It was 1948. Harry S. Truman was US President; the first monkey astronaut, Albert I, was launched into space from New Mexico; the World Health Organisation was established; and the Cold War took a new turn as the Soviet Union blockaded West Berlin.
It was also a landmark year for an island country in South Asia. On February 4, 1948, after more than a century as a British colony, Sri Lanka — formally known as Ceylon — became an independent country.
The past 70 years have seen rapid economic change in Sri Lanka, according to analysts who say the country has diversified away from agriculture into tourism, apparel and textiles, tea and information technology — boosting its GDP beyond many of its regional peers and stabilising its economic circumstances. It has, however, not come without its challenges. “During the early post-independence period, the economy was predominately driven by the production and trade in three plantation crops of tea, rubber and coconut,” says Arjuna Herath, Senior Partner and Head of Advisory of EY Sri Lanka and Maldives.
“Agriculture had a share of 35 per cent of GDP in 1950 with the services sector and manufacturing having approximate shares of 40 per cent and 15 per cent respectively.
“Seventy years post independence, the economy is predominantly driven by the services sector accounting for 56.5 per cent of GDP and the industry sector accounting for 26.8 per cent of GDP.
“The growth drivers in the service sector are primarily financial services, wholesale and retail trade, real estate and transportation activities.
“The agriculture sector has been declining consistently over the past few decades and presently accounts only for 7.1 per cent of GDP.”
According to BMI Research, a firm that provides macroeconomic, industry and financial market analysis, the Sri Lankan government’s “continued focus on deregulation, privatisation and an export-led strategy” since 1977 has been a key driver in transforming from an agricultural to a diversified economy.
“Policies aimed at trade liberalisation and attracting foreign direct investment resulted in the significant expansion and diversification of the industrial sector, which is dominated by the private sector,” it says.
BMI Research points out that the removal of barriers to international trade, lifting foreign investment caps in the Colombo stock market, adopting a more flexible exchange rate regime, and the devaluation of the Sri Lankan rupee to stimulate export growth have all been key government economic strategies since Sri Lanka was born. In addition, a focus on privatising state-owned enterprises, restructuring state bank, and the development of economic infrastructure have all supported its economic shift.
Herath adds, “The country invested heavily in the provision of infrastructure and social services to improve the living standards of people.”
Jola Pasku, economist at IHS Markit, says Sri Lanka’s economy structure has undergone an “impressive shift” from specialising in land-intensive, agrarian exports to labour-intensive manufacturing.
“Within the industry, the manufacturing sector is the most significant, with garments and tea accounting for 60 per cent of total exports. Export-oriented manufacturing represents the major generator of employment opportunities, accounting for over half of total employment growth. The services sector (accounting for more than 63 per cent of GDP as of 2016) has also grown in importance since the end of the civil war.”
Sri Lanka’s domestic policies have played a crucial role in the country’s past economic success and transformation, she says. “Sri Lanka initially embarked on an extensive economic liberalisation process in the late 1970, in the 1990s and then again after the end of the civil war in 2009.”
But despite the successes, Sri Lanka’s journey has not always been smooth over the past 70 years, according to BMI Research.
“Sri Lanka experienced spates of ethnic disturbances, terrorism and an insurgency over the years, disrupting its strong growth trajectory during the 1980s. Additionally, civil war between 2005 and 2009 and high global oil prices also negatively impacted the Sri Lankan economy during the period.”
In 2016, Sri Lanka was hit with its worst drought in four decades, continuing into 2017, and this was followed by its most severe floods in 14 years, leading to dengue cases spiraling, all of which had a drastic economic as well as social impact.
However, Herath says the economy has been resilient in overcoming these challenges and is now knocking on the door of becoming a middle-income nation.
The quality of life of people in Sri Lanka after seven decades of independence has considerably increased in many spheres of human development and in
terms of real income for people and employment opportunities, points out Herath. “The inequality of income distribution has significantly declined. The life expectancy of an average Sri Lankan has increased from 60 at the time of independence to 73 at present; the adult literacy rate has increased from 64 per cent of the population to 90 per cent; Sri Lanka is ranked among the achievers of a high level of human development and its per-capita GDP, which was about $100 (Dh367) in the 1950s, is now $3,835.”
Sectors in the spotlight
Since gaining its independence, Sri Lanka’s key growth sectors include tourism, apparel and textile (ready-made garments), agriculture (tea), and information technology as the country diversified away from a reliance on agriculture.
However, according to Arjuna Herath, Senior Partner and Head of Advisory of EY Sri Lanka and Maldives, there are other key sectors to watch out for, chiefly the telecommunication sector that has grown rapidly since reforms in 1990s, attracting significant amount of foreign investments. Logistics is another significant area that is a growth driver with investment in the port sector by the government and the private sector, says Herath. “Another sector that grew very rapidly during the past two decades is the apparel industry; 40 per cent of all goods exported from Sri Lanka are apparel which enjoys GSP+ benefit of 12 per cent duty exemption,” he says. “The key growth driver for trade in services for the country has been tourism. Tourist arrivals have crossed the two million milestone.”