Sri Lankan Economy Essay

Sri Lanka proved to be ‘the best bet in Asia’ in early 50’s with its economic stability and well structured infrastructure. To prove that, when Former Prime Minister of Singapore, Lee Kuan Yew visited in Sri Lanka in mid 50’s, stated that Singapore would like to imitate Sri Lanka. Since gaining the independence in 1948, the progression of development in Sri Lanka has captured the thoughts of a mixture of economists and politicians. The ruling governments changed constantly and none of them could implement a national standpoint in the development of economy. 30 years on, the island country faced an unsullied problem in terrorism. The country’s economic development brought to a standstill since then. In addition to that, on 26th of December 2004, over one million citizens were exiled in a matter of hours as the Tsunami flowed across Sri Lanka’s shores. 34,000 died. 97,000 residences were either destroyed or damaged. Thousands of enterprises, including in the economically vital tourism sector, were destroyed. The desolation that swallowed up the country in those unpleasant days was difficult to describe.

In this research, the aim of the author is to find methods to develop the economy of Sri Lanka which has been brought to a standstill by the terrorist activities in the island country. The liberation Tamil tigers of eelaam, commonly known as LTTE, were seeking a separate country and they had carried out several terror activities in the country since early 80’s. The LTTE was mainly based in north and eastern parts of the island though they were active in the other areas and especially in the capital, Colombo. It made a huge impact on country’s economy in numerous ways such as downfall in tourism industry, agriculture industry, fisheries industry and foreign investments. Sri Lanka suffered huge set back in terms of economic development ever since. In this research, the author expect to locate that how terrorism had effected in Sri Lankan economy in the past 3 decades and which sectors had effected mainly and how Sri Lanka can recover and develop its economy with the end of the war. Collapse in agriculture sector in north and eastern parts of the country, which is one third of the land directly affected the agricultural economy. Being a cultivated friendly soil and climate helped the northern and eastern part of the country to contribute to the economy but with the start of the war farmers were discouraged to involve in the industry as the conflict started to take lives of innocent civilians and land mines replaced the cultivations in the lands. Sri Lanka has sea area of which is 20 times the size of the country but LTTE had the control over one third of the coast line for the last 30 years. The LTTE used the sea route to smuggle arms and LTTE imposed a ban on fishing in their controlled areas. Even government had to impose some restrictions to the industry as they were concerned about the safety of the fishermen. Those restrictions composed low output in the industry which could have made a fortune by exporting raw and canned fish industry. As a result of the situation, thousands of local fishermen lived in LTTE control areas for last 30 years had a difficult existence.

Foreign investments have taken away by the Insecurity of the country and investors were not encouraged with the unstable economy. An attack to the International Air Port of the city which cost billions to the government discourage the foreign investors to operate in Sri Lanka and several attempts to attack the main Ports of the country lead insurance companies to increase their charges which resulted in higher cost in productions directed investors to find other safe and low cost destinations especially in far east Asia. The attack to the International Air Port, attacks to some tourist destinations and bomb blasts in the capital, especially targeting the public, discouraged foreign visitors and some countries even impose ban on their citizen to visit Sri Lanka as they identified the country as an unsafe place to tour. Those situations resulted in lack of foreign currency flow in to the country as well as hotel industry collapsed with costing thousands of jobs for locals. Apart from those major sectors which could have contributed to the country’s economic development, LTTE’s existence in the northern and eastern parts of the country prevented some local industries such as Salterns, Paper Industry, Ilmenite deposit sites and local cement industry. Had them not been terminated, the government could have save billions of rupees which had to pay for the exportation of above mentioned products and services and could have generate thousands of job opportunities to the locals which is a solution for the unemployment and uneasiness of the youths.

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This report mainly looks at various obstructions faced in the development procedure and the implementation of reforms, particularly with the end of 30 years long war. In the first part of the report, which is the literature review, the author examines the previous literature regarding Sri Lankan economy, effects of war to the economy, present and future development plans in books, journals and news paper articles and in the web. The second part examines the techniques to overcome the development difficulties to be the best commercial hub in Asia.

