Case Study on Sri Lanka

By:
Mohsin Mohiuddin
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Muhammad Abdullah Idrees

GEOGRAPHICAL LOCATION:
Sri Lanka is an island country located in Indian Ocean to the south of India and
separated from India by Palk Strait. It is also known as the Island of Serendipity. Sri
Lanka lies just above the equator between 5 55'N and 9 55' N and between the
eastern longitudes 79 42' and 81 52'. The maximum length and width of Sri Lanka
is 435 km and 225 km respectively. Total area of Sri Lanka is 65610 sq km (Land
area: 64740 sq km, Water area: 870 sq km).

HISTORICAL BACKGROUND:
The history of Sri Lanka begins around 30,000 years ago when the island was first
inhabited. Chronicles, including the Mahawansa, the Dipavamsa, the Culavamsa and
the Rajaveliya, record events from the beginnings of the Sinhalese monarchy in the
6th century BC; through the arrival of European Colonialists in the 16th century; and
to the disestablishment of the monarchy in 1815. Some mentions of the country are
found in the Ramayana, the Mahabharata and the books of Gautama Buddha's
teachings. Buddhism was introduced in the 3rd century BC by Arhath Mahinda (son
of the Indian emperor Ashoka the Great).
From the 16th century some coastal areas of the country were ruled by the
Portuguese, Dutch and British. Sri Lanka was ruled by 181 kings from the
Anuradhapura to Kandy periods. After 1815 the entire nation was under British
colonial rule and armed uprisings against the British took place in the 1818 Uva
Rebellion and the 1848 Matale Rebellion. Independence was finally granted in 1948
but the country remained a Dominion of the British Empire.
In 1972 Sri Lanka assumed the status of a Republic. A constitution was introduced in
1978 which made the Executive President the head of state. The Sri Lankan Civil
War began in 1983, including an armed youth uprising in 19871989, with the 25
year-long civil war ending in 2009.

ETHNIC AND RELIGIOUS COMPOSITION:

The Sinhalese, make up 74.9% of the population (according to 2012 census) and are
concentrated in the densely populated south-west and central parts of the Island.
The Sri Lanka Tamils, live predominantly in the north-east of the island forming the
largest minority group at 11.2% (according to the 2012 census) of the population.
The Moors, who descend from Arab traders that settled in Sri Lanka, form the third
largest ethnic group at 9.2% of the population. They are mostly concentrated in
urban areas in the southern parts of the island with substantial populations in the
Central and Eastern provinces. During times of Portuguese colonization, Moors were
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persecuted, and many forced to retreat to the central highlands and the eastern
coast.
There are also Indian Tamils who form distinct ethnic group which comprises 4.2% of
the population. The British brought them to Sri Lanka in the 19th century as tea and
rubber plantation workers, and they remain concentrated in the "tea country" of
south-central Sri Lanka. In accordance with a 1964 agreement with India, Sri Lanka
granted citizenship to 230,000 "stateless" Indian Tamils in 1988. Under the pact,
India granted citizenship to the remainder, some 200,000 of whom now live in India.
Another 75,000 Indian Tamils, who themselves or whose parents once applied for
Indian citizenship, now wish to remain in Sri Lanka. The government has stated
these Tamils will not be forced to return to India, although they are not technically
citizens of Sri Lanka. Smaller minorities include the Malays who descent from South
East Asian settlers, and the Burghers, who are descendants of European colonists,
principally from Portugal, the Netherlands and the UK.

Sri Lanka's population practices a variety of religions. 70% of Sri Lankans are
Theravada Buddhists, 15% are Hindus, 7.5% are Muslims and 7.5% Christians. Sri
Lanka was ranked the 3rd most religious country in the world by a 2008 Gallup poll,
with 99% of Sri Lankans saying religion is an important part of their daily life.

POLITICAL
GROUPS:

STRUCTURE

AND

INTEREST

The Democratic Socialist Republic of Sri Lanka provides for a presidential system of
government. Politics of Sri Lanka takes place in a framework of a presidential
representative democratic republic, whereby the President of Sri Lanka is both head
of state and head of government, and of a multi-party system. Executive power is
exercised by the government. Legislative power is vested in both the government
and parliament. Since decennia the party system is dominated by the socialist Sri
Lanka Freedom Party and the conservative United National Party. The Judiciary is
independent of the executive and the legislature. The Politics of Sri Lanka reflect the
historical and political differences between the two main ethnic groups, the majority
Sinhala and the minority Tamils, who are concentrated in the north and east of the
island.
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Sri Lanka's two major political parties the United National Party (UNP) and the Sri
Lanka Freedom Party (SLFP) embrace democratic values, international
nonalignment, and encouragement of Sinhalese culture. Past differences between
the two on foreign and economic policy have narrowed. Generally, the SLFP
envisions a broader role for the state, and the UNP a broader role for capitalism.

