Report No. 11862^(CE

Sri Lanka: Country Economic Update FY93Public Sector Rati'onalization for Private SectorDevelopment and Povert AlleviationJune 2, 1993

Count.ry Dquartment IIISouth Asia Region

FOR OFFICIAL USE ONLY

C~~~ TypeAT FY3

Authr g6AR8s:D0091 Dept. :SA3CI

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CURRENCY EQUIVALENTS(Annual Averages)

Rs per US$1.00 US$ per Rs 1.00

1981 19.25 0.0521982 20.81 0.0481983 23.S3 0.0421984 25.44 0.0391985 27.16 0.0371986 28.02 0.0361987 29.44 0.0341988 3181 0.0311989 36.04 0.0281990 40.06 0.035199 41.37 0.024199 43.8 0.023

Rs = Sri Lanka Rupee

FISCAL YEAR (FY)

Januar I to Deember 31

FOR OMCIAL USE ONLY

GlSSARY OF ACRONYMS

ADB Asian Deveopment BankBOI Board of InvestmentCCPI Colombo Consumes' Price IndexCPC C¢ylon Petroleum CorporationCEB Ceylon Ectricty BoardCWE Cooperative Wholesale EstablishmentEDB Expor Deveomet BoardERC Economic Reftucuring CreditFDI Foreign Direct InestmentFLAS Foreign Invetment Advioy SeicesFSP Poor Relief Food Stamp ProgramOATT General Agrmnt on Taiffs and TradeOCEC rater Colombo Economi CommissionGDP Ons Domestic ProductGNP Gro Natonal Prodtut1DA Internatonal Development AssociationIFC nal Fae CorporationJSP Jansaviya ProgramMDMP Mid-Day Meal ProgramMFA Multfiber ArrangementNI= Non-Tariff BarriersPFDC Private Finance Development CreditPIP Public Investment ProgramPMEAC Public Manufacturing Enterprise Adjustment CreditPRDA Prvincial Road Development AuthorityREER Real Effective Exchange RateSLR Sri Fanka RaiwaysTIN Tax Idenfication NumberVAT Value-added tax

This document ha a restited distribution and may be used by tecipients only in the peofomamcof thoir o&1a duties Its contents may not otrwis be diclosed without World Bank authodzation.

SRI IANKA,PUBlUC SECTOR RATIONAULZATION FOR PRIVATE

SECTOR DEVEWPMENT AND POVERTY AUEVIUAON

CONTENTS

ErEamE SUM AY .................................... i - vii

1. RECENT DEVELOPMENTS IN STABIIZ7ATION ANDSTRUCTURAL REFORM.. 1

L BACKGROUNID .

IL EONOMIC GRO SVINGS AND DINOSANdIENT TM..............2A, SectoralGrowth ............................ .. 2BR InvstnentandSavings ............. ...... ...... .4

I1L SrABILIZATION AND ENHANCED ADJUSTMENT EFFORTS ...... ... 4A. FisocalDeveopments .......................................... 4B. Pubic Entrprise Reform ........................................ 5C. Resowue MobIziMion and Tax Ref&io ... ........................ .6D. Deficit Financin, Money and Caodt .............................. .7E Pricsand Wages ..................... ........... 8F. Curet Aount, Baance of Payments and External

Resomve Poitin .................... ......................... 90. Trade ReFinms .............................................. 11

2. THE ADJUSTMENT AGENDA FOR PRIVATE SECFOR GROWTH AND PUBLICSE,COR URAmlIONAJLIZATION ......................................... 13

L THE CHALLIENGE OF EXPORT-LED GROVTH AND THES'rUCUJRAL PEFOR. PROGRAMvI ......... . .13

IL PUBLIC SECIOR RA7iONA1XZAMION ............................ 14A. PublicEnuerpiseReirn ... ........... 14B. PublicExendi.retn.n .... ........... 16

I1L REFORM OF TTAX AND TRADE REUGIM.E........ 17A. hulenx Taxation ................... 7::::1B. Cqporate and PestAl Income Tax ................. . ....... 17

Caxusoz andExemptim ............. 17Corporate Taxation ..................................... Peronal Taation .................................. 18

IV. TRADE REFORM AND THE DEREGULATION OF ECONOMICACTDVrYf ........................... 8

A. Rcifonnofthe bnportRegime .................................. 19B. C ostonuEflcbamy .................V ......... ....... 19C Rclplatoy Refrms ....................... 1

7W tepwp m I tl y Sadi AEmmsd Ozuali KaIntoofIu, Hap Dim, A. 4 K=meV^ Pef Aft .i MeudmhI ft1.P.O.b pioIie valuti ~amie =*um taa

CXONTlETS (coat) Page N&

3. POVERTY IN SRI LANKA .......................................... 21

L THE NATURBE OF POVERTY IN SRI LANKA .... .............. . 21A. bmP Pov".... * ........... o.... *.... *. o.. 21. Other Indiators of Human Welfie . ........................... 24C Sunming Up ......... 25

IL GROWTHL HUMAN RESOURCE DEVELOPM[ENT ANDSAFT-NnET PROGRBAMIS ............................. 25

A. rowth Perforna ........ 25B, Eeqging Iwsues in Education and Health .......................... 28

Education .......................................... 28Heath .................................... 29

C Safety-NetPwranms ............... .................... 30The PoorRellefFoodStamp Progr (FSP) . ................. 30The Janaaviya Ptogram (JSP) ....... 30Ihe Mid-Day Meal Programn .DP) . ...... 30Transfas to the Truly Needy .....................-- .30AssistancetoDisplaced Population ...................... ..31As>sessent of te Phogams ............................ 31Suggestion for Re stucturin the Safety-Net Programs.... . ...... 32

4. 'THE ECONOMIC OUTLOOK AND EXTERNALFINANCING REQUIREMENTS .33

L MACROECONOWC TARGES AND POUIIES .................... 33X1laeconndcTars . .......................................... 33

'Macroccoxnocand Strutuu l PolkyRefimrms ...................... 33Sound roeo1Ic ......................... 33Improve PublicEu penditue Management . .................... 33Reform the Incentive Framewiork ......................... . . 34PromotePrvawSector Activityandvawestment ................ 34

IL MACROECONOMIC OUTLOOK UNDE3R ADJUSTM5 ENT ............. 34

mI THE BALANCE OF PAYMENTS AND EXTERNALFINANCING REQUIREMENTS .. ..37

IheCurientAccount .37...37Externa Fmancing Requiements and the Capital Account ........ .. 37

Iv. R1SIS AN)D NCERTAIrES ................................... 37A. Domestic Risk .. ....i................................. 39IL EteruaaRisks ...................................... 39

STATISTICAL ANNEX OF TABLES (Table 1.1 to 1.38) ....... .. 41

MAP

LLST OF T TABLES

CHAPTER 1

Table 1-1: KyEy on.onmic ldiatc s .......................................... 3Table 1-2: Incase it Cosuers' Price Index .................................. . 9Table 1-3: Exerna Sector Prformance . .. ................................... 10Table 14: InteM aond Wage Comparisons & REER ............................ 11

CHAPTfR 3

T1l 3.1: StUdie of Absolute Poverty ...................................... . 22Table 3-2: Sri Lanka and Other Lower and MiddleIncome Counties-A Comparo

ofSome BaskIdbdicators .... .................................... 27

CHAPTER 4

abe 4-1: Key Indicators ................................................. 36Tabl 4-2: Exten Funcial quinn ................................... 38Table 4-3: Ilustative Alternative Scenario-Slectd Key hdicaton ................. 39

EXECUTIVE SUMMARY

L 9NM

1. Endowed with a richly varied natural resource base and well-developed humnresources, Sri Lana has good develpment potential. Reazing this full potenal has beenconstainedby etni and poli violne rectly dramatized by the unfortunae as_nt_of Presdent Premadasa. On the ecnomi front, the stop-go nawe of poliy refms has beenanother cidt obstacle to aciev rapid and sutaind economic growth. This report reviw therooet proge with stabiization and struc reform polcies, examines the trends in economicperforne and pover reducon, and identifies an agenda for frther refoms.

