Most of cinnamon was sold in Europe and only about one fifth was sold in Asia.

Dutch was the only supplier of cinnamon for both Europe and Asia and hence they were able to dictate the price of the commodity. Since the cost was minimum the profits were considerable. But this didn’t benefit the island and sales appeared as profits in Netherlands for the company.

Elephants

Elephants were another important export to Bengal where they fetched a high price. Jaffna was the main center for elephant trade. Elephants were used in war, haulage and ceremonial purposes. Sri Lankan elephants were popular because they were more easily tamed and trained.

Other exports

Are ca nuts, pearls, gems, chunks and cowries (types of sea-shells) were also exported mainly to India. Pepper and cardamoms were obtained mainly from Kandyan kingdom. Coconut cultivation rapidly increased in this era. Coffee which had been introduced to Europe in the mid seventeenth century and had become popular by 18^th century was grown and exported for hundred thousand pounds by 1739. But by 1760 coffee export had ceased and begun again  under the British. Tobacco grown in Jaffna was demanded by Devanagari. Palmyra timber was also export from Jaffna to South India.

Imports

The main imports were rice and textiles. Rice came mainly from Bengal and the Coromandel coast where it was cheaper than the west coast of India. The Dutch monopoly tended to stifle the trade with India and this lead to a shortage of essentials such as rice and textiles. Because of this very early in 18^th century rules were relaxed and traders from India were allowed to participate more freely but Dutch continued to control prices by a system of passes and inspection.

Other strategies

Galle was strategically situated for international trade and Dutch allowed Portuguese and English merchantmen to carry an exchange of goods at this port from 18^th century. Sinhalese traders in the south and west, Tamil traders in the north and east and Muslim traders who lived in all the ports carried on a flourishing coastal trade in small boats. Dutch built a system of canals in Sri Lanka which are part of everyday life in Netherlands. These canals were not only useful for transport of goods but also acted in some places as flood protection schemes and in others helped to irrigate crops.

The Kandyan kingdom too participated in trade by exporting items such as are ca nuts, pepper and cardamoms and importing rice and textiles. Muslim trades helped to promote kandyan trade. The salt supply to kandy was also controlled by the Dutch who allowed just enough to be taken from the salt-pans along the current needs and the excess was thrown back into the sea to avoid storage within kandyan kingdom.  Even if Dutch didn’t allowed the kandyan freedom of trade it continued openly with India because of Nayakkara influence.

Thought the Dutch policy of shifting free trade reduced the rate of economic growth, there was a general increase in productivity.

By the 18^th century money economy had expanded to include all classes. Indian merchants brought in gold and silver coins for the smaller transactions, which were becoming more frequent with the expanding economy. A competitive trade continued with India, Maldives and other countries of Southern Asia. From this trade there emerged a group of entrepreneurs- Muslim, Sinhalese, Tamils and Indian expatriates who formed a class consisting of merchants and middlemen, which became more prominent during the Bristish period.

British Era (1796 A.D to 1948 A.D)

British removed traditional tax system such as “Rajakariya” and “Uliyam” but replaced with new taxation system which caused sudden increase in taxation level.   

In 1820s and early 1830s Sri Lanka was economically and socially in a terrible state. The only important export was cinnamon. Up to 1822 external trade was monopolized by the English East India Company and only a small proportion of profit was made available to the island’s economy. After the government took over the monopoly in 1822 the price of Sri Lankan cinnamon fell mainly because of the competition from east India Company. The British continued to use the Salagama caste to collect cinnamon in their traditional role as providing free labor for a service that was essential to the state.  The larger proportion of external trade at this stage was the coastal trade with South India. Export of coffee was increased as Governor Barnes abolished export tax on coffee and made loans available for investors.

Thought the internal trade improved rapidly, external trade was slow to develop because it was still a government monopoly. The duties which were carried with native customs had been taken over by British civil servants.

Coffee

Coffee was an important export. Export duties on coffee was revoked and tax on coffee plantation was abolished in 1825. In 1835 import duties in Britain on coffee from the West Indies and Asia were equalized further helping the profitability of the Sri Lankan exports. British planters recruited laborers from South Indian Tamils for work in coffee plantations and later an unwritten contract between planter and labourer was made. As a result Indian immigrants population increased within the country.

In 1845 economic depression affected coffee industry Sri Lanka and many small investors bankrupt. In 1848 Sri Lankan government made some new ill taxes to recover the fallen income.

Other crops

The improvement in the economy had been mainly due to coffee. Success of coffee made other crops like rice to ignore. Rice cultivation was thought to be less important due to thinking it could be imported from Bengal using some of the revenue generated from coffee.

Value of cinnamon had dropped considerably because of competition and it only played a minor role in export revenue.

Sugar cane cultivation was tried but didn’t succeed due to West Indian and Javanese sugar being cheap.

Coconut grown all over the island but mainly in the maritime districts, became more popular as an export. Rubber plantation too started in Sri Lanka in Southern, Western and Sabaragamuwa provinces. It was a profitable export too and helped when the main crop was not doing well.

The cultivation of Tea and Rubber

In early years of introducing tea to Sri Lanka, it was a failure (1824-1841). However in 1860s some plants grew alongside coffee. Tea took the place of coffee. By 1883 dark tea from Sri Lanka was noted for its distinctive aroma in the London stock market and became very popular, non alocoholic beverage in Britain about that time. By late 1890s tea plantation expanded from 20000 acres to 500000 acres. Of the total export earnings about 60% was accounted by tea.  Tea became the most important single factor in the island’s economy.

When the price of tea fell in 1897 a search was made for alternative crops. More investment was made in coconut plantation. But by 1910 rubber overtook place of coconut and became second most important export. 