STATUS AT INTERNATIONAL LEVEL:

The country context has changed dramatically in recent years. A 26-year conflict
ended in May 2009, and resettlement of internally displaced persons is largely
complete. The macroeconomic situation is much improved. Sri Lanka has become a
middle-income country, and its credit-worthiness has opened its access to
International Bank for Reconstruction and Development (IBRD), allowing for
significantly increased financial support from the World Bank.

United Nations (UN)

International Bank for Reconstruction & Development (IBRD)

International Finance Corporation (IFC)

SAARC

Food and Agriculture Organization (FAO)

World Trade Organization (WTO)

World Health Organization (WHO)

International Labor Organization (ILO)

International Monetary Fund (IMF)

OVERVIEW OF THE ECONOMY:

Sri Lanka has achieved strong Gross Domestic Product (GDP) growth at an average
of 6.5 % for the past 5 years on the back of domestic demand. The economy of the
country was liberalized in the late 1970s, much ahead of other developing
countries. However, in subsequent years, policy reforms slowed down and
witnessed inconsistent direction with change in the government. The government
continues to play a major role in the economy with presence in energy,
transportation, financial sector, agriculture and employment.
An important fact related to the economy is that an estimated 1.6 million Sri
Lankans work overseas, mostly in the Middle East. The remittances sent by migrant
workers are the second biggest foreign exchange earner after garments (US$ 2.2 bn
in 2007) and support the balance of payments and stimulate domestic private
consumption which accounts for approximately two thirds of GDP (67% in 2007).

AGRICULTURE SECTOR:
The agriculture sector is the cornerstone in Sri Lanka's economy with more than
70% of the population living in rural areas depending on agriculture for their
livelihoods. Currently this sector contributes to about 18% of the Gross Domestic
Product (GDP) and 30% of the employment. The agricultural productivity has
remained relatively stable, except for rice which has reached near self sufficiency in
the recent years.

However, the growth in this sector has been sluggish. Rapid agricultural productivity
growth is fundamental for reducing poverty in Sri Lanka as nearly 90 per cent of the
poor live in the rural agricultural economy. Therefore, rapid development in food
production while protecting the environment, water resources, and bio-diversity
needs to be given high priority in the development strategies. This includes removal
of existing policy and regulatory constraints which have stifled growth in the
agricultural sector.
Fragmented land use, insufficient availability of water, credit, seed, technical knowhow, technology, marketing, storage and transportation, poor farming practices
continue to weaken productivity in agriculture. Short to medium term priorities
include adopting policies to facilitate farmer access to wider markets and improved
technologies, creating a stable trade policy regime with required safeguards and
developing a regionally equitable infrastructure development strategy for rural
development.

AGRICULTURE POLICY IN SRI LANKA:

GOALS AND OBJECTIVES:

Increase domestic agricultural production to ensure food and nutrition

security of the nation.

Enhance agricultural productivity and ensure sustainable growth.

Maximize benefits and minimize adverse effects of globalization on domestic

and export agriculture.

Adopt productive farming systems and improved agro-technologies with a

view to reduce the unit cost of production and increase profits.

Adoption of technologies in farming that is environmentally friendly and

harmless to health.

Promote agro-based industries and increase employment opportunities.

Enhance the income and the living standard of farming community.

PROMOTING AGRICULTURAL PRODUCTION:

The Government aims to promote agricultural production by implementing
technically sound, economically viable, environmental friendly and socially
acceptable program to promote sustainable agricultural development with efficient
and effective utilization of resources. The major points of the policy are:

Increase local food supply, employment opportunities and agricultural

exports by emphasizing on cultivation of rice and other field crops,
horticultural and floricultural crops, roots and tuberous crops, export
agricultural crops, herbal crops, other underutilized crops and bee-keeping as
well as supplementary food crops such as sugar cane, cashew and coconut.

Increase productivity of water and land by enhancing crop production through

the application of sustainable cultivation practices.

Promote good agricultural practices such as Integrated Pest Management

(IPM) and Integrated Plant Nutrition Management (IPNM), for sustainable
agricultural development.

Promoting income generation from integrated agriculture through livestock

and aquaculture.

Formulation of production plans that will cater to the market needs and
nutritional requirements.

Cultivation of crops based on agro-climatic conditions and promoting agrobased industries.