Introduction

Sri Lanka faces a historic prospect to progress from a lower-income country caught up in conflict, to a middle-income nation in permanent peace. Sri Lanka’s growth has reached a crucial stage. Thanks to fairly rapid economic growth that pushed per capita income over the US$ 1800 by 2010 and with traditionally high levels of human development, Sri Lanka is on the brink of becoming a matured middle-income nation. Until 2009, Sri Lanka’s growth had been controlled by three decades of conflict regardless of the country’s highly educated population. The conclusion of the conflict with the separatist LTTE (Liberation Tigers of Tamil Eelam) in 2009 offers an opportunity for the government to start on reforms and work with foreign sector together with private sector to establish a more dynamic and energetic economy.

Sri Lanka had innate from the British colonial ruling a commercially well structured plantation sector when the time of independence in 1948. Tea, rubber and coconut contributed 90 per cent of the export revenue. About 40 years ago, Sri Lanka was measured as a paradise in Asia. It had the best communal indicators in the region. What a disappointment that this beautiful nation which was the utmost promises of the most demanding continent on the earth, Sri Lanka was incorporating into south Asian regular market and Colombo was rising as an important regional harbour as have turn out to be the greatest misfortune. Sri Lanka’s growth over the years took place under traumatic surroundings. It could not compete with the development successes of South Korea, Malaysia and Singapore which countries that had similar GDP levels to that of Sri Lanka in the late 50’s.

In early 80’s Sri Lanka was ready for an economic resurgence. More than 40 foreign apparel firms had invested in board of Investments of Sri Lanka (BOI) controlled free-trade zone north of Colombo, and office towers been built on the city of Colombo in expectation of new economical revolution. Now the country that desired to be an economic centre of southern Asia has plunged behind such countries similar to Singapore and Malaysia.

Since 1983, the danger of assaults by the Liberation Tigers of Tamil Eelam (LTTE) came into view as the separatist outfit fought for a self-governing Tamil state in the north and the east of Sri Lanka. As a result of this Sri Lankan governments could not take a contribution effectively from the affected area where almost 19,000 km2, which is 28% of the whole land of the country. Although the Sri Lankan armed forces defeated the LTTE in May 2009, the riot caused significant sufferings for the public, economy and environment of the country, with over 80,000 people formally listed as killed during its process. The cost of armed conflict had a great impact on the economy. It has two divisions in direct costs and indirect costs. Direct costs have a straight attribution to the conflict such as loss of capital assets and labour, other military expenses. Indirect costs are the loss of foreign capital; occur due to the security situation of the country, emigration of skilled work force and tourist outflows.

Despite a fierce conflict that began in 1983, economic growth has maintained around 4.5%. In 2001, however, Gross Domestic Production (GDP) growth was negative (-) 1.4%, the only reduction since independence, as a result of poor administration of the military expenses of the SLFP lead government, which lead to huge government expenses and foreign borrowings. Growth then improved to 4.0% in 2002. Following the 2002 ceasefire agreement of the UNP government, which LTTE used to strengthen militarily and subsequent economic transformations, the economy developed more swiftly, recording growth rates of 6.0% and 5.4% in 2003 and2004 respectively it is recording a estimated growth of 5.40% in 2010. Sri Lankan government is forecasting a real GDP growth of an average 6.12% per annum between 2010 and 2014. During the period of 2010-2014, the government is planning to increase GDP per capita by 72% from $36.8 billion and a 7.8% annual growth during 2010-2014.

With the end of conflict, huge part in the North and East of the country, abandoned for nearly 30 years, stand to accept a considerable encouraging motivation. Peace is broadly expected to introduce a new life into the tourism sector, which so far could not obtain its full potential. After over a quarter century of terrorists’ danger, Sri Lanka is finally observing a rising in tourism. The island with plentiful natural beauty is attracting visitors, mainly from India, not just with beautiful beaches, forests and wild animals, but also with new appeals like ”ayurveda” (a historic herbal Medicare system) and adventure. With the victorious ending of the decades-long conflict in last May 2009 and the re-opening of the major north-south A9 highway, local and foreign tourists have driven or flown to Sri Lanka’s North and East to visit places of religious and natural attractions.