Analysis of interest rate and monetary policy in Sri Lanka (1977 to up-to-date)

Introduction

Monetary policy is controlling of the availability and cost of liquidity in the economy with the intention of achieving certain macroeconomic goals including faster economic growth, higher level of employment, low inflation and balance of payment equilibrium.(Colombage, 1993)
The responsibility of operating monetary policy is held with monetary board in central bank of Sri Lanka by the monetary law act. Since establishment of central bank up to 2002 the monetary policy was operated with the objectives of stability of domestic value of money, stability of external value of money, to promote & maintain high level of production, high employment, real income & promote full development of the productive resources.(CBSL, 1990). Since those previous objectives made a conflict in monetary management in 2002 objectives of central bank has been reformulate as stability in price and economy, stability in financial system. Monetary policy of central bank is mainly focused on achieving price stability.
Monetary policy instruments.
Central bank of Sri Lanka uses different instruments to control the money supply of the economy. Those can be classified as,

1.Market intervention
a.Open market operations
b.Bank rate
2.Portfolio limits
a.Reserve requirements
b.Credit ceilings
3.Other instruments
a.Prior import deposits
b.Moral suasion

Open market operation, bank rate and reserve requirement are indirect type of control while credit ceilings, prior import deposits and moral suasion are direct type of controls. Though traditional central banks in developing countries used direct controls since lack of having a developed financial market, now many central banks including Sri Lanka using indirect instruments as monetary economists Argive that direct control instruments create market distortions and they are less effective compared to indirect ones.(Colombage, 1993)
After 1977 the Quasi money hold by people began to rise hugely. Quasi money consist mainly savings and time deposits. This mainly happen because of the positive real interest rate and liberalization of financial sector. In 1970 the M1 was 63.15% of M2. But when it comes to 1985 the percentage has been reduced up to 38.79%. And after introducing electronic payment systems the money in circulation of Sri Lanka become smaller portion in M2. In 2016 the money in circulation was 15.79% of M2 [Table1].(Colombage, 1993)
In closed economy model handling monetary policy is less complex compared to a liberalized one. Due to fixed exchange rate system and restrictive financial systems the control of money supply was less complex. So previous monetary authorities used interest rate, reserve requirement and credit control as main monetary policy instruments. And prior to 1977 the intermediate target of monetary policy framework was narrow money. After liberalized economy that lead to liberalized financial sector and relatively flexible exchange rate system, made monetary policy much more complex with previous policy instruments. So in 1984 CB shifted towards open market operation from interest bank rates & statutory reserve ratio in controlling money supply since those instruments failed to achieve desired outcomes. They were able to mop up the excess liquidity in the economy which had arisen from high tea prices & excessive government expenditure. Also in 1988 because of the savings and time deposits considered as much liquidity asset that directly affect money supply of economy, the intermediate target of monetary policy rearrange as broad money from narrow money.
In 1981 central bank introduced national credit plan (NCP) in the objective of setting monetary and credit targets with forecasting monetary bases. The NCP has prepared annually to guide monetary management of CB. Same year secondary market for treasury bills has been introduced that led to development of TB market.(Karunathilake, 2000)
In order to widening open market operations repurchase agreement system has been introduced in 1993. In reverse repo agreements central bank can sell treasury bills that in position with them to public with the agreement to buy back after a specified duration. In 1995 central bank introduced reverse repurchase agreement system in OMO.
Monetary board of CBSL is having the responsibility to handle monetary policy and in 2001 monetary policy committee (MPC) was appointed to advised monetary board by studying monetary aggregates within the economy. They meet monthly & evaluate economy & recommend suitable policies.
In 2003 active open market operation system introduces with many attractive functions. Establishing daily auction system, maintaining interest rate corridor with repo and reverse repo rates & Outright Sales/Purchases of government securities to address long term (structural) liquidity imbalances.(Wijesinghe, 2005)
In 2009 with the intension of accelerating economic activities the penal rate charged on reverse repo transactions when participating institution exceeded the maximum no of times that could access to reverse repo window in a month has been removed and the 100% margin deposit requirement  for opening letters of credit imposed in 2004 which later in 2008 raised up to 200%, is removed in 2009.

Future development
Since in 1980s central bank has adopted a monetary targeting framework to address the defined objective of enabling price stability by influencing monetary aggregates by addressing reserve money. But recent years with the weakening relationship between money and inflation several central banks whole around the world has adopted flexible inflation targeting policy instead of monetary targeting framework. Central bank of Sri Lanka now working to meet requirement of such framework that enable to shift at inflation targeting framework.(CBSL, 2010)

Prerequisites that needed for adapt Inflation targeting monetary policy.(Perera, 2007)
•CB should have independence specially in legally.( specially mandated to achieve price ability)
•Low and stable fiscal deficit with freedom from fiscal dominance.
•Well understood channels between policy instruments and inflation.
•Flexible exchange rate system.
•Effective inflation forecasting models.
•Developed financial system with policies that enhance transparency of central bank.

Interest rate
Interest rate liberalization
Before 1977 the interest rates were kept low in formal sector than organized sector by interest rate ceilings, subsidized credit allocation and high reserve ratio. This lead to have a negative real interest rate throughout the years before 1977. These financial repressions undertaken by central bank are removed through interest rate liberalization. This created a chance to formal financial sector to attract more deposits as well as could lend more to public. This reduced the effectiveness of interest rate as a policy instrument. (Colombage, 1993)
Since interest rate not allowed to adjust for inflation real interest were negative before 1977.with the raise of bank rate from 6.5% to 10% all commercial banks rose their deposit rate together. The 12 month fixed deposit rate was doubled from 7% to 14%. [Table 2]
Policy interest rates
Central bank uses bank rate, repurchase rate, reverse repurchase rate as policy interest rate which help to affect all other interest rate in market. Bank is not very active today since the penalty rate is high. Repo rate and reverse repo rate is the main policy rates CB used to affect to all other interest rates and ultimately on money supply by affecting interbank call money market liquidity.
Interest rate corridor
Central bank operates repo and reverses repo agreements to control the liquidity in call money market. The call money market rate adjusts according to the liquidity in the call money market. Repo and reverse repo rate act as a corridor to AWCMR. Before 2014 repo & reverse repo rate was determine by the auction bids. Later it was named as standard deposit facility rate & standard credit facility rate and rates have been determined by CB. [Figure2]
Limitations in monetary policy of Sri Lanka
•Less sensitivity of people to interest rates. [Figure 5]
•Commercial banks keeping excess reserves.
•Financial cost of statutory reserve.
oStatutory reserves held in CB does not creating any profit to commercial banks though the money raise by interest bearing sources.
•Continuous budget deficit of government.
•Underdeveloped money & capital markets.
•High volatility in exchange rate in Sri Lanka.
•External effects.(political influence)

 