2. The repon conclud that, with the resumptionf adjustment effort snc 1989,some encouraging progress has been made m a number of plihcy area which has helped reducemacoeconomic imbalancs and raised economic growth. Neverthless, there is a substantialunfeinshed policy agenda. On the political side, the astion of the Preddt has hegtneduncertain Futue ecomic prospect will criticay depend upon the new leadershipls apacityto sustain peace efforts and to push head sntly with te implementatio of the neededeowomic refom With favable deelpmets in these two areas, it shoud be possible for SriLank to acelerte its a growth rate to 6% pa. ove the mediumterm. Aceving this gowthpath will be critical for enurig sustaned prgre ss in poverty reuctia and furthe humadevelopmenL.

IL ECON-OMIC DEVE:M

3. Sni Ianas economy has erinced a rebound m gowth since late 1989, spwrrdby renewed stabhiation and adjustment effors The toIrm effrt focssed on rOducingmacoeconomic imbalances ad improving the incentves for private sector ough privatzatlo,rade and eteral payments reforms The rebound was broad4bsed, wistrowg gwwth in

industy wd sevie (in the private sector), and a rapid expanion of domestic and foreign privateinvestment Real GDP rose by an aver-ge of 5% p.s during 1990-92, as compared with 2.7% in1987-8, the budget defici was reduced to 7.4% of GDP frm 11.2% in 1989; aveae inflindecelerated to 11.4% from 20% in 1990, the curart amount deficit declined to 5.5% of GDPfrom 7.1% in 1989, the overall balance of pyments recorded surpses in 1990-92 and oficialreserves rose to 33 months of imports by the end of 1992.

4. The reforms, resulting in more market-oriented incentives, produced a significantprivate sector response Prate investment increased from 88% of GDP in 1988 to 16.7% in1992. Much of this intment went to manucturn, which in tum providd te man impetusto gmowth. Maatu value added expanded at an avage pace of 7% p.s in 1990-92, higherthan the growth d in the 1980s. Agricu s per however, stagnated,growiog by oDy 0.5% pa over the past fie yem, maiy refectg iappropriate domesticpolcies Although grwth prmance in the s secor ws ondable with the rcoveyin toursm-53% in 1990-9Z, higher than the 2.7% in 1987-this peroace is still belowpotential becaue of inefficiencies in the large public service entities.

S. Despite the reduction In m economic baacs the quality of the fiadjustmnt and dippages in Impl n metaty piHcy targets are of corn TMe budgetdeit was reduced largely thr smaller tansfer to stae ntepises and rstruturing ofpublic capital spending. But mounting presures on current expeditures a preented astrone, sustainable fical adjustmet In additim to lwer capital spending, enditures onmaintenance fell to at the escalation in spending an defense, civ sevie sabaies anddebt servie ablgatin Defiense spending rose fm 31% of GDP in 1989 to 42% in 1952,illustrating the risig fiscal burden of the civil war. Wages and salres which akeady acount fora big share of public ependitures (4.9 of GDP in 1992) are ecpected to inrae furt in1993 bec_s of acros-the-board wage increases for civil sernt Debt service, the rges.component in curet ependitures, accounted for 6% of GDP in 1992. On the monetary polcddp slippages In npolc tr resulted in a rapid epanson of mone supply in1990-92. Hower, moneta control measures have been more reetly (April1993). On the strctural font, whie good progess was made in the prvtization of smal andmedium entpries and reform of the trade and extea payments pstem pgre has beenweak in reoming the banking sector, the large publc entises in the services sector andagrltural sector policies.

mTL RHEflFGEN12l

6. Notithstanding the farabl overall ecomic perfirmance in the past threeYeas, Sri Lanka fces major challenges, not least the continuing cvil war whi dearly is exactinga high cost Yet, despite the countrys troubled politcal suation, the private sector has shown aremarkable permanceM The rezation of the Sn Lankas considerable dcpmnt potentidwill, howe, requre a consitent teform effort over the medium-trm. The polc reformprogram launched in 1989 needs not only to be continued but also intensified, in pel withequa vigorous efforts to restre peace.

7. As spdled out in its 1992 Fifth Policy Framework Paper (PFP), the mainobjecti of the Govenmet's reform agenda are accelerated gmoth of output and emplomt,and povety alleviatio As in the past, the focus of the refrm womd need to be: (i) therestr ing of the public sector, pulalyacceleat privatl n and iasing theefficienc of remining public entpise and public (ii) impoving the ta and tadergmes to reduce distortons in pnvate sector eentives; (iu) deregulation of private secto entry,exit and competition; and (iv) strgting of socid servies, pa y health and edtionand pv t of the covge and effiienc of safety-net programs The poposed reformsneed to take place within a macroeonomic fameNwork that further reduces interna and extenlImbdaln

A. Pblic Sw R

& Reform of the public sector shoud tak a two-pronged appmach: (i) publicenterprise reform and prvatat; and (iI) imprved effiiec and rato of publicexpenditures consistent with development objectveL With respect to i e r in thenext two yeas the Govaenen needs to: (i) acimte p*atiton; (i) impose hard budptaryconstants on those public enterprises not to be privatied immediately and hpv monitwoing;(iii) inreaws the autonoy and Imprve the regulatory eionment of the utili and transpcrt

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sectors to facilitate private sector entqr, and (iv) improve the efficiency and profitabfity of state-owned banks, and laying the groundwork for their prIvatizatoDL

9. Whike the privatization program is wel advanced for the smal and mediummanufcturing enterpries, progess in privatn the laer enterpries, particarly in the serioessetr, has proven more dificult. As a first step, the Government should proceed quickly withthe privatization of enterprises where broad agrement appears to exist-CWE (the state-ownedtrading company), the remaining sugar and cement companies, and the remahinng 50% of thetransport-related assets of the Central Transport Board. In the tea sector, initial steps to involvethe private sector (as management contractors) need to be quickly expanded to transferinvestment decisions and risk to private companies. Two other priority issues are the privatizationof the Air Lanka and the two state commercial banks. At the same time that an accelerateddhvestiture program is being implemented, it is important to impose a hard budget constaint forenterprises that are not to be privatized immediately or are likely to remain in the public sectorfor an extended period. Of special concem is the need to address the financial difficles of theCentral Electricity Board (CEB) and the Sri Lanka Railays (SLR); where delays in tariffadjustment are resulting in mounting losses. The 30% increase in CEB's average tariff recentlyannounced is an important first step to make up for these delays In genera, the Governmentneeds to reinforce tne autonomy of public enterprises in decision-making, prepare action plans forthe rationalization and/or divestiture of the public utilities and transport companies, and developreglatory reforms to promote competition and avoid monopoly practices.

10. As to the gublic expenditure reform the main priorities are to: (i) improve theeffiienc of the public investment program (PIP), both on- and off-budget; (ii) containexpenditures for ci service wages and salaries; and (iii) strengtben povety alleviation progrms

rough better targeting. The Bank is curnatly undertaking a review of public expendPreliminay analysis suggests that a number of large projects with doubtful economic benefits havebeen included in the PIP. Tbese require thorough review ed scrutiny. On the other hand,expenditures for infrstructure rehabflitation and operations and maintenance (O & M) for roads,water supply, irrigation and health need to be raised. Along with higher financial resources, thepaning and execution of maintenance also needs improvement. Regarding the containment ofthe civil sevice wage bill, a full solution to the problem calls for a comprehensive reform ofpublic administration over the medium-term. In the short-term, a check on fiurther incaes inthe wages and pensin benefits and a recruitment freeze on lower ranking civil servants,including teachers and health workers, would help contain the civl service wage bill. Finally, thesafty-net progams face targeting and efficieny problems. A carefil reassessment of theseprograms would not only help ensure that the truly poor benefit from the progams, but cnuldalso comnserve finanal resources (see also par. 18).

B. Reorm of the Tax Regiem

11. Although Sr Lankas tax effort (19% of GDP) compares favorably with otherdeveloping countries, serious inefficiencies resulting from the tax stucture remain. In 1990-92,the Government moved to reduce the distorting effects of taxaton on economic activity byimproving the efficiency, flexibility and simplicity of the tax system while safeguarding the overalrevenue effort. The potive impact of this reform has been reduced by the proliferation of taxholidays and administrative inefficiencies. The main focus of further tax reforms needs to be:(i) improving indirect taxation by introducing a VAT and rationalization of the excise duty regime;

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(U) reform of corporate and personal income taes; and (ii) rationalization of tax incentes. Tsxand trade reforms wil need to be implemented in line with the stabi n ptogram, and theoverall tax and trade reform pakae woud ned to be desiped In a manner so as to ensrrevenue neutrality.