Security circumstances in the country give a new hope for the residents; especially in north and east. With the flow of people to their regions, they have involved in micro businesses; start making an income for their lives rather than being in clutches of LTTE. People of the north and east are naturally experts in Agriculture and fishing. The Sri Lankan Government is planning to restore these lost livelihoods of the people of the North as an outcome of the conflict. Although the North cannot be built up in a hurry given the destruction it has suffered during the past 30 years, the Government is dedicated to restoring the shattered economy as well as cultural and social life as quickly as possible. A boost in foreign investment and tourism, along with enhanced employment and large-scale rebuilding projects in the North, are expected to maintain and accelerate Sri Lanka’s development in the near future. The country also rises to attract more Foreign Direct Investment through BOI especially in the rapidly increasing business process outsourcing sector (BPO) which embraces considerable guarantee.

The future of Sri Lanka changed when former Prime Minister Mahinda Rajapaksa elected as the head of the state. The President defeated the barbaric LTTE outfit, 4 years in to his office and has started the promised economic development throughout the country. President Rajapaksa’s broad economic tactic was summarized in his election manifesto in 2009, which now directs government economic strategy. The policies focus on navigating investments in to disadvantaged areas; developing the small and medium enterprises (SME); poverty alleviation and promotion of agriculture, tourism and expanding the civil service. The government has structured a 10-year development framework to improve growth through a mixture of large infrastructure projects. The government discards the privatization of state owned enterprises, including airports, electrical utilities and strategically valued enterprises such as state-owned banks. Instead, it plans to keep ownership and administration of these enterprises and operating them as profitable institutes.

According to Guerrero, I. (2010) Sri Lanka, emerging from three decade-long armed conflict, is at a critical juncture of transition to a middle income country in lasting peace. Kohona, P.T.B. (2010) States that Sri Lanka is at a critical juncture in its history and its development process must continue. Kohona, P.T.B (2010) further states that as normalcy returns, Sri Lankan companies established abroad, are beginning to discover the opportunities opening up especially in the areas of tourism, fisheries and agriculture. The North and the East present inspiring prospects in these areas. Special encouragements are provided by the administration for investing in the North and the East. This is in addition to the encouragements provided for all foreign investments. World Bank (2010) states that Sri Lanka’s economy expanded by 3.3% in the second half of 2009, the fastest rate recorded since 2002. Increases in foreign direct investment and tourism are expected to sustain and accelerate Sri Lanka’s growth throughout 2010. Indicators, such as increased registration in new motor-vehicle registration and electricity generation, confirmed a strong increase in economic activity for the region. In addition, the agriculture, transportation, and communication sectors showed strong performance in the last quarter of 2009.

Colombo Page (2010) states that the Sri Lankan government targets to increase the country’s per capita income to USD 4,000 over the next five years under the president’s (Hon. Mahinda Rajapaksa) election’s economic manifesto. The manifesto maps out a development plan to increase the per capita income to USD 4,000 by 2015 from the current income of USD 2,000 and the plan is based on development in five sectors – naval, aviation, knowledge, commerce, and energy while the government expect the commitment from the general public to develop the country and uplift the living standards of the population.

• Ports

Ports and cargo handling have a huge promise in development of Sri Lankan economy. Being close to an international shipping route will give the advantage to the government to capitalize. There was a lack of international ships operations in Sri Lanka over the past two decades due to terrorist activities. That resulted in fewer foreign exchange gaining. The end of the conflict has given the government of Sri Lanka to invest in new ports projects to enhance the gross domestic production of the country. According to Daily News (2010) Sri Lanka Port Authority (SLPA) declared that the Colombo Port records a highest ever monthly container throughput in March 2010. It has handled a record volume of 360,801 TEUs (Twenty foot Equivalent Units) with a growth rate of 27.4 percent, showing signs of an economic boom in the immediate future. Sri Lanka Colombo port gains many opportunities to enhance the economy with the proximity of the port to India and other major shipping routes between Asia and Europe. Another 286 hectares will be added and expand the area in order to enhance the international marine industry services. Construction of the fourth terminal increases the Colombo’s cargo facility by 50 %. The SLPA has embarked on a number of mega development projects aiming at capacity expansion and other state-of-the-art technological requirements with a view to making SLPA on par with the top notch ports in the world. Colombo Page (2010) States that the Sri Lankan government is aiming to commence novel projects to gain international support and to widen the ports network in the country.