Analysis of Interest Rate and Monetary Policy in Sri Lanka from 1948 to 1977

Introduction
Throughout the British rule period Sri Lanka had an open and liberalised economy and even up to the point where exchange restrictions were imposed during the Second World War. Central Bank followed a loose monetary policy in the early 1950s. But here after it was focused on balance of payment and credit to priority areas with the purpose of controlling inflationary situations caused by high fiscal deficit. Though exchange controls were existed after 1955 the economy was virtually open. Since the liberalisation was introduced in 1977, there were several important reforms to the financial sector in Sri Lanka. Direct controls were used as monetary policy measures which includes control of interest rates, credit rationing, ceiling and exchange rate controls. During the period 1960s to early 1970s policy measures were a combination of the restrictions and concessions. The Bank Rate and the Statutory Reserve Requirement Rate were the major policy instrument of that period. Control of money supply is the major part of the monetary policy. Reserve money is the liability of the central bank basically determines the money supply .The effect of money supply often leads to the changes in general price level. Those are the money which is held by the hands of general public, not the money in the vaults of the central bank. The stock of money held by the public in purchasing goods and services is called money supply(Karunathilake, 2000).
Monetary policy is the actions of the financial authority of a country to change the factors which are affecting to the financial system. In Sri Lanka Central Bank(CBSL) is the financial authority which was established on 28th August 1950. The first governor of the central bank was Mr.John Exter and he was from the Federal Reserve Bank. Before the establishment of CBSL the monetary system of Sri Lanka was controlled by the currency board system since 1884, which the currency of the country was totally backed by foreign reserves with the Reserve bank of India. The only function of the currency board system was to issue new currencies. According to the Exter’s report there were some limitations in the currency board system such as lack of instruments to face an inflationary situation, limited activities and inability to control crisis situations etc. The monetary policy that applies for developed countries is not always suit for developing countries. Because the problems and objectives they are trying to achieve is different to each other. Monetary policy in developing countries should focus on effective stimulants for economic growth since they are trying to achieve a stage of self-sustained growth from the stage of under development.
Monetary Policy (1948-1959)
Monetary policy is the process by which the central bank of a country influences to the cost and the availability of money(Ms) which is linked to the price level. The Monetary Law Act No.58 of 1949 provided the legal framework to administer and regulate monetary system for the CBSL. After the establishment of the CBSL most of the commercial banks deposited some portion of their cash with the central bank to meet their reserve requirement. Those deposits were Rs.165.2 million as at December 1950. According to the monetary law act the effectiveness of monetary policy heavily depends on the monetary board and further it has mentioned there are four major objectives in CBSL under stabilization and development strategy before the amendment in 2002, those are stabilization of domestic monetary values, stability of the exchange rate and third one is to promote high level production, employment and real income, and to encourage productive resources. The principles clear objectives, systematic rules, open communication, and stable independence are determined the success of the monetary policy. The monetary policy actions of the central bank directly influence to the credit and money supply, and interest rates which have impacts on aggregate demand and inflation. When we consider about selective weapons or qualitative instruments of monetary policy Exter has categorized them as the methods of credit control. By fixing maximum maturity period for loans and investment central bank tried to monitor loans given to unsound business activities and not to curtail credit to productive purposes. Further, monitory board has the power to prevent the commercial banks by increasing the amount of loans and in section 104 of the Monetary low Act emphasizes the importance of the ceiling on interest rates.At the initial stage, the CBSL had to face a distinctive experience due to the export boom. Because, the Korean War boom resulted to increase in export prices especially rubber and coconut. The Korean War which was broke out in the period 1949-1950 led to the increase in export prices as a result of increasing the demand suddenly and the uncertainties generated by the war. This was also affected by the devaluation of Ceylon rupee in 1949 and a large accumulation of external assets threatened the stability of the price level. Hence maintaining the stability of the rupee was the main function of the monetary policy. In achieving a likely inflation, commercial banks were asked to invest their foreign reserves in abroad. By December 1951, the external assets were increased up to Rs.1185 million from Rs.934 million in 1949. There was an immediate increase in money supply from Rs.663 million to Rs.1106 million due to the monetization of exports. The increase in money supply led to the increase in purchasing power and it pushed up the general price level. Normally, when the money circulation in a particular country increases, it would positively affect to the interest rate movements(Kelegama, 2004).
In this era the government was encouraged to liberalized import controls for several countries; especially Dollar countries by the surplus in balance of payments and also middle income earners were able to consume luxury goods. But the banking system had to face many problems. Through them inflation was the major one and monetization of foreign exchange receipt put further pressure on it. CBSL aimed at to control increase in external assets due to favorable BOP. Further it managed the credit for non-essential purposes while increasing the domestic production of consumer goods and services by reducing the imports control in 1951 as a remedy for continuously rising prices. During this period commercial bank in Ceylon had more excess reserves due to the increase in money supply and exports by making traditional policy tools worthless. So, the Central Bank increased reserve ratio from 10% to 14%. In addition Central bank decided to engage with open market operations for the first time but it was not successful due to the smallness of the bank’s portfolio. After the end of the boom monetary authority had to adjust for new economic conditions due to the changes in certain key indexes such as Export Prices, BOP, Money Supply and External Assets. In this crisis situation CBSL had to finance a large budget deficit by using direct advances. Since the bank’s view was that it would be inappropriate to increase interest rate when there is an inflationary situation, bank rate was tried to be constant at 2.5%. Treasury bill rate increased up to 0.92% in 1952 from 0.4%. Further it increased up to 2.47% in 1953(Karunathilake, 1973). An important feature of that particular period was that heavy borrowings of the government from the banking sector which resulted in inflation. There was an improvement in 1954 after the recession in 1952 and 1953. Government had a budget surplus and external assets were at Rs.1135 million while trade surplus was Rs.412 million. The reason behind this situation is that the Tea Boom. The increase in money supply in 1954 was less than the increase in external assets compared to the Korean War Boom. The major task of the monetary authority was to increase money supply during that period. In here Treasury bill rate has declined to 1.65%. In 1955 government did not borrow from the Central Bank and it did not engage with open market operations. Interest rates declined moderately. The strategy used by the Central Bank is to ask the government to hold the budget deficit at a favorable stage. In 1958 monetary authority had to face three major problems. Those are high level of budget deficit, tight cash position of commercial banks and adverse BOP. To increase the cash base of the banks Central Bank discounted their Treasury bills and allowed to borrow at a moderate interest rate. During this period money supply increases due to the large increase in Central Bank’s assets.                         
Monetary Policy After 1960
There is a landmark in Ceylon monetary policy in 1960 due to the BOP problems which were prevailing over three years before. In here money supply rose by 3.5% and the value of imports declined by 13.1%. But in 1961 BOP was appeared to be favourable. Central bank introduced quantitative restrictions on imports while controlling bank credits in this year and ceiling rate was 6% on commercial banks. Further it obtained Rs.53.8 million from International Monetary Fund in April 1961. Commercial banks were permitted to hold a special reserve equal to 38% on demand deposits instead of 12% general reserve requirement. Due to the excess budget deficit government had to borrow money by issuing Treasury bills in 1962. As a result of following an expansionist fiscal policy the money supply was increased by Rs.54 million in this year and the liquidity assets that had a declined in 1958, rose again up to Rs.466 million(Cooray, 2003). Treasury bill was the only instrument to borrow money to the government to finance the budget. Monetary policy was directed towards controlling further expansion of bank credit and directing credit for essential purposes. In 1963 Ceylon had to face an inflationary situation and lack of certain imported goods. And also credits to the private sector from the commercial banks were the major factor of monetary expansion. And further they formulated a monetary policy in achieving a higher economic growth in the same year. Due to the higher prices in imported good Sri Lanka faced a severe balance of payment problem in 1964 and foreign exchange controls caused to the ability of achieving raw material, machinery and spares needs. Central bank report for this year has been mentioned that since the commercial bank did not make a proper investigation regarding the flow of credit, it had use further credit control and moral suasion was also successful in directing credit for productive purposes.
During this period the objective of monetary and fiscal policy was to restrain from monetary expansion by having a closer correspondence between aggregate demand and supply. In 1965 the performance of Ceylon became unfavorable due to low increase in GNP. In here the special case is that there was a contractionary effect on money supply by the Central bank credit to the government. By increasing Bank rate in to 5% and introducing special reserve requirement of 28% on the Peoples Bank, took further steps to control credit expansion. From 1966 to 1969, Ceylon experienced an improvement in economic condition as a result of increasing domestic production. In 1967 Sri Lanka rupee was devalued to provide an incentive to exporters by 20%. In 1970 bank rate was increased up to 6.5%. The minimum and maximum rates on advance were 7% and 9.5% respectively. Since Sri Lanka experienced a BOP deficit in 1972 due to the excess liquidity, a restrictive monetary policy was introduced and in achieving monetary stability there was a limited credit expansion to private sector. The ceiling on bank credit which had prevailed previous years was removed in 1972. However no changes were made to the SRR. So, commercial banks were informed that not to increase credit to non-essential purposes such as consumption and speculative stock building. Though these controls were existed up to 1974, the demand for bank credit was increased. When we consider about Ceylon monetary situation in 1976, the proportion of the reserve requirement was gradually decreased and a ceiling was imposed on bank credit on non-essential purposes(Central Bank of Sri Lanka, 1986). In 1977 there was a land mark in monetary policy due to the launching aggressive monetary measures. As a whole, during the period of 1960 to 1977 administrative type of monetary policy was pursued to face BOP difficulties and to have price stability. For that purpose traditional credit control and introduced selective controls to promote credit to the development of priority sectors.
References