Introduce improved and modern technologies to the village whenever and

wherever possible.

INDUSTRIAL SECTOR:
The industry sector plays an important role for any developing a country. In 2007,
this sector has contributed Rs. 635,199 Million, representing 28.5% of the total
production (GDP), while agriculture sector, and service sector contributed 11.9%
and 59.6% respectively to the total production of the country. Since its
independence in 1948, Sri Lankan economy has been through some major highs
and lows. However, it grew at a rate of 7% a year between 2006 and 2008. Colombo
is the major industrial centre of the country. The major industrial sectors in Sri Lanka
are food processing, petroleum refining, construction, telecommunications,
insurance, banking, textiles and apparel, cement, agriculture and shipping. Due to
recession in 2009, the countrys industrial production growth rate dropped to
-0.9%.The three main strengths that Sri Lanka offers are:

Cheap Labor that was easily available and accessible

Conducive conditions, including infrastructure and government policies

Literate Workforce, both in terms of skill and literacy

THE TREND OF THE INDUSTRY SECTOR:

In 2006, the industry sector had grown by 8.1% than in 2005 and that growth had
reduced up to 7.6% in 2007. The growth rate of the Industry sector had increased
beyond the growth rate of service sector by intersecting service sector line during
2004 and prevailed still. Therefore, the industry sector is in the front line by scoring
highest growth rate than other sectors from 2004. However, the growth rates of all
three sectors have been reducing since 2006.

PRODUCTION AND GROWTH OF THE INDUSTRY SECTOR:

According to the Central Bank Annual Report of The Sri Lanka, the industry sector is
consisted of four main categories. Those are:

Mining and Quarrying

Manufacturing (i.e. processing of agricultural products, Factory industry,

Cottage Industry)

Electricity, Gas & Water

Construction

The mining and quarrying, which has the highest growth of the industry sector has
been growing with increasing rates from 2004 to 2006 and since 2006, this growth
has been reducing. The growth of the electricity, gas and water has been reducing
drastically since 2006 and accordingly, it has arrived to the lowest point in 2007
than other sub sectors in the industry sector. Further, the productions of the
manufacturing sector in 2007 and in 2006 were Rs.394,233 million and Rs.370,355
million respectively which were the highest contribution (62 % of total production)
out of above four categories. However, when considering the growth rate, the
manufacturing sector was the lowest growing sector under the industrial sector. The
declining of the production of the industry sector in 2007 might be as a result of the
reduction of private sector investment.

SERVICE SECTOR:
Services sector contributes 59.3% to GDP (2010) and 43.1% of employment as the
dominant sector in the Sri Lankan economy. This sector has maintained average
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annual growth rate of 6% during the last few years. From the development
perspective, Sri Lanka looks to service sectors liberalization in order to attract
foreign investments and develop infrastructure. The major sub-sectors in the service
sector are wholesale and retail trade, transport and communication, banking,
insurance and real estate and Government services that contributed 23.2%, 13.9%,
8.9%, and 7.6% to GDP 2010, respectively. Telecommunication, trading, financial
services and port services in Sri Lanka have been the driving force of the service
sector growth in the recent past.
Throughout its history, Sri Lanka has been a beneficiary of being an active partner
in global trade. In addition to being located on a very convenient naval route,
conducive policies adopted by successive rulers have been a booster to
international trade, and through it, to wealth creation.
The reliance on services, especially commercial services, for wealth creation is not a
new policy paradigm for Sri Lanka. Sri Lanka which is devoid of a sufficient natural
resource base would find it difficult to enhance growth through industry or
agriculture alone.
The countrys available land is limited and its population density at over 290
persons per square kilometer is one of the highest in the world. Another factor that
has driven Sri Lanka to the services sector is the ever rising globalization of
services.
At present the service sector is the leading factor for the total economic growth
rate. This sector has contributed 72.7 percent for the economic growth rate in the
third quarter of 2009, while Agriculture sector contributed negative 2.7 percent
contribution for this quarter. Contribution of industry sector has recorded 30.0
percent for the same quarter.
Sri Lanka has generated 234,000 service sector jobs in the third quarter of 2009
from a year earlier, though 89,000 jobs were lost in industry, and 240,000 were lost
in the farming sector according to government estimates. Tourism, banking, finance,
and retail trade are the major components of the service sector.
Sri Lankas financial sector comes under the purview of the Central Bank of Sri
Lanka. Liberal policies and a lucrative business environment have made the island
nation an attractive location for several global banking firms to set up operations,
complementing a strong local network of investment and commercial banks.
Sri Lankas IT industry has made rapid progress in the past decade, becoming a
vibrant sector in the country and the region. The significant inroads has prompted
growth and development in IT-related services as well as IT education. The sector
has become particularly popular among the countrys younger generation who have
given prominence to improving their skills and knowledge in IT-related products and
services.
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NATURE OF EXPORT
The Island Sri Lanka has also won its name in the export market for their best quality spices,
gems, jewellery, handicrafts, aquarium, coir products, leather products and household
products. There is no doubt Sri Lanka name stand upon others for such products because of
the unique and high quality finishing. Total export is estimated as $10.19 billion.