Reuters (2010) states that Sri Lankan government is seeking sponsorships from external investors for the $1.5 billion Hambantota port project and the external investments will coincide with the November opening of the port on Sri Lanka’s southern coast, along an ancient “Silk Road” trading route and one of the world’s biggest East-West shipping lanes. The poor economy can be improved by this single large project by the services which are involving. War was a major point which let the economy down for more than quarter century and this is going to be an opportunity to renovate the economy status. External and internal companies are encouraged by Sri Lankan government to operate new $550 million tax free port zone plans to invite overseas and local companies to set up operations in a new $550 million tax free port zone in order to enhance the outcome. Ondaatjie, A. (2010) states that the Island is also 19 miles south east of India, the world’s second fastest growing major economy. The opening of the shipbuilding, ship repair and warehouse facilities will be provided by Companies from Australia, India, China, Russia and Dubai. It is beneficial to Sri Lanka being situated on the route between the Malacca straights and the Suez Canal. The canal is a connection between Asia and Europe. Usually 47 ships a day utilize Suez Canal which can be an advantage.

Sri Lanka’s Hambantota port project is moderately prepared to carry out the functions by November 2010. Port World (2010) States that the first phase of the project consists of two general purpose berths, one bunkering berth and a small craft berth of 120 metres long. The $360 million first phase includes a $76.5 million bunker terminal with an initial capacity of 500,000 metric tonnes (mt).The terminal will have 14 tanks for marine fuel and six others for aviation fuel and LPG. The completion of the four stages of the port project will be within next 15 years from 2007. The project is a chance to advance many areas including employments, public services, airport, Highways, railways, refinery and ancillary facilities. Country’s economy will be benefitted from the project and Hambantota which was a neglected region will improve in to a commercial city not only in the country but in the South Asian region. Inhabitants had to endure due to the shortage of proper accommodation, water, electricity and employments. This can be a huge occasion for the residents of Hambantota with thousands of upcoming job opportunities. In completion of the two major harbours, Sri Lanka can expect a mammoth improvement in economy in coming 5 to 10 years.

• Aviation

When operations at its peak, the LTTE even had Air military unit and they had six runways. After capturing them all, government now plans to improve them in to local air destinations for tourists and training bases. Colombo Page (2010) states that the government decide to put up a complex equipped with a training and research institute in Iranamadu in order to reconstruct the affected area. The LTTE during their reign had built six airstrips in the thick jungles of the North and the strip at Iranamadu near an irrigation reservoir was the main site for their tiny air wing.

With the influx of tourist to the country with the end of the conflict, Sri Lanka is planning to expand its aviation industry. BBC (2010) claims that China is going to provide $200m (£133m) to Sri Lanka for the second international airport in the southern part of the country and work has already begun on the airport. In addition to the second International Airport, India also planned to build an Airport in northern part of the country. According to Business Standard (2010) Airports Authority of India (AAI) is planning to build an airport at Palali in northern Sri Lanka. The project will improve the relationship with southern India which had uneasiness during the war time.

With the end of the conflict, Sri Lanka Air Force (SLAF) has started a domestic flight service and it has turned into a well-liked mode of transportation between the North and the South. Colombo Page (2010) States that the Helitours has flown 2,669 passengers and was the only fastest route to travel to Jaffna in the North before the main A9 Jaffna-Kandy highway was opened. Helitours offers scheduled flights to Palely in Jaffna Peninsula and China Bay in Trincomalee in the East. In addition to domestic aviation, there is a huge increase in international aviation as highest ticketing sales have reported in the march in this year. According to Perera, H. (2010) the sales for the month of March 2010 were over Rs. 2.6 billion to various destinations. Arrival of more tourists has shown a great improvement in aviation industry in Sri Lanka which is an indication of increase the tourism in the country.

• Agriculture

According to Kohona, P.T.B (2010) the agricultural infrastructure demolished by the LTTE is in the process of restoring. According to World Bank (2010) improving the agricultural field will assist to increased agricultural production in the North. It will hold the food prices low and Inflation is anticipated to go relatively low in 2010.