C Trade Rehm and the Dergationof Economic Actvity

12. Despite recent reforms, Sri Lanka is still highly protected and regulated, especiallyin agriculture. The Gooverments objective in trade reform should continue to be to reduce thelevel and dispesion of protection and to reduce and eventually eliminte the anti-pt bias.Tariffs have been reduced and should now be fur ratonaized through the removal of specifiduties and special import arrangements and complemented by improvements in customsadmistration. There should be a three-band rate with a maxmum tariff of 35%, and Importcertification should be discontinued. Regarding non-tariff barriers (NTBs), some 200 items stillrequire import licenses, including most agricultunl products lAeralhation of these NTBs shoudbe pursued with increased vigor and speed.

13. The Bank and the IMF have supported a Goverment program aimed at revingcustoms policies, simplifying procedures, stgthening organizon and controls, andcomputerizIng operation. Proges in these areas should continue. To balance revenue

generation and trade fciltation, the Government should (i) move ahead with the contract forthe services of a preshIpment inspection company for a period of three years; and (ii) strngththe customs reform program.

14. Over the medium-term, reform of the legal framework regulating the formation ofcompaies and baniruptcy would facilitate the further development of the pnvate sector.Necessary measures include: institutional improvements in the Department of the Registrar ofCompanies and in the commercial court; facilitation of exit through imprved procedures fordealing with the assets of insolvent ur defunct companies; and improved provisons governingasset restuctuing and rehaiitaion of busineses faced with temporwy d;fficulties. Reform inthis area call for a systematic review of the various underling laws and regldations. Considerabletechnical assistance may be necesay.

D. Poverty Alfiviaton

15. Sri Lanka has established an excement rcord in social development, as evidencedby indicators that compare faoably with much higher income-level economies, especially in termsof life expectq, infant mortality, school enroflment and adult literacy. However, resource andpoliy constraints threaten to undermine sme of these achievements. At the same time,relatively low income growth, especily the recent stagnation of agriculture, raise concoe aboutthe sustainability of the poverty alleviation efforts. Clearly, the ability to accelate and sustai ahigher growth rate overall, and a strong growth in agriculture, will be the key determit offuture progress in reducing poverty. This needs to be complemented with efforts to improve theefficiency of spending on education, health and the safety-net programs.

16. In the area of ug. five issues need to be addressed: (i) he 7% shae ofrecurrent education expenditure consumed by salaries in 1992 left few resources for quality-enhancing expenditures, such as for instructional materials and repairs and maintenance.

(11) lhere s a wide dsrepancy in the resoure allocation per student between small and largeschool (I) bere are aso wide d in the alloction of education resources mprovinc, with the pooer ones getting short shift. (hv) Te sharp increase in the number ofteachers ha led to a studentteaher ratio that is vety low by international standards. (v) Thehigh rate of gowth on spending on unierty education in real terms, combied with the poliy ofno cost recovery, could crowd out higher prioty expnditures on geal educatiowL

17. The key issues in the hbo setr derive largel from the decline frtility andrlted demographi change. As the number oL people 60 and over more than doubles, therwill be an inrae in the burden of diseases with high treatment costs, such as cancer adcardocula dase. These changes, togetr with the strong gwth of private health semicesin recent yes (including widespread pivate pracdoe by publc sector doctors), call for a thoroughpolicy review of the sector, with attention to a number of issues. (i) A regulator and supervioyframework is ned to govern the eatly expanded network of private services (ia) Theincidence of morbidity from several preventable diseases is rising. (iin) Quality differentialsresulting in ovrcrwi at higher level facilities and provincial hospitals and underutflization ofsmaller facilities needs to be addressed by more adequate funding for the latter. (iv) Animbalance may have developed between spending on expanding failities and that on operatiaosand maintn enditures for maintenance ih 1990-92 were only about one-tbird what wsrequired.

I8. The Goverment has traditionaly offered an army of safq-n thattransfer income to certain groups. The most important are the following (i) The Poor ReliefFood Stamp Program (FSP) provides monthly food coupons. It suffers from poor targeting andhence covems many ineligible beneficiaries while Acluding some bona fide ones. Te value of thebenfits per household has fallen dramaticaly, and it is unclar whether the program is achievingits objctiv To reduce costs and impmre progressivity, the JSP targeting methods could beusd to prn the rolls of the FSP. At the same time, the amount of FSP payments perhousehold could be rased (u) Te Janamp Program (JSP) prvxes poor households withfixd monthly cash gants for two years and smaler payments for an i ithereafter.These payments are itended to enable recipients eventually to ext povert. AltWough rcvetchanges bhe greatly imprv targeting, the payments after the end of the two yeas appeareXcessive. More important, there is no real evidence this program enables many to exit poverty.The open-ended monthly payment after two years could be replaced by the FSP with improvedtargeting methods. If cuts need to be made in the safety-net programs, they should mainly comefrom the JSP program (il) The Mid-Day Meal Program (MDMP) is a universal non-targetedprogrm for all children attending primay and secondawy schooL It is aimed at improvingnutrion and increasing attendance and alertness. It may be argued that the distibution ofbenefits is regressive and that the program may be yielding few social benefits per rupee speat.The MDMP coud be restricted to primary school children, where the institutionl impact may bethe largest, to reduce the cost and improve progressivity.

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1V. MEDIUM-TERM PROSPEC AND EEAL FINANCING REOUIMEO

A. Econoic Prospects and Finandig Needs

19. As indicated in the Government's fifth-year PFP, Sri Lank's medium-termmacreconomic objectives are to achieve and maintain a strong rate of GDP grwth of 6% pa.,reduce the fiscal deficit to below 7% of GDP, reduce the external current account deficit to about5% of GDP and maintain price stabflit, while ensuing that scal and envionmental concerare addresed. As noted, Sri Lanka's medium-term prospects criticaly depend upon developmentsin two fronts: status of the civil war and policy progress. With sustained peace efforts andconsistent progress in implementing policy reforms along the lines discussed in Section MI above,Sri Lanas macroeconomic objectives are achievable.

20. The immediate task ahead is to ensure that policy slippages in the area of fiscaland monetaty policies are rversed. Immediate actions should include reviewing expenditureplans for 1993 and beyond, including containing the recent across the board wage increases, theprposed 15,000 rural infrastructure project scheme, the Air Lanka airplane purchase, and the busasembly scheme. At the same time, the severe financial situation of the CEB needs to be quicklyrelieved by implementing the required tari increases. As noted earlier, the Government movedin April 1993 to strengthen monetary controL Thi policy stance needs to be maintaned to avoida regeneraton of inflationary pressures.

21. Assuming that security wil improw and that the Government will implement itsmacroemonomic stabilization and adjustment program forcefully, our projections show that realgrwth wold increase gradualy to about 6% per year, whle inflation is expected to decline to anannual average of about 6% by 1995. A large part of the increase in GDP would come from themanufacturing and services sectors. Continued strong private investment in export-orientedacivities will support a strong manufacturing supply response (gVowing 8-9% p.a). Greaterprivate investment in servces, coupled with improvements in the efficiency of public utilities, wiboost the growth of value added in the services sector (around 6% p.s). Although the output

pansion in agriculture wfll be relatively modest (2-3% p.s), the improvent in incenties inboth plantations and smalLholder agriculture will support greater private investment and a morebuoyant agriculture supply response than in the past.

22. Total investment wfll increase from about 22.5% in 1990-92 to about 25% ofGDP by 1995, with public investment maintained at 99o of GDP. Public investment wilconcentrate on improving economic infrastructue and providing social seice sevces, mainly inbealth and education. To accommodate the higher investment effirt, gross domestc saving willneed to rise by about 3% of GDP by 1995 largely through the expected increase in public saving.The increase in national saving will reduce the dependency on foreign saving for financing a highlevel of investment. Successful implementation of fiscal discipline is crucial to achieving thesaving target The current balance of the budget is expected to improve from a deficit of -0.6%of GDP in 1992 to a surplus of about 2.5% of GDP by 1995, wbile the overall budget deficit wfllneed to drop by an additional 15-2% of GDP to about 6-65% of GDP. Fscal adjustment has totake plac mostly through a rationalization of current expenditures.