Nature and content of the ETCA agreement

Introduction

India is Sri Lanka’s third-largest export destination while India is the primary origination of imports of Sri Lanka. As well as Sri Lanka is the second-largest trading partner of India in the SAARC region (‘International Trade Statistics of Sri Lanka - 2015’, 2015). Therefore, they entered ISFTA in 1998, and it is operated from the year 2000. From 2003 they have discussed comprehensive economic partnership agreement(CEPA) time to time. In the CEPA they discussed regarding four fillers including trade in goods, trade in services, investment and economic cooperation. After appointed of the new government in 2015, they again started to discuss an agreement called Indo Sri Lanka Economic and Technology Cooperation Agreement(ETCA). The important thing is no one of two government has published the real deal of ETCA. But some organizations have drafted the content of the agreement, and the Sri Lankan government is still failed to reject that written framework agreement.
According to the drafted framework agreement published by government medical officers’ association, the agreement includes trade in goods, trade in services, investments, economic corporation, technology corporation, and other provisions.

Objectives of ETCA agreement

a) To strengthen and advance the economic, trade, investment and technology cooperation between two parties
b) To promote further liberalization of trade in goods, liberalizing trade in services between the two parties and gradually establish fair, transparent and facilitative trading, investment and investment protection mechanisms.
c) To expand areas of economic cooperation and create a corporation mechanism
Source: (GMOA, 2017)

Trade-in goods

Under the ETCA agreement, they have proposed further, step by step eliminating tariff and non-tariff barriers to trade in goods between two countries. To that, they suggested an early harvest program to be implemented before executing the agreement. Both parties are considering to modify the negative list, MRP and quota under the Indo Sri Lanka free trade agreement. And also, thy consultations about rules of origin, Customer procedures, non-tariff, and trade remedy measures. According to the goods that can be subjected to tariff concession, they have categorized into three as goods subjects to immediate tariff elimination, goods subjects to phased tariff reduction, and exceptions (GMOA, 2017).

Trade-in services

According to the drafted framework agreement published by (GMOA, 2017), Sri Lanka offer seven types of services to India while India offers sixteen kinds of services to Sri Lanka. As per the GATS (General Agreement on Trade in Services) agreement all the types of trade-in facilities including cross border supply (Mode 1), consumption abroad (Mode 2), commercial presence (Mode 3), Movement of natural persons (Mode 4) involved here.

Sri Lanka’s offer list

1. Computer Related Services
Computer-related services include database management services, Networking, Software, and hardware installation, Data processing, and software implementation services.
2. Other Business Services
Under the other business services Sri Lanka offer convention services to India
3. Telecommunication Services
This is one of the primary growth sectors in India. In 2015 the telecom sector contributed 6.5% of GDP. The amount was INR 9 lakh crore. Bharti Airtel and Sunil Mittal are the major service providers in India.
4. Financial Services
India financial service sector contributes around 6.65% of the GVA of India. Under that Sri Lanka offers banking services insurance services and leasing services to India.
5. Health and Social Services
Indian health sector includes hospitals, medical devices equipment, and supplies, medical infrastructure, pharmaceuticals, diagnostics. The health sector contributed 4.2% of GDP in India, and the value was USD 78.6 Bn. The hospital provides 71% of the income of the health sector. Since Sri Lanka has a stablishing market for this sector.
6. Tourism and Travel Related Services
Tourism and Travel is the third-largest foreign exchange earning industry and one of the fast-growing industry in India. Tourism and Travel sector contributed USD 136.3 bn to the GDP in 2015
7. Transport Services
Here Sri Lanka has the opportunity to invest in road transport, water transports, air transport in India. Road transport is the primary transport sector of India,

