Background
before 1977
In 1970, United
Left Front (ULF) was elected for power, and they followed “Socialist Economic Policies.”
Focusing on the welfare of society. A five-year plan (1972-1976) was introduced
and the objectives of the project were accomplished through import substitution in
Agriculture and industry by imposing import restrictions. However, the project was
not successful due to agricultural production was affected by continuous
drought during the plan period, the oil crisis in 1973 and the worldwide grain
shortage.
Liberalization of the Economy (1977 – 1994)
The UNP government
headed by President J.R Jayewardene assumed the office in 1977. They were
handed over a stagnated economy with the problems of shortage of foreign
exchange, the delicate balance of payment situation, and lower GDP growth rate in
the marketplace. The new government focused on market-oriented and outward-looking
Economic policies. The main characteristic of the economic reforms initiated in
1977 was the stimulation of the private sector economic activities by setting
up a liberalized financial system in Sri Lanka. Role of the government was
concentrated on large scale development projects to build up the infrastructure
facilities required for private sector investments. Primary policy measures
are undertaken were;
1.
Unification
of the exchange rate and adoption of a floating exchange rate system with an
effective devaluation carried out in 1977.
2.
Restructuring
import tariffs and quantitative restrictions to reduce import controls and
import duty rates and ending license requirements and state monopoly for most
types of imports.
3.
Adaptation
of Export Oriented Industrialization (EOI strategy) instead of Import
Substitution Industrialization (ISI strategy).
4.
Replacement
of food subsidies with a food stamp scheme for the benefit of lower-income
Groups reflecting social policy.
5.
Partial
liberalization of the financial market, with interest rate reforms.
6.
Implementation
of export promotion policy to achieve a higher economic
Growth through export promotion. Specific incentives such as exemptions of
import of intermediate and capital goods from import duties and infrastructural
facilities were granted.
Impact of the
Liberalization Policies.
The outcomes of policy reforms were
positive until the mid-1980s. After 1985 the economic growth rate was declining as
the ethnic conflict rose and affected negatively to the economic activities. (Table
01)
1.
Increase
in foreign trade as a result of liberalization. (Table 02)
2.
Investment
the rate increased substantially after the policy reforms due to significant public
investment program. (Table 03)
3.
Changes
In government revenue structure could be observed. In 1977, import duty revenue
was 4% of total government revenue while it was 13% in 1978. Export duty
revenue grew up to 36% of total government revenue in the period of 1977- 1980.
The second wave of Liberalization (1989 – 1994)
The change in
The government in 1989 retained the power with UNP. Therefore, no substantial
difference in the economic policy followed in 1977. A separate Ministry of
Policy Planning and Implementation was established in 1989. An agreement was
signed with the IMF to introduce economic reforms which included privatization and
poverty alleviation in the policy agenda.
1.
Privatization
Was formally announced as a state policy with the objectives of reducing the
fiscal burden and improving the efficiency of public enterprises.
2.
Main
poverty alleviation program, which reflected the social policy was “Janasaviya.”
The objective of the program was to enable poor people to establish a mode
of income.
3.
When
it comes to the industrial policy is focused on decentralization of locating
industries in rural areas. “200 Garment
Factory Program” and “Karmanthapura” are the significant programs undertaken.
4.
A
high-interest rate policy was adopted to bring down the inflation rate to a
single-digit figure. (Kelegama and Dunham, 1994)
5.
Liberalization
Of exchange controls on the current account of the balance of payments.
6.
The
Elimination of export duties, a further devaluation of rupee to promote export-led growth.
7.
Introduction
of a four-band tariff.
Policy Measures under Kumaratunga Government (1994 –
2001)
After the
the assassination of the President Premadasa, People’s Alliance; a coalition of
left-oriented political parties assumed the office headed by Chandrika Kumaratunga
focused on market-friendly policies and private sector involved economic
Development.
1.
Extensive
Privatization Program.
The government continued with privatization
and privatized entities such as the plantations, telecommunications, Air Lanka,
gas, insurance, National Development Bank.
2.
Continued
on Trade Liberalization.
Government liberalized trade further by
decreasing tariffs. It also reduced corporate taxation to 15% and provided
incentives for garment industries.
3.
Monetary
Policy.
The high-interest rates that prevailed
were reversed in 1997 and Central Bank reduced Statutory Reserve Requirement
several times.
4.
Industrial
Policy.