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23. Strengthening of the extemal position will be mainly achieved through a strongerexport performance, leading to reduction in the current account deficit to about 5% of GDP.Manufactures are expcted to be the most dynamic ex;rt sector, but traditional exports willregain an upward trend based on improved agricultural performance Imports wil grow moreslowly than expots but wil incree faster than GDP. Large workers' remittances and bigherreceipts from tourism wil also help improve the external sector position. Sri Lanka's capitalaccount is beginng to undergo structural changes. In particular, the share of private and short-term capital inflows has incrased sharply. This trend should boost the availabiity of exteraresources. These developments together with the expected external support program will yieldmarginal surpluses in the overall balance of payments. Under these circumstances, gross officialreserves will rise to four months of imports by 1995, a trend that will facilitate furtherlberalization in the external sector.

24. Under the adjustment scenario discussed above, Sri Lanka's external financingrequireents will be stable at around US$12 billion p.a throughout the projection period. Thislevel of external finaning requirement is within the range of expected donor commitments andprvate capital flows, and the need for external commercial borrowing seems unlikely. In thelong-term, prospect for increasing the levels of official aid are uncertain, reflecting the scarcity ofofficial lending resourc_s and increasing demands elsewhere (eg., Africa, the FSU, etc.). SriLanka's success in attracting these resources in the future wfll depend increasingly on its efficiencyin managing the aid portfolio.

B. Risks and Uncertutes

25. The illustrative adjustment scenario is subject to several risks. An acceleration inpolitical umest is a major threat Apart from the direct financial cost of the civil war, the kus ofoutput through disruption can be substantial Moreover, the acceleration of political unrest willlkely weaken the Government's ability to formulate and implement the required rforms. Evenwithout an acceleration in the civil unrest, the Government may not be able to consistentlyimplement the required reform program. The past experience of stop-go reforms illustrate thisrisk In the event that the implementation of the reform program falters, Sri Lanka's economicperformance would be considerably weaker than that presented in the adjustment scenario (about3% GDP growth p.a), which would have serious adverse implications for employment andPovt.

26. Externa shocks, especially unexpected changes in the prices of major exports andimports, are another potential source of risks Changes in the Multifber Arrangement (MFA)could affect Sri Lanka's gament exports significantly. To a lesser extent, Sri Lanka is alsovulnerable to variations in international interest rates and exchange rates. In the event that anexternal shock emerges, achievement of high growth will depend heavily on the degree and speedof the Govement's response in terms of compensatory policy reforms. While the adverseconsequences of small, temporary disturbances could be absorbed through reserve damwdown,large external shocks would caU for an appropnate response in terms of a strengthenedmacroeconomic management and structural policy reforms. Over the longer tern, Sri Lankaneeds to minimize these risks through eWort diversification.

1. RECENT DEVELOPMENTS IN STABIIZATIONAND STRUCTURAL REFORM

L BACKGROUND

1.01 Following a period of poor economic performance during 1970-77, theGovernment of Sri Lanka initiated a new economic policy in 1977 that sought to gradualyincrease the role of markets by relaxing the regulations on prvate sector activity. Reformsreduced the restrictions on pricing, investment, and extera trade and payments. The supplyresponse was strong: the average annual rate of GDP growth inrased to 6% dunng 1978-82compared with about 3% in the early 1970s (see Annex Table 1.1). lbe donor communitysupported the liberalization policies with grants and concessional lending for investment programs,particularly for irrigation.

1.02 In 1983, the civil situation deteriorated because of the escalating ethnic andpolitical conflicts, reaching a crisis in 1987-89, that hurt the economy badly. However, theeconomy was also hurt by the faltering nature of the Goverment's adjustment program. Therfm progam of 1977 was not folowed through with further measures to address the remainngstructural constuaints, particlarly the need to restructure the burdensome public sector, whichdominated ag tue, industty and services. Growth of GDP decelerated to only 2.9% p.a. in1987-89. Pronounced macromnomic imbalances emerged as a result of the large and inefficientpublic sector that had been eft intact. The current account deficit was about 10% of GDP in195-87; the fiscal deficit exceeded 15% of GDP in 1988, a reflection of the size of the publicsector. A large savig-imvestment gap reinforced the heavy reliance on foreign borrownng toawommodate public sector spendig. Strucural constraints at the sectoral level inhibited gains ine*ien and gowth in factor productivity.

1.03 In late 1989, renewed stabilization and adjustment efforts emerged. How effectivewas this reform effort? This Chapter looks at the progress in stabilization and structural reformssince 1989 and its impact on economic performance. The main conclusions are:

e The economic rebound resulting from reforms since 1989 has been broad-based,with strong growth in manufacturing and services (in the private sector) and rapide_pnsion of domestic and foreign private investment. Notwithstanding adeterioration in the terms of trade, real GDP grew by an average of 5% during1990-92 (see Table 1.1).

o Consumer price inflation decelerated to 12% in 1991 and 11% in 199Z after risingby more than 20% in 1990.

* The external current account deficit as a percent of GDP was reduced to 5.5% in1992, down from 7.1% in 1989. The overall balance of payments ran surpluses in1990-92 that contrasted with the deficits of the previous five yeas Grow officialreserves rose from 1.5 months of imports in 1989 to 3.3 months by the end of1992, buoyed by higher concessional aid and inflows of private capital.

o Progress on the fiscal front has been mixed. While the budget deficit was reducedfrom 11.2% in 1989 to 7.4% in 199, largely through reduced transfers to stateenterprises and restucturing of public capital spending, mounting pressures on the

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current expenditures prevented a stronger, sustainable fiscal adjustment.

o Some slippages also emerged in the monetary policy implementation during 1991-92. Domestic liquidity expanded rapidly because of growth in private sector credit,unsterilized icre in net foreign assets and a large expansion of credit to theCeylon Electricity Board. However, monetary control measures were strengthenedmore recently (April 1993).

o Good progress has been made in implementing structural reforms in a number ofareas--ecan and payments system, privatization and trade reforms. Paetlcubanoteworthy is the progress made in hberalizing the current account of the BOP,including relaxing the requirement to surrender export earnings in foreignexchange. However, progress has been weak in reforming the banking sector, thelarge public enterprises in the services sector and the agncultural sector incentives.

IL EC:ONOMIC GROWTH SAVINGS AND INVESTMENT

A. Sector Growth

1.04 As noted, GDP growth rebounded in 1989-92, growing by an average of 5% p.a,as compared with 2.7% in 1987-89. The sectoral composition of growth is shown in Annex Table13. The changing composition of Sri IA s GDP reflects progress on the strucural reforms.The liberaliztion and privatization efforts since 1977 have centered on manufactuin& whoserelative share in total output epnded from 14.4% in 1982 to 16.8% in 1989. The broad-basedpriate sector response to the more market-oriented incentives influenced industrial performance.The more recent reforms starting in late 1989 have further boosted the manufacturing sector'sgrowth performance Value added in manufacturing grew by 7.9% on average during 1990-92 ascompared with 6% p.a. in 1982-89. As a result, the manufactring sector's output share grew to185% in 1992.

1.05 In contrast, agriculture's growth performance faltered (0.5% pa. over the past fiveyears), part due to adverse weather conditions in 1991-92 but mainly because of inappropriateagricultural sector policies. The drought in late 1991 and the first half of 1992 hurt rain-fedexport crops, and tea production in 1992 was 18% below the normal five-year average. Thedecline in value-added from plantation crops (some 24% of agricultural value-added) and frompaddy (23% of sectoral value-added), 2.9% p.a. and 2% p.a. on average since 1985, respectively,lie behind this weak performance. Government policies have traditionally been directed atachieving food self-sufficiency. Tbese policies include cropping and land-use restrictions, andexsceive protection of food crops, especially rice, leading to significant efficiency losses. In theplantations subsector, inefficient public corporations are the main factor explaining the subsector'sdecline.

1.06 The service sector accounted for more than half the increase in GDP durming thelast decade. The average growth increased in the early 1990s to 53%, as compared with 43%p.a during 1982-89 and only 2.7% in 1987-89. However, this performance remains modest whencompared with the sectors potentiaL Inefficiencies in the large public corporations, whichdominate trade, transport and utilities, are a major constraint on the performance of the servicessectr.