Exports - commodities:
High-tech machinery, Textiles and apparel, tea and spices; rubber manufactures;
precious stones; coconut products, fish

Exports - partners:
US 20.1%, UK 9.3%, India 6.3%, Italy 5.1%, Germany 5%, Belgium 4.5% (2011)

EXPORT

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NATURE OF IMPORT
Imports in Sri Lanka increased to 1580 USD Million in October of 2012 from 1314.70
USD Million in September of 2012. Import in Sri Lanka is reported by the Central
Bank of Sri Lanka. Historically, from 2003 until 2012, Sri Lanka Imports averaged
2581.58 USD Million reaching an all time high of 5641 USD Million in December of
2011 and a record low of 1314.70 USD Million in September of 2012. Total import is
estimated as $20.02 billion

Imports - commodities:
Petroleum, textiles, transportation equipment, building materials, mineral products,
foodstuffs.

Imports - partners:
India 26%, China 15.9%, Singapore 7.1%, Iran 6.2%, Japan 5%

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IMPORT

(ACCOUNT DEFICIT OF $9.83 Billion)

MAGNITUTUES AND ECONOMYS INDICATORS

Targets

Unit

2005

2010

2011

US$bn

200
0
16.5

24.4

49.6

59.2

2016
(Projected)
98.0

GDP
Per Capita Income

US$

899

1,241

2,400

2,836

4,470

6.7

10.4

7.3

7.8

4.0

5.5

6.3

8.6

10.6

18.0

0.25

0.36

0.58

0.83

2.75

0.9

2.0

4.6

5.1

7.0

Women in Labor %
Force
Unemployment
%

33.9

32.6

32.1

31.2

40.0

7.6

7.2

4.9

4.2

3.2

Poverty Headcount

24.7

15.2

8.9

4.2

Literacy Rate

95.6

95.8

98.0

98.0

99.0

Inflation
Deflator
Exports

GDP %

Earning
Tourism
Remittances

from US$bn

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US$bn

US$bn

Gross Domestic Product:

The Gross Domestic Product (GDP) in Sri Lanka was worth 59.17 billion US dollars in
2011, according to a report published by the World Bank. The GDP value of Sri
Lanka is roughly equivalent to 0.10 percent of the world economy. The gross
domestic product (GDP) is equal to the total expenditures for all final goods and
services produced within the country in a stipulated period of time.

GDP PER CAPITA

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The Gross Domestic Product per capita in Sri Lanka was last recorded at 1402.12 US
dollars in 2011. The GDP per Capita in Sri Lanka is equivalent to 11 percent of
the world's average. The GDP per capita is obtained by dividing the countrys
gross domestic product, adjusted by inflation, by the total population.

INFLATION

The inflation rate in Sri Lanka was recorded at 9.50 percent in November of
2012. The inflation rate measures a broad rise or fall in prices that consumers
pay for a standard basket of goods.

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CONSUMER PRICE INDEX (CPI)

Consumer Price Index (CPI) in Sri Lanka increased to 167.10 Index Points in
November of 2012 from 165 Index Points in October of 2012. The Consumer
Price Index or CPI measures changes in the prices paid by consumers for a
basket of goods and services.

REMITTANCES

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The Workers' remittances and compensation of employees; received (US dollar) in

Sri Lanka was last reported at 4155200195 in 2010, according to a World Bank
report published in 2012. Workers' remittances and compensation of
employees comprise current transfers by migrant workers and wages and
salaries earned by nonresident workers. Data are the sum of three items
defined in the fifth edition of the IMF's Balance of Payments Manual: workers'
remittances, compensation of employees, and migrants' transfers.

UNEMPLOYMENT RATE

Unemployment Rate in Sri Lanka remained unchanged at 3.90 percent in the second
quarter of 2012 from 3.90 percent in the first quarter of 2012. The
unemployment rate measures the number of people actively looking for a job
as a percentage of the labor force.