India’s Offer List

1. Professional services
2. Computer Related Services
3. Research and development services
4. Real Estate Services
5. Rental Leasing services
6. Other Business Services
7. Telecommunication Services
8. Audio Visual Services
9. Construction and Related Engineering Services
10. Distribution Services
11. Educational Services
12. Environmental Services
13. Health and Social Services
14. Tourism and Travel Related Services
15. Recreational, Cultural and Sporting Services
16. Transport Services

Investments

Under this chapter of ETCA framework agreement, Sri Lanka and India have agreed to conduct consultation on the matters of investments within six months after the entry into the contract. Also, such agreement shall include,
a) Establishing an investment protection mechanism
b) Increasing transparency on investment-related regulation
c) Gradually reducing restrictions on mutual investments between the two Parties
d) Promoting investment facilitation

Economic Cooperation

The two parties come to the agreement to strengthen and enhance economic corporation between them based on equality and mutual benefit. And also explore new areas of and develop appropriate measures for closer commercial operation as a means to greater economic integration between the two countries and support and augment economic cooperation following developmental needs of each other and the welfare of their respective people (GMOA, 2017). Under the commercial agreement, they expect to cover intellectual rights protection and cooperation, financial cooperation, trade promotion and facilitation, customs cooperation, e-commerce cooperation and the significant areas of industrial and SME collaboration and strengthen the relationship between trade bodies of two countries.

Technology corporation

According to the drafted framework agreement published by government medical officer’s association in their web site in that framework agreement under the technology cooperation chapter no any terms conditions or discussions or suggestions mentioned. The reason is regulatory controls regarding technology cooperation is not in the place in Sri Lanka.

Analysis on Government Debt and Debt Financing in Sri Lanka (1977 to up to date)

Background of government Debt

There are three ways to finance the fiscal deficit. They are government debt, money creation, and
taxes. Government debt and money creation impact on economic growth adversely.
(Amirthalingam 2013) The fiscal deficit is a chronic problem of Sri Lanka and other developing
countries. [Table 1].The average fiscal deficit was 13.14 percent of GDP from 1977 to
1990. It was 9.3% from 1991 to 2000. But it was 7.7% from 2000 to 2015. (Central Bank
Report) Anyway a high amount of figure, fiscal deficit to GDP ratio is not good for macro-
The economic environment of Sri Lanka, because the fiscal deficit is financed by government debt. It is
a very popular way to finance the fiscal deficit in Sri Lanka. When fiscal deficit increases, it
causes to increase the government debt. If our country tax system is efficient, the fiscal deficit would
have financed from tax revenue. Thereby government debt could have reduced. But tax revenue
to GDP ratio has been decreasing from 1977 to 2013. [Table 1, Graph 1]. The average tax
revenue to GDP ratio was 18% from 1977 to 1984. But it was 17% from 1985 to 1995. Then
it was 16% from 1996 to 2005. But it was 13% from 2006 to 2015(Graph 2). (Central Bank
Report). But Kaldor (1963) argued that a country should impose taxes at 25 – 30 percent of GDP
to achieve economic growth. Kaldor's’ target needs to Sri Lanka to disentangle the debt
trap (Amirthalingam 2013).

The fluctuation of government debt up to 1977
Government debt has two parts. They are domestic debt and external debt. Household debt is the
debt which borrows from the local market (non- banking or banking or issuing Treasury bill or
Treasury bond) to finance the fiscal deficit. External debt is the debt which borrows from international organizations and foreign countries to finance the fiscal deficit. Domestic debt
surpassed external debt from 1977 to 1986. But external debt had surpassed domestic debt in 1987
To 1996. After that, household debt has exceeded external debt from 1997 to 2016. [Table 3 &
Graph 3]. Anyway, domestic debt and external debt cause their own problems. The obligation to GDP
ratio has reached a peak point in 1989. It was 108.7%. This rate was the highest debt to GDP
ratio in the debt history in Sri Lanka. This had happened because of the deflation of the rupee value
in 1989. When deflating rupee value, it causes to increase the cost of production. Oil and other import
production have to be paid than earlier. It causes to undermine foreign resources, and external debt
services also have to be paid more than earlier. On the other hand, due to the JVP confusion
economy had collapsed in Sri Lanka and the government had to borrow money from the foreign market,
because of domestic savings had undermined during the JVP conflict period. The GDP to external
debt ratio was 62% in 1989. This was the highest foreign debt to GDP ratio in Sri Lanka. As well
as the Mahaweli development project had implemented from 1986 to 1989, therefore, Debt to
GDP ratio had increased by 28.5% from 1986 to 1989. As well as debt to GDP ratio has declined
by 9.5% from 2004 to 2005. The reason behind that was Tsunami disaster. Many of Sri
Lankan’s creditor nations granted debt write off and interest-free periods on loans to assist the
reconstruction process during that period. (Wijeweera, Dollary & Pathaberiya 2005).Debt to
GDP ratio has decreased by 14.6% from 2009 to 2010. The reason was that the war was
finished by 2009. The war which had been three decades in Sri Lanka. (1983-2009).The aim was
behind that government had to borrow a lot of military items to defeat the LTTE. Therefore ending
war caused to decrease the government debt.

Comparison of Government debt from Asian Countries
When comparing debt to GDP ratio among Asian countries, Sri Lanka has recorded the highest debt
to GDP ratio in 2015. The figure is shown that inability of debt management in Sri Lanka. When
comparing Bangladesh and Sri Lanka. Government debt had been kept sustainable level by
Bangladesh. It was 34% in 2015. But it was 77.6% in Sri Lanka. According to the table
Indonesia, Malaysia, the Philippines, and Thailand had maintained a sustainable level in 2015.Debt to
GDP ratio was 67.2% in India, but it was reasonable they had achieved 8% GDP growth rate in
2015. But the GDP growth rate was 4.8% in Sri Lanka [Table 4]. Therefore the government should keep
GDP to debt ratio as below the threshold level. Research has concluded that the threshold level
for public debt is 59.42% of GDP. Above this level, public debt makes a negative impact on
GDP per capita growth (Cooray & Heemantha, 2013).