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Table 1-1: KEY ECONOMIC INDICATORS

1. Natlona-iIncome & ExpenditureGrowth of GCNP (at constant prk#4 (qb) 2.7 2.3 6.2 4.6 4.3GNP Per Capita US $ 375 367 417 460 494InvestmenUGDP FRaio (qb) 22.8 21.7 22.2 22.9 23.7Domestic SavingsGDP Ratio (*) 12.0 122 14.3 127 15.3

2. RWe Interest Rate (per annum 9)12 Months deposits -2.3 1.6 -3.0 3.4 36Commercial Lending 4.2 6.9 -4.0 7.4 83Treasury Bills (3 months) 5.1 5.9 -3.6 4.8 5.8

3. Pries and Real WagesAnnual Change In Consumer Prce Index (%) 14.0 11.6 21.5 12.2 11.4Annual Chanoe In GNP Deflator (%) 11.5 9.9 20.0 10.5 9.9Minimum Wage Index Wages Boards (1978-100) 107.9 112.0 107.6 109.7 112.0Government Wage Ind (19786100) 125.4 121.9 113.2 113.2 106.0

4. Public FinanceGovt. Revenue as% of GOP 18. 21.4 21.1 20.4 20.3Govt. Current Expenditure as % of GOP 20.8 22.6 22.3 225 21.0Govt. Capital Expenditure as % of GDP 13.7 10.0 8.7 9.6 6.8Budgeto Deficit as % of GDP -15.7 -11.2 -9.9 -11.6 -7.4Domesti Bank Borroulng o % of GOP 4.6 -1.3 0.1 -0.2 -0.5

5. Money Credit (Annu4l Increase)Growth in Broad Money(M)(%) 16.6 11.3 20.5 22.1 17.4Growth In Domestic Credit () 28.8 5.1 14.6 10.2 12.7Growth In Public Sector Borrowing (%) 37.4 5.5 4.2 -3.0 -3.3Growth In Prvate Sector Credi (9) 21.7 4.7 24.3 20.5 19.6

6. Extemal Trade lrdicataoExport Volume Index (19885100) 101.4 103.0 120.0 125.0 143.8Import Volume Index (1985-100) 95.6 90.0 95.2 107.7 118.6Export Price lndex (1985-100) 127.8 150.7 183.0 186.4 211.4Import Price Index (1985-100) 137.5 164.8 209.4 217.5 237.8Tems of Trade (1985-100) 93.0 91.4 87.4 85.7 88.9Share of Non-traditbonai 5pots (%) 64.0 66.7 68.8 73.6 81.4Current Account Deficit as % of GOP 4.5 -7.1 -5.5 -7.6 -5.5Overall BOP Surplu&/Oeft(-) US$ Mn. -86 -86 181 209 182External Debt Serve Ratio (%) 28.6 24.2 17.8 18.5 1.7

7. Exchange RateNominal Average Exchange Rate (FdUS.) 31.3 36.0 40.1 41.4 43.8Real Effective Exchange Rate(1980-100) 90.9 86.1 87.7 92.4 88.3

8. Population Growth Rate (%) 1.4 1.3 1.1 1.5 0.9

Soc: Cm" Bank of Sd Larn and DepatnW of Cemm and SNUB&$

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L Inestment and Savi&

1.07 ITe private investment response to the stabilization and structural reforms hasbeen significant. Grass fixed prvate investment incresed from 8.8% of GDP in 1988 to 13% in1991 and 16.7% in 1992 (Annex Table 1.4). Foreign direct investment more than doubled in1992, although still accounting for only 5.4% of total investment. Total gross investment rosefrom 21.7% of GDP in 1989 to 22.9% in 1991 and 23.7% in 1992. Ibisrise is attrbutableexclusively to pdvate investment: the private sector investment index rose by 43 base pointsbetween 1987 and 1991, whee the public index declined by about 27 base points during thesame pernod Reliance on the stock market for investment financing rose significantly with theacceleration in privatizaton and pent-up demand for affordable finance.

1.08 Despite recent reform efforts, public spending continues to crowd out privateactivity. In 1992, public domestic saving remamed negative at -0.6% of GDP, a slightimprovement over the -2.0% of GDP in 1991. Because of increased remittances and otherpriat foreign traDsfer, private national saving rose from 14.6% of GDP in 1989 to 183% in1992, with financing from faoeign savmng accounting for about 23% of gross domestic investment. Gross domestic saving rose modestly from 12.2% of GDP in 1989 to 12.7% in 1991 but thenieased sigificntly to 153% in 1992, in part becase of the reduced budget deficit.

LIL STABILUTION AND ENHANCED ADJUSTMENT EFFORTS

A. FisaDevebpucuts

1.09 Despite coretive measures since late 1989, fiscal pressures remain significant.Moreover, notwithstandig a substantial declie in the fiscal deficit from 16% of GDP in 1980 toaround 7% in 1992, the upward pressure on current spending in the 199Xs raise some concernabout the long-term sustiability of the fiscal deficit reduction effort.

1.10 Exped sas a shae of GDP decined from a peak of 43% in 1980 to 28% in1992. Te evel and composition of publc expenditures are critical for stablization andadjustment. Sine 1990, the share of curent expenditures has risen she -ly, while the share ofcapital expenditures has fialen to accommodate escalating defense spending, new welfare schemesand greater debt servce obligation. Wages and salaries, at 4.9% of GDP in 199, are ected:to increase further in 1993 because of a proposed across-the-board 30% percent wage "a rease forcH servants, which will apply regrdlss of productivity gains or performance (equivalent to aneffecve 169b percent effective increase in the wage bill over the 1992 level). This increse isdouble that contemplated in the Goverment's fifth-year PFP. Expendiures for defense rose to4.2% of GDP in 1992, up from 3.1% of GDP in 1989. Debt service, now the largest componentin the budget cment e ture, accounted for 6% of GDP in 1992, as the public debt reached96% of GDP. Much of this refect the sevicing needs for domestic debt; because ofcnesional terms for foreign lending, the foreig debt serice is only about 1% of GDP.

1.11 Transfers to households reached 5% of GDP, as new welfire schemes came onstream and pension benefits from the non-contbutoy civil service pension scheme increased(2.4% of GDP in 1991). One positive feature, however, was the reduction in budgetary transfersto public enterpries. Current transis to public enterprises declined to 0.4% of GDP in 1992,

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down from 1.1% in 1989. Furthermore, the Government has used reductions in capital transfersto public entitles to rationalize public expenditure; nevertheless, these capital transfers stillaccounted for about 3% of GDP in 1992.

1.12 On the public investment side, overall spending was cut to bring in the fiscaladjustment. Much of the cutbacls were concentrated on large str projects, especiallyin irration Wbile the Govenment has rightly emphasized attention to basic infrastrcture in itscurrent public imvestment program, inclusion of a number of large projects with doubtfuleconomic benefits and inadequate attention to and 0 & M remain a major concer

1.13 As to reform of public administration, the Government has not yet met itsobjectves with respect to restcturing the civ service. There is still overstafflng the number ofcivil servants in both the Central Govrment and Prvincial Councils appear to have inceasedsubstantially since 1988, and hiring is still underway in education. Generous severance packageshave doubled the civil service pension bM from around Rs 4 bilion to Rs 8 billon per year.Because the benefits of the pension fund are not linked to a retu on contributions, theGovernment has to cover any obligation out of current resources.

FL Publlc Enterprise Reform

1.14 The marked difference between private (largely manufactring) and public sector(plantations, sevices) performance has improved the political climate for privatization, whichaccelerated coniderably in 1992. Direct budgetary transfes to public enterpris fell from about1% of GDP in 1989 to 0.4% of GDP in 1992. Howeer, public enterprises continue to burdenthe ficial system, and credit to public enterprises, extended by the two state-owned commercialbank alone, inceased by Rs 1.3 bIlion in 1992. This remains an important source ofmacroeoxnomic instability.

1.15 The Governmt launched its privatiation efforts in 1990, when the insttutionalcapacity for diesthe was streoened somewhat. Greater poltical acceptability and regulatoryreforms encouragg paricipation and transfer of ownership to foreigners boosted theprivatzaton program in 1992. A number of policy measures were also introduced to facilitate

ivatition M The tax on the transfer of equity to forignr was eliminated and the 40% limit onforp ownesip was relaxed. Also, in July 1992, the Govenment shifted management of 449public estates to 22 private management companies on a profit-sharing basis. Ihe companies tooka number of small but cria steps to improve m nt. However, because the Governmentgave the companies only five-year contacts, they have been reluctant to make new inmestmentdeciions Mhe Govemment and the private management companies are discussing the convesionOf the contracls to 30-50 year lease-type arrangements, with the private sector assuming the risksHowever, Govenmuent's unilateral decision in late 1992 to raise plantation workers wages by 30%has weakened the fincial viability of the companies.