It is noticed that now there is a huge demand for the tea export. Positive weather patterns, appropriate use of fertilizer and economic improvement in the country are the other contributions. According to Colombo Page (2010) there is an increase by 27.8 percent in six months of 2009 than 2010 which was 166.9 million kilos. The increase of tea production from 24.9 to 29.5 is a proof that the tea production has increases in 2010 than in 2009.The demand for Sri Lanka tea declined in world market during the past period due to a number of reasons including restrictions from some Europe countries in terms of international trading facilities (GSP+) as a result of the conflict.

According to Radio Netherlands Worldwide (2010) increase in the crop allowed gaining the record of 1.4 billion dollars from tea export in this year. They earned 1.3 billion dollars in export sales in 2009 from foreign market under the trade name of ”Ceylon Tea”. Tea shipments from January to June rose to 143.3 million from 134.5 million kilograms in the same period of 2009. Sri Lanka expects to maximise the volume with new markets in the future as country is heading without a political and economic uneasiness.

With the conclusion of the terrorist activities, Sri Lanka has begun to improve the economy which based on a home grown system. On the other hand, it protects the traditions of local farmers as well. The government plans to find out a method to save the money which they spent on foreign products. According to Colombo Page (2010) setting up a process to produce liquid milk is one of the results of it. As annually, 20 billion rupees are spent to import milk powder products from international markets. One of the proposals is to launch two Ultra-Heat Treated (UHT) milk processing plants in Milco in Colombo and in Polonnaruwa. By 2015 the government expect to increase the milk production from 22% to 50%. Encouraging the public to utilize of fresh milk is a step to save billions of rupees on imported powdered milk.

• Fisheries

Apart from Hambanthota harbour government is building one of the largest fisheries port in recently captured are of Eastern province. According to Bandara, S.A. (2010) the construction of a harbour in the Eastern Province was decided in the Government as part of a broader infrastructural development drive undertaken to improve the quality of life and ensure economic growth. Construction of Oluvil harbour with a trade complex and a fisheries port in Eastern coast will be terminated sooner than the end of the year. It is proposed to open for the public by the beginning of 2011. The main purpose of the harbour is to progress all the activities in the Eastern region. The government is also planning to promote the newly captured areas as tourist destinations in addition to fisheries industry. Colombo Page (2010) States that under the Northern development plans, Mullative, former military base of LTTE, is proposed to open for tourists with some great facilities as well as fisheries-based engineering equipment industry.

• Tourism

According to Colombo page (2010) after the war Sri Lankan tourism industry is recovering and showing a great path following the end of the war last year and has seen an increase in the number of foreign tourist arrivals to the country. Colombo Page (2010) further states that the tourism industry has increased comparing to last year with nearly 16 percent. Irish Sun (2010) states that after the historic defeat of terrorism, the tourism industry has been on the rise with increased interest from foreign tourists as well. Interactive Investor (2010) illustrates that first five months of 2009, tourist industry has gone down by 19.8% due to the war. When compared to last year it has boost from 21.7% with the ending of the war in May. Colombo Page (2010) states that more hotel room accommodations were required by the end of the conflict in may 2009 with the demand of the tourist industry. The tourist arrivals have been steadily increasing and tourist arrivals rose nearly 48% in June compared to 2009. Most of the hotels are in a competition with each other to supply more accommodation and services to arrival of tourists to the country. The Tourism Board of Sri Lanka expects to attract 2.5 million tourists by 2016 and to earn 2 billion-dollar annual income. According to World Bank (2010) the hotel industry is growing approximately 32% due to an arrival of tourists raise the hotel industry by around 32% after the end of the conflict. It was increased from 34,000 to 52,352 at the end of June 2010. Colombo Page (2010) states that the Indians topped the list of tourists arriving in the country with 8,607 and tourists from United Kingdom (8,559) and Germany (5,305) are closely follow.

According to The Island (2010) considering the industry’s potential to grow in post-war Sri Lanka, Sri Lanka Tourism Development Authority (SLTDA) estimates that income from this sector could reach around US$ 600 million this year, from an estimated number of 600,000 total arrivals. Tourism industry is speedily rising and the year 2011 has been listed as the visit Sri Lanka. In January this year, visitors from Middle East rising from 1,176 to 2,674 and the growth rate were 127.4% where as Western Europe had around 445 visitors which was an increase of 87.8 %. The number of Eastern Europe tourists developed by 55.8 percent while entrance from South Asia increased by 28.2 %. SLTDA plans to develop another 13,000 new rooms to compete the demand from increasing arrivals. In addition to that The Island (2010) states that the tourism board had planned to increase the yield per visitor from the current US$80 to US$130 for 2009.

