The economy that evolved in Sri Lanka under British rule consisted of
a modern sector, whose main component was plantation agriculture, and
a traditional sector comprising subsistence agriculture. Manufacturing
was an insignificant segment of the economy. Banking and commerce
were, for the most part, ancillary to plantation agriculture. Nearly
all foreign earnings were derived from the three staple plantation
crops—tea, rubber, and coconut. The country depended on imports for
nearly three-fourths of its food requirements and almost all of its
manufactured goods.
During the first three decades after independence, development policy
focused on two themes, equity through social welfare and substitution
of imports with local products. Government price subsidies on food,
statutory price controls on consumer goods, and the provision of free
education and health services by the government were the principal
measures guided by equity considerations. Stimulating local production
to cater to an increasing share of domestic consumption and imposing
diverse restrictions on imports were the main elements of the import
substitution policy. The pursuance of these policies required
increased government intervention in the economy.
The social welfare policies achieved a measure of success in lowering
mortality rates and in increasing life expectancy and literacy rates
to levels seldom matched by other developing countries. However, the
restrictive impact that the policies had on domestic capital
accumulation and investment retarded economic growth, leading not only
to soaring unemployment but also to the persistence of low incomes.
The achievements of the import substitution policies were even less
tangible, except perhaps in the production of rice and subsidiary food
crops. Industry, starved of imported inputs and domestic investment
and often mismanaged under state control, failed either to grow or to
achieve acceptable standards of product quality or to remain
commercially viable. The policy focus on import substitution also
meant the relative neglect of plantation agriculture, which,
nevertheless, had to carry a heavy burden of taxation.
After the late 1970s there was a shift away from the earlier policies
toward ones aimed at liberalizing the economy from excessive
government controls. The new policies were designed to accelerate
economic growth by stimulating private investment and to increase the
country’s foreign earnings by promoting export-oriented economic
activities.
The liberalization policies succeeded initially. Stimulated by a
substantially enhanced level of foreign aid and investment, the
economy became buoyant, recording, up to about 1984, real growth rates
of about 6 percent per annum. Thereafter, however, there was a marked
deceleration of growth, caused mainly by the disruptive effects of the
ethnic conflict on economic activity.
In Sri Lanka the resource potential in minerals such as gemstones, graphite, ilmenite, iron ore, limestone, quartz, mica, industrial clays, and salt is large. Small but commercially extractable amounts of nonferrous metals and minerals like titanium, monazite, and zircon are contained in the beach sands of a few localities. Of fossil fuels, the only known resource is the low-grade peat found in a swampy stretch along the west coast.
Rice production is the most important economic activity of Sri Lanka’s
peasantry. Since independence there has been an impressive increase of
paddy production. The factors that contributed to this were, first,
the opening of 248,000 acres for paddy in the colonization schemes of
the Dry Zone (including those of the Mahaweli Development Program
launched in the early 1970s) and, second, the adoption of
yield-increasing technology. Other important changes in peasant
agriculture during postindependence times included diversification of
production as well as increased commercialization of production
transactions.
In terms of product value, contribution to export earnings, and the
size of the work force, plantation agriculture has continued to figure
prominently in the economy of Sri Lanka; however, its long-term trend
has been one of relative decline.
Tea, the preeminent crop of the plantation sector, grows in many parts
of the Wet Zone. Crops that are concentrated at higher altitudes
supply some of the best-quality black teas to the world market. The
main rubber-growing area is the ridge-and-valley country of the Wet
Zone interior. Coconut is grown mainly in the hinterland of the
western seaboard.
Plantations represent a segment of the economy that has failed to make
significant advances since the time of independence. This is largely
attributable to the persistently low rates of investment in this
sector. Sri Lanka’s land reforms of 1972–75, through which the
government acquired the ownership of about 60 percent of the total tea
acreage and 30 percent of the rubber acreage, also contributed to the
decline in productivity and commercial viability of the plantation
sector.
Forestry and fishing are relatively insignificant components of the
economy. Forests had been cleared for settlement and agriculture at an
estimated rate of 104,000 acres annually between 1956 and 1981.