1.16 With support from the Asian Development Bank, in 1992 the Governmentinitiated the priatization of the sugar industry. Realizaon of the benefits has been hampered bythe limited number of importers operating under restrictive import aangements and high specificimport lvie. A proposed US$500 per ton minimum guaranteed price for private sectorprde could also limit efficiency if implemented.

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1.17 With supot from the Itr al Development Association's (IDA) 1990 PublicManufacturing Enterpre Adjustment Cdit (MEAC), the Goveament prvatized 40% of theshares of mining and minera publc entiti Faced with limited gais from the 40%privatatoi, n 1992 the Government sold up to 90% of the sck in ming companies tocorporate ivsto and distrbuted the remaining 10% to enterprise worker

1.18 he rcet cowneion of the Sri Lanka Telecommunicaton Department to apubic corporaton, with more autonomous maagemet, and the opening of tlecommunicationservice except for basic telephone seve, to the prvate sctor, have led to better qult, andexpandd services. Transfer of tecdology advances and gains in efficiency would hae been moreproounced had pivate secor prtcipation been edended to basic telephone seric

1.19 Not all the reform efforts have been successful Sodal and political consideratioshave severely constrained the autonomy of the management of almost al public utilities andtraport entities. In particular, the financial situatio of the CEB and SLR is aannin A long-awaited incree in CE's taf has been postponed at the same time that acceleration of therunal eletrification program is placing nabldemands on CEWs limited financialresources. he recent decion to adjust CEB's tarff by 30% is an important first step to improveCs finances, but further increses are still needed. Similarly, badly needed incras inrailroad fares have been stalled, a delay that is also jeoparding the financal viability of SLR.

1.20 Progress on reform of the financial sector has been halting In the comma calbanking sector, eforts so far have fosed on amendig the Bank's Act, recapitiing the twostate-owned cmmerial banks and transferring bad and doubt debts to independent collaectionagncies However, the two state-owned banks, which control more than 50% of commercibank deposits, continue to have limited autonomy in lending decions, despite recent measestaken in this regard, partcularly when they consider public enterprises. As a result, seriousfinancial sector inefficiency and prvate sector crowdig out persists.

121 Six years after the insurance busines was opened to the prate sector, the twostateowned insurance institutions still controlled about 85% of the insuce market In early1993, the Gonment convered the two corporations into companies and is taking steps, prior tointended prnvatization, to regulate the sector properly. The Govenment also continues toeercise control over the Nationa Saving Bank, the Employees' Provident Fund and thedevelopment financial institutions even though it has recently privatized the NationalDeveopment BanL

C. Resource M a and Ta Rdfo

1.22 The tax revenue effort in recent years has been at about 18-19% of GDP, whiletotal revnues are in the 20-21% of GDP. While this effirt compares favorably with theperlfomance in counties at similar income kv, the tax struure suffe from sinificanteconomic inefficiencies. Tax refim has been a part of the policy rerm agenda since 1990. Ithas three basc themes: a wideing of the direct and idirec tax base; reduction of the marginalrates for income taxes; simplfation of the indirect taUes; and review of the administratiestucture for improved effcien and greater tax complanc A major problem has been theproliferation of tax hoidas, a trend that has crtical implcations for effiienc andmacroeconomic stability. The inability to reform the tax hoidays and tax concesons is hurting

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effot to expand the tax base, cua tax evasion and improve the efficiency of the system

123 Since 1990, the Govrnment has made excelent prosin comput ginfomation for the brgest taxpayers. In 1993, it wil computeriz the indirec and direct taxrturns of 2,000 corpora tape accounting for 80% of retun Stil compliance is weak andefts to broaden the tax base and improve enforcement need strengthenin Refm to shiftthe iciece of taxation fm production to consumption led to the elimination of export txe in1993. Thes revenues fell from 5.6% of GDP in 1980 to 0.2% in 1992Q reveu frminterntiol trade ta decined from about 10% of GDP in 1980 to 5% in 1992, lagely becaeof the drop in export ta8 (se Annex Table 1.16). Import tax revenues rose from about 3% ofGDP in the early 198Qs to 5% in 1992, as tarff replaced most non-tariff barriems

1.24 Nevertheless, reliance on indit taxe re;i substantiaL In 199Q, direct taxesgenerated less than 17% of total revenues, despite the marked expanion in prvate sector activity.Income taxes generated ess than 3% of GDP in 1992 and corporate ime taxes only 2%. Theshare of indirect taxe reached 9% of GDP.

1.25 During 1990-9Q, the Govrnent moved to reduce the distortng effects oftaxtion on economic activity by improving the effidency, flexibility and simplicity of the taxsystem while safeguarding the overall revenue effort. The maximum corporate income tax ratewas reduced from 50% to 4S% in 1992 and 40% in 1993. he Government modified thedepredatio schedules in 1993 to reflect the economic life of investment lTe tax-free tsholdfor persona taxes was raised, and the maximum marginal tax rate was reduced to 35%.

1.26 In a move to establish a value-added tax (VAT), the Govenment took steps tosimplify the rate stuctre of the turnover tax, reduce the cascading ekment and broaden itscoverage. The number of rate bands in the tunover tax went from 10 to 3, input credits for rawmatenals and capital goods wer made available, an( the number of goods subject to zero rateswas reduced. Moreover, the tuover tax on finanal ittutions was lowered, while the capitalgains tax and stamp duties on share tansactio were removed to encourage financialintermeiation and development of the capital markets Stamp duties on letters of credits werereduced, a step that lessened the exchange distortion Purely on revenue grounds, the coverageof eiske taxes ws expanded to a large number of consumer items

1.27 Impwving the admInitrtion of customs has proven dificul The Goementhas taen inita steps to cnt for a three-year period the servies of a preshipment ikspectionagency to expedite import procedures and reduce lakage from the export promotion schemes. AVAT is tentaively planned for April 1994.

D. Deficit Fluanclug Monw sad Cedt

1.28 The budget deficit was financed through foreign grants and loans, domestic non-bank borowing and domestic bank borrowing. While freign grants d concessional foreignborrowing have virually no or vey low interest cost, domestic borrowing, paricularly from themarket is expeive because of high domestic iterest rates During the last three yeas, the shareof foreign sources in deficit financing rose somewhat to about 6% of GDP during 1990-92, withforeign grants at about 2% of GDP and foreign loans at about 4%. Project loans hae becomethe major conbutor to budget deficit financig, while net non-project loans have decined

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bcause of net repayments in recent years.

1.29 Domestic bowing dedlined to 3.6% of GDP in 199Z, from about 6% in thesecond half of the 1980L Furthermore, eept for 1990, net borfowing fhm the baking gstemhas been negative since 1988. Domestic n-market bomwing declined in favor boowig atmarket rates Tbese developments are encouraging and indicate a move towards a more prudentiscal policy and reduction in tresuy bill holdings by the Central Ban.

130 Monetary expasion has been high during 1990292 period because of high pdvatesector demand for credit and the limited capacity of open market operations to neutalie theexcess liquidity created by net foreign assets. Credit to the private sector decelerated onlymoderately, from 24.3% in 1990 to 20.5% in 1991 and 19.6% in 1992 (Annex Table 1.18).Private demand for credit partly reflects the greater credit requirements for financig theprivatization program, but mostly the need to fice the 200rment factory progam Althoughthe expansion of credit to the public sect, espedaly the Govenment, has deceleratedsubstantally since 1988 and in fact turned negative in 1991-92, the adjustment has been less thananticipated.