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WOMEN LABOR FORCE

The Labor force; female (% of total labor force) in Sri Lanka was last reported at
32.22 in 2010, according to a World Bank report published in 2012. Female
labor force as a percentage of the total shows the extent to which women are
active in the labor force. Labor force comprises people ages 15 and older who
meet the International Labor Organization's definition of the economically
active population.

LITERACY RATE

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The Literacy rate; adult total (% of people ages 15 and above) in Sri Lanka was
reported at 90.56 in 2008, according to the World Bank. Adult literacy rate is
the percentage of people ages 15 and above who can, with understanding,
read and write a short, simple statement on their everyday life.

POVERTY HEADCOUNT

The Poverty headcount ratio at national poverty line (% of population) in Sri Lanka
was last reported at 8.90 in 2010, according to a World Bank report published
in 2012. National poverty rate is the percentage of the population living below
the national poverty line. National estimates are based on population-weighted
subgroup estimates from household surveys.

APPLICATION OF GROWTH THEORIES

1. SOLOW
MODEL:

GROWTH

MODEL/

EXOGENOUS

GROWTH

This model illustrate how Savings, Population growing rate and Technological progress effect
the level of an economy output and its growth over time. The neo-classical model was an
extension to the 1946 HarrodDomar model that included a new term: productivity growth.
Important contributions to the model came from the work done by Robert Solow and T.W.
Swan who independently developed relatively simple growth models. Solow's model fitted
available data on US economic growth with some success. In 1987, Solow received the Nobel
Prize in Economics for his work. Solow was also the first economist to develop a growth
model which distinguished between vintages of capital. In Solow's model, new capital is
more valuable than old (vintage) capital becausesince capital is produced based on known

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technology, and technology improves with timenew capital will be more productive than
old capital.

Extension to the HarrodDomar model

Solow extended the HarrodDomar model by:

Allow increasing capital intensity to be distinguished from technological progress. A

common prediction of these models is that an economy will always converge towards
a steady state rate of growth, which depends only on the rate of technological
progress and the rate of labor force growth.

POPULATION

SAVINGS RATE

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2. UN-BALANCED GROWTH THEORY:

TOURISM

The International tourism; number of arrivals in Sri Lanka was last reported at
654000 in 2010, according to a World Bank report published in 2012.
International inbound tourists (overnight visitors) are the number of tourists
who travel to a country other than that in which they have their usual
residence, but outside their usual environment, for a period not exceeding 12
months and whose main purpose in visiting is other than an activity
remunerated from within the country visited. When data on number of tourists
are not available, the number of visitors, which includes tourists, same-day
visitors, cruise passengers, and crew members, is shown instead.

3. ROSTOWS STAGES OF GROWTH (TAKE-OFF):

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This stage is characterized by dynamic economic growth. As Rostow suggests, all is

premised on a sharp stimulus (or multiple stimuli) that is/are any or all of economic,
political and technological change. According to our studies we observe that Sri
Lanka lies at take-off stage. Few features are:

Increased Industrialization: In recent years we have seen a rapid growth

in industry sector.

Agriculture sector employees ratio decreased: As industry is rising,

there is a drop in agriculture sector thats why labor is declining in this sector.

High savings: It is previously discussed that Sri Lanka is country which have
high saving rate.

Growth within country: As they are focusing on tourism, they are making
much better infrastructure to attract tourists.

4. FALSE PARADIGM:

Ethnocentricity: The super powers have an impact on Sri Lankan economy.

As International Monetary Fund (IMF) has granted the loan to Sri Lanka in
beginning of 2012 and they are making policies for the Sri Lankan
government.

Education in Abroad: The Sri Lankan citizens are learning and getting
education in different developed countries and after completing their studies,
they came back to Sri Lanka and apply those studies which are related to
developed countries. This creates conflicts between citizens and government.

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REFERENCES:
http://www.tourism-srilanka.com/geographical-location.html
http://en.wikipedia.org/wiki/History_of_Sri_Lanka
http://en.wikipedia.org/wiki/Demographics_of_Sri_Lanka
http://en.wikipedia.org/wiki/Religion_in_Sri_Lanka
http://en.wikipedia.org/wiki/Politics_of_Sri_Lanka
http://www.worldbank.org/en/country/srilanka/overview
http://www.samn.eu/index.php?q=efosrilanka
http://www.tradingeconomics.com/sri-lanka
http://www.tradechakra.com/economy/sri-lanka/agriculture-sector-in-sri-lanka335.php
http://voices.yahoo.com/the-performance-industry-sector-sri-lanka-2418830.html?
cat=3

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