The industrial policy of the government
was focused on private sector involved export promotion policy. The government
focused on increasing the international competitiveness of the industries through
technological improvement and efficiency improvement... In 1995, an industrial
policy framework was announced, which gave the main emphasize on promoting private
sector involved export industries. The industries who are adopting new
technology to enhance their productivity were given import tax concessions and
incentives through the 1996 budget proposal.
Policy Measures under Wickramasinghe Government (2002-
2004)
The UNP government
launched a program for fiscal consolidation and structural reforms aimed at
further economic growth and poverty reduction under the policy framework of
“Regaining Sri Lanka” which focused on accelerating economic growth with the
Involvement of the private sector. Policy measures were taken under Fiscal Consolidation
to reduce the budget deficit to 5% of GDP, selective
expenditure cuts( freezing public sector hiring), the introduction of Dual rate VAT
system on behalf of Food and Services tax and National Security Levy.
Establishment of Public Utility Commission of Sri Lanka and adjusting petroleum
and electricity prices regularly are undertaken.
Policy Measures under Rajapakse Government (2005-
2015)
Although
Leadership changed in 2005 the economic policies remained in the liberal
financial framework while giving grater emphasize on domestic agriculture and
infrastructure development. The government has recognized the importance of the private
sector and public projects through private, civil partnership. (Henegedara, 2009) According to “Bright Future” policy
program for 2011-2016 macro-economic development was focused on forming five
hubs, i.e. commercial, knowledge, energy, air and aquatic centers with the view of
becoming a miracle of Asia in 2016. Main characteristics of economic policy are;
1.
Privatization
was rejected in the economic policy. (Athukorala and Jayasuriya, 2012)
2.
Greater
state control of the economy.
Government economic policies have deviated
towards greater state control of the economy through activities of government
taking over the previously privatized entities such as Insurance Corporation,
Sri Lanka Air Lines and Shell gas and the enactment of legislation to takeover
underutilized and underperforming enterprises.
3.
Food
self-sufficiency.
The government
emphasized a policy of greater focus on import substitution in food which
has led to several development projects such as “Api Wawamu Rata Nagamu,”
“Divi Nagumo” and “Hada Bima.” The Hadabima is the cultivation of vegetable
a project involving armed forces while the Divi Neguma program focused on
establishing 1,000,000 household economic units.
4.
Infrastructure
Development.
The role of the government is to implement
major infrastructure projects in the areas of economic, social, and financial
infrastructure. It involves highways, education, health, and communication
projects that strengthen production efficiency and eliminate regional
disparities. The development strategy has not only focused on infrastructure
development but also equitable access to such infrastructure. (Central Bank,
2010)
Conclusion.
Economic policies adapted after 1977 in
Sri Lanka under different regimes was under the broad wings of liberal
policies. Even though the main focus is on export-led strategy, there were
weaknesses like inadequate domestic value addition and lack of export diversification.
With the ethnic conflict over 3 decades, economic development has been hindered.
Apart from that lack of focus on policies in areas like tourism, technological
the advancement could be observed.
Appendices
Table 1: Economic Growth Rate 1977-1987
Year
|
Annual Growth
Rate (%)
|
1977
|
4.19
|
1978
|
8.23
|
1979
|
6.32
|
1980
|
5.81
|
1981
|
5.78
|
1982
|
5.07
|
1983
|
4.96
|
1984
|
5.05
|
1985
|
4.96
|
1986
|
4.28
|
1987
|
1.45
|
Source:
Central Bank of Sri Lanka
Table 2: Trade Dependency in
Sri Lanka from 1970 -1994
Time
Period
|
Trade
Dependency Ratio
|
1970-1977
|
32.75
|
1978-1984
|
70.30
|
1985-1988
|
59.00
|
1989-1994
|
66.86
|
Source:
Central Bank of Sri Lanka
Table 3: Capital
Formation in Sri Lanka from 1977- 1985 (% of GDP)
Year
|
Private Sector
|
Public Sector
|
Gross Domestic
Capital Formation
|
1977
|
9.35
|
5.10
|
14.45
|
1978
|
13.67
|
6.38
|
20.05
|
1979
|
18.67
|
7.15
|
25.82
|
1980
|
25.22
|
8.55
|
33.77
|
1981
|
23.06
|
4.71
|
27.77
|
1982
|
25.78
|
4.98
|
30.76
|
1983
|
26.88
|
5.77
|
32.65
|
Source:
Central Bank of Sri Lanka