131 In the last three years, the Governmet has imposed credit ceings on mjorpublic entities. There was a noticeable reduction in credit to public corporations in 1991, as oansto the plantations sector wer converted into Government equity. Nevertheess, a number oflaWe public entities continue to exit excessive reliance on credit, over and above worigcapital needs, and credit to public enterprises increased, albeit by onl 5%, in 1992. For exampl,during 1992 credit to CEB and J _ increased by Rs 2 billion and Rs 08 bilon,respectvl

132 One positive development in monety polcy management has been that theGovernment has shifted from non-market instruments or direct controls for monetarymanagement to indirect measures, mainly open market operations In 1991, the Governmentinitiated steps to curtail the refinance facilities and raise the refieance interest rates towards themarket rates. In 1992, it also extended the coverage of the statutory reserve requirements toinclude foreign currec deposits with commercial banks.

E Primces and Wages

1.33 Inflation, as measured by the Colombo Consumers' Price Index (CCPI),decelerated to an average of 12.2% in 1991 and 11.4% in 1992. At the end of 1992, hower,inflation accelerated as a result of slippages in monetary policy as wel as cost-push fctors durngthe second half of 1992. The Greater Colombo Price Index (GCP1) with 1989 weights and alarger product coverage displayed similar trends.

1.34 Expectations of inflation were strng in late 1992, fueled by concems overmoneta grwth. On the cost side, the depreciation of the rupee and incres in the defenselevy (from 1% to 3%) contributed to inflation. Most important, however, was the announementof the wage increase for the public sector. Thbs decision, together with deteioration in SriLankas overal competitive position, necessitated a more active echange rate policy.

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IbkI1-a INCREASE IN CONSUMERS' PRICE INDEX

1990 1991 1992

Annualized 21.5 122 11.4Point-to-point 19.6 9.0 13.8

QCPIAnnualized 19.9 11.6 9.4Point-to-point 17.8 6.9 11.5

Souwre: CenCad Bank of Sri Lanka and Depamen of Censs and Saistcs

135 MInimum real wages in the wage boards have kept up wMth inflation, while realwages in the state sector have declined. Significant wage incres were recorded in the infformalsector. As noted, the Government bas proposed a major wage increase for the formal sector.Mme wage increases dereed for unskilled textile and plantation labor wi further flatten the waestructue, another obsace to productivity gains

F. Cuemt Amomit, lBalnce of Payments and Exteal Reee Poson

1.36 The curent account deficit increased from 5.5% of GDP in 1990 to 7.6% in 1991as the grwth in ats slowed and the incaes in imports, including secuty-related ones, werehigher than epected. In 1992, extenal sector accomplishments fell back in line with the targetsof the PFP, and in fact the reduction in current account deficit to 55% of GDP was well belowthe target of 6.4%. Imports rose mainly because of increased rice and wheat import and importsof intermediates for the gment subsector. Record grwth in industial exports offset thedrought-related decline in traditional exports, while service receipts InTeasd substatially as aresult of significant mprovements in the tourist industiy. Private traner receipts rose by about30%. An increase i service account outflows in 1992, partly explained by the relaxation ofcontrols on service payments, was offset by corresponding increases in inflows.

137 The overall balance of payments has run a surplus shie 1990, a reflection of theincreased concsionay lending and private capital inows. Gross infows of ocesnary loanand grants averaged 5.4% of GDP in 1992, while extn debt service rates decined from 28.6%in 1988 to 15.7% in 1992. Consequently, the gs official reserve position was strengned from1.5 months of imports in 1989 to 3.3 months of imports at the end of 1992.

1.38 The composition of exports has shifted from agriculture toward manufacturi andprocessing. In 1992, gross industrial exports were 69% of total exports, venus 15% in 1977, whilethe share of agculual exports decined from 79% in 1977 to 24% in 1992. Ihe value of tea

xports fe from 44% of exports in the late 1970s to 20% in the early 1990X Gross grment

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Table 1I3: EXTERNAL SECrOR PERFORMANCE

1988 1989 1990 1991 1992

Trade Acount Dect (% of GDP) 109 9.6 8.8 11.1 IQOCurrent Account Delicit (% of GDP) 85 7.1 5.5 7.6 5.5Loas & Grants (% of GDP) 86 7.1 7.2 9.1 5.4Debt Servioe Ratio 28.6 242 17.8 1&1 15.7Ovemll Deflcit/

Surplus US$ Mn. .86 -86 181 209 183Import Capacity of GwoOfficial Reserve (No. of Months) 1.5 1.5 1.9 2.7 33

Soww CnW Bank of Sh Lanka.

exports, which accounted about 2% of total expots in 1977, represented 48% of t grosseports n 1992. Although agricultural xports share declined to about one-third of the totalexport earnings, their share in net export earnings has been sbsatiallyr higher because of thelow requrm sfor imported inputs

139 Nootwtsnding the broad sectora shifts, eos have remained narrowly basedan tea, rubber and grments, and there has been little vicaon within theme categoriesBuk tea accounted for 65% of total tea erts in 1992, and the share of high value-addedgaments in total gament exports has been malL Ibe export product dn indexndicate only margioad improements in the last 15 years, and the export market divrficationindex reflect ireased export market over time.

lAO Sri Lnkaws external competitive reflects is inexpens, quality labor, chagiutural lad and potential touist sites. Its labor costs influence the competi of thepredoinantly labor-ienive industrial export sector in part. Sice 1989, the Govermenthas followed e_hange policies aimed at _Saudin the country's cmpartive advantage. In thesecond half of 1992, eochange rate mmements in neighboring countries and Europe (particularlythe devaluation of the pound sterling) and higher domestic iflation raied quesions about theadequaq of the exchange rate policy for the countrys competiivene and export driv. Ihedepreciation of the rupee, thefore, accelrated after mid-December 1992, a trend that improvedexter competit somewha e rupoe depqiated aginst the dolar by 6% in 1991, afurther 8% in 1992, and 32% in the fist quarter of 1993. The reale et ehange rate,howver, appiated steadily from 1989 until end 1991, but the trend was reversd in 1992 andthe real effecive excange rate is nclose to the 1989 level (Annex Table 1.1). On average,howev, Sri Lan still compares fvorably wth most cmpetitors in the region (soe Table 1-4).

1.41 Pardcularly since 1990, Sri Lanka has been offering generous tax incentives topromote exports and encourage foreip direct investment. Tenyear tax holidays starting from thefirst yea of profits appear to have had little efft on the cost of capital and thus on future

* ll1-

IFIbl 14: INTERNATIONAL WAGE COvIPARISONS ANDREAL EFFECTIVE EXCHANGE RATE (REER)

REER 1991 FACrORY WORKERS(1987 100) (US$ per month)

Sri Lanka 109.2 40.25Pakdstan 71.5 54.14India 633 66.09Bangladesh 106.2 40.22

bhafland 98.1 133.72Indonesia 92.2 39.61Philippines 96.8 82.80Malaysa 83.4 276.77

Source: Wodd Bak Foreign Invesment Advisoiy Sevice, MIGA

imvestment. On the other hand, they have distorted relative prices and adversely affectedefficiency in resource allocation, while hurting macroeconomic stability. Research on experiencefrom other countries cast serious doubt on the eficacy of tax incetves for attacting foreigninvestments. Similarly, the positive impact of the recent policy to move industries into remoteareas with tax incentiv but inadequate itructure is questionable.

1.42 Notable progress has been made in lberalizing the external payments system. In1992, the Govenment liberalized the repatriation of profits and dividends The facility to openforeign currency accounts was extended to all residents, and capital transfers to c"igrants wereraied. In eady 1993, payments for business, tourism and education were fully liberalizedLSimlarly, the export surrender requiements were elimated so that exporters can keep thepoceeds from exports in foreign cuncieLs Sri La also eliminated the limits on foreignexchange for travel, education, medical treatment and penion remittances. Domestic residentscan open foreign curenT acoounts in Sri Laka with no disclosure requirements. Howeve,domestic residents are generally not permitted to hold investments abroad and must have theapproal of the Central Bank to borow in external makets

G. Thude Reforms

1.43 Good progress has been made in reducing and rationalizing nominal protecdon.The 1992 tariff stm was dominated by four rates (10, 20, 35 and 50%). However, a number ofitems were not subject to any duty, others to rates higher ta the 50% maximum, and there wasan import tax of 10% on the duty paid on imports dutiable at 50% or above, with the proceeds tofinance the Export Development Board (EDB). Specific duty rates or refrence prices, whichcover about 1,000 out of the 6,000 tari lines and represented more than 30% of the value ofimports in 1990, were introduced in 1991 ater the maximum rate was lowered. Ihese rates varsigficantly, with ad valorem equivalents axeeding 100% in many cases. Specific rates applicable

- 12-

to tho textile subsector wee converted into 100% ad valorei as of May 1, 1993.