Colombo page, (2010) states according to the government statistics, almost 4 million tourists of both foreign and locals have visited in Jaffna, the capital of Northern Province after the end of the war. A huge number of travellers turned up in the east to visit the beaches in the area. The government also plans to establish a tourist corridor along the coastal line connecting Arugum Bay, Pasikkudah Beach in Batticaloa and Nilaweli Beach in Trincomalee. Infrastructure of the Jaffna and East cities, hotels and other services should be improved to meet the increasing demand of tourism. Sri Lankan tourists board is showing more attention on bring the number of tourists close to 1.5 million by year 2011. At the moment Sri Lanka has nearly 14,500 hotel rooms in the country. The government needs to take it up to close to 50,000 by then. Irish Sun (2010) States that the developmental plans and marketing plans being worked out to attract as many foreign visitors as possible. Vigorous promotions in terms of trade and consumer fairs will take place in their key markets. Britain, Middle East, India, France, Germany and China are the leading countries of it. Usually the product offering has been limited to sun, sand and sea. Now novel product offerings are being developed to improve the observed component of tourism. They are consisting of ayurveda, eco-tourism, and wildlife adventure tourism. Even tourists are happy to be in the country that boasts of beautiful, clean beaches, tempting water sports, breathtaking mountains, abundant rivers and waterfalls and an abundance of wildlife.

According to The Island (2010) the government is discussing a US$ 18 million loan with World Bank in order to develop the infrastructure to satisfy the short time rising demand in tourist industry. That would distribute US$ 4.8 million to arrange business plans, improve technical capacity and to carry out existing laws which is related to tourism. US$ 8.1 million is earmarked to develop tourism infrastructure in the East which was demolished by LTTE in last 3 decades. The project plans to employ local communities and include them in the operation. Another US$ 4.6 million is used to support in form a business model to continue tourism for a longer period.

• Industries, Investments and Infrastructure Development

Central Bank of Sri Lanka (2010) States that the northern region devastated by the decades-long conflict is seeing an economic revival with the opening of A-9 highway, the main land route that connects the northern Jaffna peninsula with the southern main land. With the economic prospects in the northern part of the country are increasing day by day, it’s vital that the central bank also planning to set up a local offices for the benefit of the people and Hong Kong and Shanghai Bank (HSBC) is the first foreign bank to open a branch of over 90 banking facilities has been approved by the CBSL to operate in the northern region. In addition to that, Colombo Page (2010) states that Japan has hold discussions on a wide range of Japanese aid for post-war development in the country including Japanese investors to play an energetic role in the development of infrastructure in variety of fields including highways, power and energy, irrigation systems, and the health sector.

Colombo Page (2010) further states that the Asian Development Bank (ADB) had announced that it is providing US$150 million in emergency loan to the Government of Sri Lanka for projects which will support reconstruction of urgently-needed infrastructure, to restore essential services and revive livelihood opportunities for people in war-affected regions. ADB’s aid will increase and strengthen the reconstruction of immediately needed necessary economic and social infrastructure and organizational services, and create sustainable employment prospects in the war-torn area. According to Kuroda, H (2010) one year after a decades-old civil conflict ended in Sri Lanka, top priority of development is to make sure that rapid reconstruction continues in the conflict-affected areas and the benefits of development reach everyone in the country. This attempt will promote investments in undersized areas including the areas affected by the conflict. Colombo Page (2010) reports that the Central bank of Sri Lanka (CBSL) has established a special loan scheme to the benefit of the small and medium scale businesses in the war ravaged north and aims to uplift the livelihood of their people. It is really important to uplift the micro and medium scale business in the area parallel to the development of other infrastructures as this process help to rebuild the people’s livelihood but all the financial grants should be disburse through a well structured system.

Among the promising enterprises in the area, food processing and especially canned fish industry hold a great stake. Shivaramakrishnan, P. (2010) states that the food processing industry in Jaffna will get a big boost as a result of the first International Trade Fair and it is organised to improve and uplift the economy of Jaffna resulting upon the situation being better now. Due to the conflict in the area, no equipment or any technological development has reache