Sri Lankan Economic history

Sri Lanka began to shift away from a socialist orientation in 1977. Since then, the government has been deregulating, privatizing, and opening the economy to international competition. Twenty five years of civil war has no doubt slowed economic growth , diversification and liberalization, and the political group Janatha Vimukthi Peramuna (JVP) uprisings, especially the second in the late 1980s, also caused extensive upheavals.The Mahinda Rajapakse government stopped the privatization process and indeed launched sveral new ones (Mihin Air). Still, Sri Lanka, retains her vaunted high human development index with widespread and near total literacy rate (90.1%), result of universal education policies, widespread health delivery, low infant mortality (one of the lowest in the region). It has 555 government funded hospitals.

Following the quelling of the JVP, increased privatization, reform, and a stress on export-oriented growth helped revive the economy's performance, taking GDP growth to 7% in 1993. Economic growth has been uneven in the ensuing years as the economy faced a multitude of global and domestic economic and political challenges. Overall, average annual GDP growth was 5.2% over 1991-2000. In 2001, however, GDP growth was negative 1.4%--the first contraction since independence. The economy was hit by a series of global and domestic economic problems and affected by terrorist attacks in Sri Lanka and the United States. The crises exposed the fundamental policy failures and structural imbalances in the economy and the need for bold reforms. The year ended in parliamentary elections in December, which saw the election of a more pro-capitalism party to Parliament (while the socialist leaning Sri Lanka Freedom Party retained the Presidency).

The government of Prime Minister Ranil Wickremasinghe of the United National Party has indicated a strong commitment to economic and social sector reforms, deregulation, and private sector development. In 2002, Sri Lanka commenced a gradual recovery. Early signs of a peace dividend were visible throughout the economy. Sri Lanka has been able to reduce defense expenditures and begin to focus on getting its large, public sector debt under control. In addition, the economy has benefited from lower interest rates, a recovery in domestic demand, increased tourist arrivals, a revival of the stock exchange, and increased foreign direct investment (FDI). In 2002, economic growth bounced up to 4%, helped by strong service sector growth. Agriculture staged a partial recovery. At present Agriculture in Sri Lanka needs keen attention as it directed towards disastrous situation. Industrial sector growth, however, faltered for the second consecutive year due to weak demand and lower prices for Sri Lanka's exports. The government was able to exert fiscal control, and inflation trended down. Total FDI inflows during 2002 were about $246 million and are expected to exceed $300 million in 2003. The largest share of FDI has been in the services sector. Good progress was made under the Stand By Arrangement, which was resumed by the International Monetary Fund (IMF). These measures, together with peaceful conditions in the country, have helped restore investor confidence and created conditions for the government to embark on extensive economic and fiscal reforms and seek donor support for a poverty reduction and growth strategy. However, the resumption of the civil-war in 2005 led to a step increase defense expenditures. The increased violence and lawlessness also prompted some donor countries to cut back on aid to the country. Sri Lanka has also accumulated a 9.2 % deficit and the central bank has not intervened since late 2006 to print more currency . A sharp rise in world petroleum prices combined with fallout from the civil war has led to inflation hitting 20%.