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.