Extraction of timber and fuelwood from forests is constrained by
environmental conservation. In fisheries, the resource potential is
abundant, particularly on the north and northwest coasts. Constraints
on development are largely technological. Fishing, however, is an
important occupation for the people living along the coastal fringe.
Sri Lanka’s mineral-extraction industries include mining of gemstones
and graphite; excavation of beach sands containing ilmenite and
monazite; and quarrying kaolin, apatite, quartz sand, clay, and salt.
Among them, gem mining is the most important, producing high-value
gemstones such as sapphire, ruby, and topaz, in addition to a variety
of semiprecious stones, most of which reach foreign markets. Graphite,
ilmenite, and monazite, exported in semiprocessed form, contribute on
a small scale to Sri Lanka’s foreign earnings. The other minerals are
used locally as raw materials in the manufacturing and construction
industries.
Until the late 1970s, manufacturing in Sri Lanka was dominated by
several large-scale enterprises developed within the state sector to
produce goods such as cement, fabricated steel, ceramics, fuel and
lubricant oils, paper, leather, tires, textiles, sugar, and liquor.
Only a few factory-based industries, most of them producing light
consumer goods, were in private hands.
The liberalization policies adopted in 1977 brought significant
changes. Some state-owned industrial enterprises were privatized.
Fiscal and other concessions were offered to prospective private
investors, particularly to attract foreign investments. These included
a package of incentives provided at several investment promotion
zones. The low wage rates prevalent in the country were an added
attraction to the industrial ventures that responded to these
incentives. By the early 1990s new industries employed a work force of
more than 70,000 and had nearly equaled tea in gross export earnings.
Many of them, however, depend on imported inputs and involve
considerable repatriation of profits. Hence, they generate relatively
low net returns to the economy.
Among the industries that flourished under the liberalization policies
was tourism, which, however, remains highly sensitive to political
instability. The expansion of tourism, along with the massive
irrigation and housing projects undertaken since 1978, have
contributed substantially to the growth of the construction
industry.
The rivers that cascade down the Central Highlands offer prospects for
hydropower development. Some of it is being harnessed at large power
stations, including those established under the Mahaweli Development
Program. Hydropower provides nearly three-fourths of the country’s
electricity supply. Imported crude oil is being converted to gasoline
and other petroleum products at the state-owned refinery. Some of
these products are reexported. Fuelwood continues to be the major
source of energy in rural areas.
Banking and the issue of currency are controlled by the Central Bank of Sri Lanka. Until the late 1970s, commercial banking was the near-exclusive monopoly of two state-run banks, the Bank of Ceylon and the People’s Bank. The postliberalization period allowed the establishment of several private commercial banks and an overall expansion in banking, particularly with the government’s decision in 1979 to allow foreign banks to open branches in Sri Lanka. These same trends were replicated in other spheres of commerce such as insurance and wholesale trade in imported goods. The increased participation of the private sector in industry and commerce led to the emergence of a small but vibrant stock market in Colombo.
Changes in agriculture and industry brought about a decline in the relative importance of plantation products among the exports and of food commodities among the imports. This, however, has not reduced the adverse balance in foreign trade from which the economy continues to suffer. Much of the trade deficit results from transactions with the industrialized countries of Asia, including India, China, and Japan, from which imported manufactured goods originate. Singapore and the United Arab Emirates are also major sources of imports. The United States, the United Kingdom, Italy, and Germany are all important export destinations.
Road and rail transport accounts for an overwhelmingly large share of
the movement of people and commodities within Sri Lanka. In rail
transport the government holds a monopoly. Passenger transport by road
is shared by the government and the private sector. The private
automobile remains a luxury that only the affluent can afford. The
bicycle and the bullock cart are important modes of conveyance,
especially in rual areas.
SriLankan Airlines (formerly Air Lanka), the national airline,
operates regularly between its base at Colombo and dozens of major
cities in Asia, Europe, and North America. The seaport of Colombo
handles the bulk of Sri Lanka’s shipping, including some
transshipments of the Indian ports. International cargo is also
handled by the ports at Trincomalee and Galle.