Composition of Domestic debt and External debt
Domestic debt has two parts as banks and non -bank sector. As well as external debt has two
parts. They are concessional loan and commercial loan. At the same time, the government can
borrow from banks or non- banks or can get a business loan or concessional loan. .Government
has borrowed debt from the non-banking sector than debt from the banking sector during 1985to2016
(Graph 4). Government has acquired concessional loan than commercial loan during 1980 to
2016. (Graph 5) But the commercial loan has been increasing from 2008 to 2016. The reason was
previous government had issued Treasury bill for foreign investors, and they had invested heavily
in Treasury bond. Second sovereign bond had released in 2009. After graduating from a lower-middle-income country, it made difficulties to borrow concessional loan (Amirthalingam 2012).
Government debt can be defined broadly and narrowly. But the debt to GDP ratio sets using
a narrow definition (Central Bank Reports). Total central government debt is called a narrow
definition of government debt. It doesn’t include contingent liabilities. A contingent liability is
a liability which government entities borrow from the market with the guaranteed issued by the
government. If government entities will not be able to pay off debt, the central government has to take
responsibility of government entity borrowings. They are Ceylon Electricity Board, Ceylon
Petroleum Corporation, Road Development Authority and Sri Lankan Airlines. The narrow
definition misleading since it does not show the actual indebtedness for which the tax players are
responsible. Therefore both of direct borrowings and contingent liabilities should take to the debt
management process.

Consequences of domestic debt and external debt
Household debt and foreign debt cause an economic problem. When the government borrows money lot
from the local market, it causes to increase the interest rate. Thereby impede the private sector
investment. This is called crowding out effect. When decreasing private sector investment, it
impacts on economic growth adversely. Increase in government borrowing may also cause
inflation through the expansion of the money supply. External debt causes to undermine the creditworthiness in Sri Lanka. Foreign currencies should be demanded when paying off international debt
services. This procedure causes to deflate the rupee value. Deflate the rupee value causes to
wane the balance of payment (BOP).
On the other hand, deflating the rupee value causes to
increase the competitiveness of export items. But our export items less than import items and
export items don’t have the strength to earn a lot. That’s why in such a situation, BOP is going to
undermine. Debt service payments are a severe financial burden to the Sri Lankan economy. Debt
repayments as a percentage of revenue have increased from 1980 to 2016. It was 98% in 2016.
Debt repayments as a percentage of exports also have increased from 1980 to 2016. It was 92%
In 2016 (Table 06). Therefore debt service payment compels a country to abandon or postpone
investment on essential development projects. Government expenditures are (Education,
Health) necessary to develop the country. As an example, before developing Singapore
had expended a lot to education. Therefore human capital development is significant to
develop the country. But the Sri Lankan situation is unfortunate. Government has to spend to interest
payment than education expenditure. This is the opportunity cost of debt servicing. In 2015
Interest payment was 22%from total expenditure. But education & welfare expenditure were
10%, Health expenditure was 8% (Table 06). Therefore the government was unable to spend
sufficiently on most important sectors which are very useful to develop the country.
Finally, I suggest procedures to reduce government debt. Fiscal deficit should finance by
tax revenues. Then the tax system should be simple, and politicians should not intervene in the tax
system what businessman evade the taxes. On the other hand, after 2005 there are lots of
corruptions and frauds had recorded. These kinds of crimes also caused to increase the
government debt. As an example, the southern high way project also has recorded corruptions. Then
debt was not enough to implement a plan, and the government had to borrow debt back to finance
the project. Therefore if we want to strengthen as a nation, we should stop corruption and
inefficient things. As well as the government would earn sufficient revenue from exports, the fiscal
deficit could have financed by export revenue, and it will cause to increase the foreign assets in
Sri Lanka. Anyway, the present government has been implementing some strategies to improve tax
compliance. Ultimately they aim to reduce the government debt. Plans are (a) “broadening
the tax base to ensure tax revenue of around 15-16 percent of GDP (b) rationalizing the tax
system while minimizing tax exemptions, tax holidays and special tax rate that are detrimental to
fair and effective tax administration (c) strengthening public financial management, particularly
commitment control and financial planning and discipline (d) eliminating unproductive
expenditure (e) Improving efficiency of State-Owned Business Enterprises.” Restructuring
process, increasing transparency of money transaction and increasing accountability are used to
increase the efficiency of State-Owned Business Enterprises. (Central Bank Report 2016).

Analysis on Government Debt and Debt Financing in Sri Lanka (1948 to 1977)

01. INTRODUCTION

In generally Government debt is referred to the debt owed by a central government of a
country. Government debt also referred to as public interest, national debt, and sovereign debt.
In Sri Lanka, Public debt can be defined as a debt owed by both the central government and other
public entities. According to the above definition, other public entities included government
corporations, government statutory boards, government academic institutions, government
banks, etc.

01.1. OBJECTIVES OF PUBLIC DEBT IN SRI LANKAN GOVERNMENT
Generally, the government borrows funds from internal sources and external sources to
meet three main goals.
➢ To meet the budget deficit.
➢ To meet the expenses of war and other extraordinary situations.
➢ To finance development activities.

01.2. SOURCES OF GOVERNMENT DEBT FROM 1948 TO 1977
When considering government debt sources in Sri Lanka from 1948 to 1977, those debts
references can be divided into two main categories.

➢ Internal Debt Sources / Domestic Debt Sources
The funds borrowed by the central government of Sri Lanka and other public institutions from
lenders within Sri Lanka. Those lenders include commercial banks, other financial
institutions, the general public, etc.
Treasury bills and Rupee loans were primary domestic debt sources from 1948 to 1977 in Sri
Lanka. Treasury bills are short-dated securities issued by the Sri Lankan government to
finance budget deficit or to finance projects. Rupee loans refer to loans denominated in Rupees.
➢ External Debt Sources
The funds borrowed by the central government of Sri Lanka and other public institutions of Sri
Lanka from foreign lenders. Those foreign lenders include foreign commercial banks,
governments, or international financial institutions.
When considering foreign debt in Sri Lanka from 1948 to 1977, external debt can be divided into
three main categories project loans, non-project loans (commodity loans), and sterling loans.

02. OVERVIEW OF GOVERNMENT DEBT FROM 1950 TO 1977

In 1950 total outstanding government debt was Rs. 654 million. It was included Rs. 529
Million domestic obligations and Rs. 125 million foreign debts (Figure 01). In 1950 domestic debt
was 13.70% of GDP while external domestic debt was 3.2% of DGP (Figure 02). When
considering internal debt sources, 14.93% represent treasury bills, 82.42% represent rupee
loans, and 2.65% represent other debt sources.
In 1977 total government debt was Rs.24, 985 million. It was included 14, 392 million
domestic obligations and Rs. 10, 593 million foreign debts (Figure 01). It was 26.20 times
improvement of domestic debt when compared with domestic debt in 1950 and 83.74 times
development of external debt when compared with external debt in 1950. As a result of this debt improvement caused to increase domestic debt to GDP ratio up to 39.50% and foreign
debt to GDP ratio increased up to 29.10% (Figure 02). When considering local debt
sources, 17.4% represent treasury bills, 72.2% represent rupee loans, and 10.4% represent
other debt sources.

From 1948 to 1977, Sri Lankan economy can be divided into 4 main stages based on
political regimes and economic policies executed by various political governments. Therefore this
analysis is done based on these 4 stages.

02.1. From 1950 – 1955 (LIBERAL MARKET ECONOMY)
In 1950, the United National Party won power, and from 1950 to 1955 Sri Lankan Government
executed liberal market economic policies. In 1950 total government debt was Rs. 654
million. (Figure 03) It was represented 16.90% of GDP. (Figure 04) According to Central
Bank of Sri Lanka, from independence to today there were colossal budget deficit except 1954
And in 1955. In 1954 the government budget surplus was Rs. 24 million and in 1955 the government
budget surplus was Rs. 117 million.
From 1953 to 1954, government tax revenue was increased by approximately 8%, government
non-tax revenue is increased by 7%, and grants were increased by 5 times. From 1953 to 1954
Total government recurrent expenditure was decreased by approximately 15%, and total
government capital expenditure has been reduced by about 14%. As a result of above
increased in government revenue and decreased in government debt was caused to
the government budget deficit in 1954. As a result of this government budget deficit in 1954,
total outstanding debt was being reduced by approximately 7%.
In 1955, multilateral donors (United Nations Agencies, the European Investment Bank, and
the International Fund for Agricultural Development (IFAD)) and bilateral donors (China,
Japan, India, South Korea, Iran and etc.) began to provide assistance to finance development
projects in Sri Lanka. As a result of this grants from 1954 1955 total government grants were
increased by approximately 40%. As well as government total tax revenue was increased by
around 14% while non-tax revenue was increased by about 13% when
compared with 1954. Even though recurrent government expenditure was increased, total
government capital expenditure was decreased by approximately 13%.
As a result of this increase in government revenue more than government expenditure, from
1954 to 1955, the government budget surplus increased by approximately 4 times. Due to the huge
government budget in 1955, the total outstanding government debt was decreased by
approximately 4%. From 1950 to 1955, 79% of total government debt was financed by
domestic debt sources, while 21% of government debt was financed by foreign debt sources
because domestic credit was more readily available than foreign credit.

02.2. From 1956 to 1964 (CLOSED ECONOMY)
From 1956 to 1964 the Sri Lankan economy was a closed economy. Up to 1956, the Sri Lankan
economy was highly depended on a few exports, and the private sector could not
undertake huge capital investment. Therefore new government started to play a major role in
the economy and ten years planning project was started to implement in order to uplift living
standard. Development policy was embedded with this 10 years plan. New government
implemented the previous government strategy of agricultural imports substitution also to
industries. Due to new economic policies implemented by the new government in 1956
government budget deficit was increased up to Rs. 42 million. Due to the increase of government
budget deficit, debt was increased up to Rs. 1208 million. It was 7.20% increase in
government debt within one year. Ten years of the development plan was implemented from
financial year 1957/58. Therefore capital expenditure was started to increase.

Within this period, the most significant incident was the government of Sri Lanka began
obtaining loans from the World Bank in 1959. It was profoundly affected to increase foreign debt
from 1960 to 1965. At the beginning of 1960, the government was facing a critical problem
concerning external reserves position. Even though more than sixty percent of the imports
were represented essential consumer items, to solve this problem in the budget of 1960 by
sharply increasing the duties of cars, petrol, liquor, and tobacco. But government expenditure
was increased more than government tax revenue from 1960. Therefore the government budget
deficit was increased from 1960 to 1965. Thus total government debt was gradually
increased from 1960 to 1965. Due to the flood in 1964, the entire government recurrent expenditure
was increased by approximately 15%. As a result of this increase in this total outstanding debt
was increased by approximately 12%.

02.3. From 1965 to 1969 (PARTIAL OPEN MARKET ECONOMY)
From 1965 to 1969 the Sri Lankan economy was a partial open market economy. In 1965 total
government debt was Rs. 4435 million and debt to GDP ratio is increased up to 54.80%.
Due to increasing government debt, the Aid Group for Sri Lanka was established in 1965 to
provide financial assistance for the Sri Lankan government. In 1966 “Walawe Ganga” project
was started. Therefore capital expenditure was increased gradually and for financed this
project had to borrow funds and it was caused to increased total outstanding debt from 1966
to 1969. As well as the drought was caused to increase total outstanding debt at the end of
1969.

02.4.CLOSED ECONOMY (1970-1976)
From 1970 to 1976 the Sri Lankan economy was again closed economy. In 1970, 20% of
recurrent government expenditure was expenditure on welfare activities. Therefore it was
caused to increased government budget deficit as well as increased in outstanding debt. In
1970 to reduce imports, the government increased tariff on imports. From 1970 to 1974, total
government expenditure and total government revenue gradually increased. But in 1975
government total expenditure was increased by approximately 25% when compared with 1974.
Therefore it was caused by increased government debt.

03. Consequences of increasing government debt
If an increase in government expenditures (recurrent and capital expenditure) or decrease in
government tax revenue and non-tax revenue lead to government budget deficit. This
government budget deficit should be financed from internal debt sources or external debt
sources. Then interest on public debt is started to increase gradually when finance budget
deficit in every year by borrowings. It also caused to decrease in private investment. This
process is called crowding out effect of government borrowings.
The growing public debt in Sri Lanka from 1950 to 1977 and its servicing costs were a significant
burden on the Sri Lankan economy. It had adverse effects on long term economic
development of Sri Lanka Because, if the government have to considerable expenditure on debt
serving, the government have to fewer resources which can be used for the development process.
Borrowing funds from both internal and external sources don’t necessary implies economic
growth of a country if the government borrows funds from domestic debt sources, it caused inflation in an economy. From 1950 to 1977, 58% of total government debt was financed by
domestic debt sources. It caused to increase in the cost of living, especially it was caused to fixed-wage earners and pensioners. It also caused an increased cost of production.

Socio Economic & political analysis of ECTA

Social analysis.

The main argument made by many professionals in the health sector is that ECTA can be severely affected by the health standard of Country. Since the rule of doctors in that country is not as good as Sri Lankan one, it could severely affect the health condition of our domestic people. The argument has been made around some statistical comparisons.

Source: Human Development Reports, UNDP

According to the given statistics in 2016, there is a vast difference between health condition in Sri Lanka & India. The life expectancy of Sri Lanka is 75 years while India only has 68.3 years. The adult mortality rate has been 276 in Sri Lanka when it has been 362 per 1000 people in India. Also, the infant mortality rate was significantly high in Indian compared to Sri Lanka. This can be taken as a sign of an adverse health service in India. Most of the Doctors in Sri Lanka is complaining that through ECTA there will be lousy performing health service will stabilize here that can hinder the health condition of Sri Lanka.
According to 2015 statistics at CIA factbook, there are 2118100 HIV/AIDS infected people in India while Sri Lanka had 4200 people. Also, India is categorized as very high risk in major infectious diseases while Sri Lanka is in a high-risk category. So, there can be a possibility to spread those contagious diseases in Sri Lanka from the free movement of people if there isn’t a proper mechanism to monitor.

Economic analysis

According to neo, classical trade theories, trade between goods or services is beneficial when there a difference between taste (demand) for products. So, there is a possibility to increase consumption in both countries if there is a trade between India & Sri Lanka. Also, when comparing the market size of two states, Sri Lanka is quite a small market compared to India. While Sri Lanka has 20 million of population, India has 1.3 billion people. Sri Lankan service providers have a significant advantage from ETCA agreement by getting the opportunity to cater to a big market.
Also, in Sri Lanka, there is a monopolistic situation in consultation or channeling service. So, there is a third level of price discrimination present in those services. People are paying higher prices for the services that they receive. The gap between marginal cost and the marginal benefit is enormous. By importing those services from India could lead to reducing those prices while industries becoming more competitive. Ultimately people would be beneficial by consuming low-priced services.
Also, currently, there are some labor deficiencies in some service sector industries. Especially in the IT industry. By importing deficit units of labor from India can eliminate the excess demand in that sector while increasing countries GDP indirectly.

Because of these labor deficiencies, the labor cost is high in those sectors. This lead to an increase in the price of the final good. When analyzing the salaries of qualified software engineers in two countries in Sri Lanka, there are higher salaries compared to India. So, the final product if think it’s a software it would have a high price because of this problem. With low-cost Indian service providers, our producers could make the product at a lower cost which enables to compete with other products.
Another vital aspect is India is the major tourist arrival country to Si Lanka currently. In the year 2016, there were 356729 tourist arrivals to Sri Lanka. Also, when compared to the 2010 statistics, the visitors have been grown up by 185% when it comes to 2016. ETCA is permitting income Indian service providers to operate in the tourism sector in Sri Lanka. Having Indian cultured service providers in the tourism sector would be attractive for Indian tourist and could end up having increased the number of arrivals from India. Also, there would be room for high-quality service received by Indian tourist since they will much familiar with an Indian setting.

The critical aspect of going to be included in the ETCA agreement is that the removal of Non-trade barriers. Unique insight has been given to this case in the event of the CEPA agreement. Primarily it has been focused to remove the port restrictions that exhibit with our export to India. Removal of non-tariff barriers will enhance shipping to India.
But in economic view, Sri Lanka is disadvantageous when analyzing the potential impact on the labor force. According to the statistics, India currently has 48.26 million people unemployed. This is twice greater than that of what Sri Lanka’s population. If these unemployed people move towards Sri Lanka, can made Sri Lankan people unemployed if they cannot compete with that low-cost arrives. High unemployment will hinder the growth of the country, and ultimately, this can lead to diminishing the standard of living of Sri Lankan people.

Sriram panchalingam has posted in his tweet account in 2015 Sep 18, there were 2.3 million applications received for 369 clerical jobs in Uttar Pradesh India. There were 152000 graduates plus 255 Ph.D. holders who have applied for this position that pays only 16000 NIR per month. With this kind of situation, there can be an enormous pressure coming from India unemployed population into our labor market.

Also, there can be a considerable brain drain issue in the Sri Lankan context since the arrival of Indian service providers would reduce the salaries in Sri Lanka. Currently, there is a high brain drain rate in Sri Lanka. In the year of 2015, 6257 professional workers have left the country. It has increased by the speed of 16.5% compared to 2014. In 2015 there are 82098 skilled workers has left the country for work abroad. It has increased by 12.2% compared to 2014. The leading issue caused by this brain drain problem is the differences in the salaries in countries. With this situation inflow of Indian workers will reduce salary levels more that will increase brain drain issue.

Another aspect is that still there is a high and increasing balance of payment Sri Lanka with India. In 2015 BOP trade deficit with India is accounted as -3530.27 US $ in a million. By ETCA, there is a possibility of increasing our trade deficit more. If so we would be worse off from the agreement. As well as growing trade deficit will severely impact on the foreign reserves in Sri Lanka. Having a trade deficit will increase exposure to foreign reserves.
A primary reason for not being able to get the best out of ISFTA is having a competitive trading structure between the two countries. This theory could apply even for the case of ETCA. Having

labor endowment economic structure there is a barrier to be a success from a service liberalization system.
In the classical theory of economics when there is competitive advantage between the two countries is related to different goods can be beneficial from trade. The comparative strength of a specific product only lies with one country. So, in the view of this theory, there is a conflict when analyzing the offer list of two countries in the proposal to the ETCA. Many services are going to be offered by both countries. Those are,

1. Computer Related Services
2. Telecommunication Services
3. Health and Social Services
4. Tourism and Travel Related Services
5. Transport Services

Only two services are not on the list of Indian offers. So, the point is if Indian services have the comparative advantage of issuing those, Sri Lankan people miss the market because of having comparatively disadvantage. Then it seems like only two functions are liberalized to Sri Lanka. It reflects that Sri Lankan authorities have not correctly analyzed the capabilities & competencies that lies with services which can cater to the Indian market.

Political impact

India is a powerful country compared to Sri Lanka. Some professionals argue that the ETCA agreement is going to sign by force. According to them, India is influencing our politicians in signing that agreement. Also, another aspect they emphasize is after signing ETCA they going to cater to the best sectors in our service sector. By taking access to the best industries in our service sector, they could have able to acquire higher portion from our GDP and high power over our economy ultimately.

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)