1.44 The role of NTBs, howv, remains sigificnt. Some 200 items con torequ import licenses. In some case the rationale is national security, health or evirnmentaprotc Other items, however, are on the list for protectonist reasons Tem majority of theseare agriculal good Progess has ben achieved in eliminating the state import monopoies foragricultural commodities: those for rice and sugar were lifted in the 1960, and import leensesreplaced the CWE import monopolies on major staples in 1992. Ucenses are stil required forrice, sugar, m,lk onions, leatils, wheat and wheat flour, and molasses. Import cses andseasonal quotas for rice and sugar are allocated to the CWE and to a limited number of privateagents. These agents are entrusted with maintaning buffer stocks to avoid short-term shortages,especially in view of uncoertnties aring from the civil war. An import prohibitions s til ineffect on potatoes.

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2. THE ADJUSTMENT AGENDA FOR PRIVATE SECTOR GROWTHANM PUBLIC SECTOR RATIONALIZATION

2.01 Notwithstanding the favorable overall economic performance in the past threeyears, Sri Lanka faces major challenges, not least the continuing civil war which clealy i eactinga high cast Yet, despite the country's troubled political situation, the private sector has shown aremarkable performance. The reaition of Sri Lanka's considerable development potential wil,however, require a consistent reform effort over the medium-tem Te policy reform programlaunched in 1989 needs not only to be continued but also intewifide in parallel with equallyvigorous efforts to restore peace. This chapter reviews the main areas where further reforms areneeded In the coming years in order to achieve and sustain a higher pace of economic growth,which is necessary to reduce poverty.

2.02 The adjustment agenda would need to support reform of: (i) the public sector,particrly public enterprises and improved allocation of public ependitures; (ii) the tax, andtrade regimes to reduce distortions in prvate sector incentives; and (iii) regulation of privatesector entry, eit and competition. A reduced state role in commercia activies, Ibe on ofthe trade regime and economic deregulation would foster prnvate entrepreneurship and greaterefficiency in resource utlization, while rationalizatin of the public sector would release resourcesfor private sector, incrae effciency in resource use and provide resources to improve theprovision of infrastructure and social services. Rationalization of the public sector is critical forthe Government to meet its policy objectives of incresed gowth across regions and activitiesthrough a dynmc private sector, but most important, the proposed reforms would need to takeplace within a macroeconomic finework that substantally reduces internal and ex alimbalance The Govment's fifth-year Policy Framework Paper (PFP) restated its commitmentto sound macroeconomic management

L THE CHALNGE OF EXPORT-LED GROWTH ANDTHE TTA REM PROGRAM

2.03 The chief priority for the Government's adjustment program needs to be therationalization of the public sector, partularly public entrprise reform. Ihe program also needsto strengthen ongoing measures to reform the tax regime and tax incenties and to liberalize tradeand dereulat economic activity. Reform of the publc sector is necesary for meeting privatesector and social equity policy objectives. A smaller and more effiient pubLic sector wouldrelease resources for private sector acvity, lessen inflationary pressures and fcilitate financialintermediation. Further liberalzation of exemal trade and dereguation of the factors ofproduction would result in incremased competition, efficient factor use and reduced relative pricedistortions. All these measures would encourage efficient private sector activity and growth,which in turn will help reduce povert.

2.04 Satisfactory macroeconomic performance is necesary for the success of thestuctural reform agenda Sri Lans medium-term macroeconomic objectv are set out in thefifth-year PFP and are being onitored under the DMFs Enhanced Structral Adjustment Faciity

* -.14-

(ESAF) progam. Agreement on expenditure reductions or revenue measures to be caTried outin 1993 to achieve the PFP and ESAF argets has not vet been completed and an essentialprquisite to proceed with the adjustment agenda. Past effort has yielded some major benefits,reflected in a stronger growt, Investment and export performance. Sustaining and evnacceletating this higher growth performance is a key polcy challenge for Sri Lanka. Without thissustained stronger growth performance, Sri Lans ability to create productive employmentopportunities for its labor force and reduce the incidence of povet will be severelycomprmsed

II. E11LIC SIMOR RATAIONA&IION

2.05 Reform of the publc sector requires a two-tier approach: (i) public enterpriereform and pnvatization; and (ii) improved efficiency and rationalization of public expendituresconsistent with development objectves.

A. Public Enterprise Rerorm1

2.06 As noted in Chapter 1, Sri Lanka has made good progress in the area ofpriaation. lbe Goverment has redefined its privatization objectives and plans to stegthenthe instituions and tcnical skills that are prerequisites for minimizing the risks and acceleratngdiengagement from commercial activities. Recently, it eaffimed its commitment to enlarge thescope and acoelerate the pace of divestiture, and to institutonalie the reforms necesaly toaccelerate privatization. A team comprised of staff fom the Commercialization Division of theTreasury and the privatization unit of the Ministry of Industries will act as the technicalseetariat. Advice and expertise from international accounting and imestment banking firms willbe provided as necessary. Privatization, however, needs to be pursued in an open trade regime.Prefential trade arrangements granted to new private owners would undermine severelyeicienc gains from privatization. Over the next two yeas, the Government needs to:(i) accelerate pnvatization; (ii) impose hard budgetar constraints on those public enterprises notto be privatized immediately and improve monitoring by the Publc Enterprise Divsion of theTreasur, (iu) increase the autonomy and improve the reguatory envim nt of the utility andtrasport sectors to facilitate private sector entry, and (iv) further improwv the efficiency andprofitability of the two state-owned banks through greater autnomy and eventual pivatiaon.

Z07 With respect to accelerating privatization, a primary objective is to increase theefficiency of resource use in manufacturing services and other sectors through increasedcompetition. The divestiture guidelines are being revied to facilitate the complete divestiture ofmost commercial enterprise by the end of 1995. The Gonmment will need to deal with thelabor redundancies associated with privatization in a manner consistent with the dual objectives ofimproving eficienc and welfar Retrenchment costs should be fuly taken into account in atraparent manner in the Government's financial program for the consolidated public sector.The cost of compensating all excess labor is estimated at 1.6% of GDP, to be covered through

It Extensive background work on this subject is underway in the contex of the preparationof the proposed Second Economic Restucturing Credit (ERC-II) and sector work anagriculture

1S -

the proeeds of pritization, reduced budgetay transfe to state-owned enterpres and, ifnecessa, offsetting meveue measures.

2.08 Public utilities and Air Lanka, the Sri Lanka Railwa (SLR), CWE (the largeststate-owned tradig company), Ceylon Shipping Corporation, the state plantations, the sugrcompuies and the cement companies have been responsible for more than 80% of the totalbudgetay deficits originating from the public enterprise sector. The Government agrees thatCWE should be fully divested to allow increased competition in food staples and is curentlyworking with IDA and other donors on a plan to dhest the enterprise. Privatization of thecement plants located outside the security zone and the sugar companies is advancing. TNocement plants are currently open for tender, while tenders for two sugar companies have recentlybeen completed with the assistance of the Asian Development Bank (ADB). Simarly, CqyonShipping Lines, a subsidiary of Ceylon Shipping Corporation, bas recently been privatized. TheGovernment recently agreed to explore options to privatize Air anka, with help from thenternational Fmance Corporation (FC), and it is currently renewmg Air LankaT s plans to

purchase sevral large aircraft

2.09 At the same time that an accelerated divestiture program is beig implemented,steps need to be taken to impose a hard budget constraint for enterprises that are not to beprivatized immediately or are likely to remain in the public sector for an extended period. Initilsuccess in 1992 in reducing losses and improving yields from the state plantation sub-sectorthrough the transfer of management to prvate sector has paved the way for increased privatesector participation. Tbe ment is now discussing with priate management companies thecanditios for long-term quasi-lease arrangements that approimate the economic life ofivestment in the sector. Full transfer of plantation management and risk to the private sector isessetial to improve effiiency economic performance of the plantation sector. The Govnmntalso plans to complete the privatization of the rmaining 50% of the transport-related assets ofthe Central Transport Board before the end of 1993 and to deregulate bus fares. A timelyimplementation of these policies wil be important.

2.10 Substantial increases in electrcity tariffs and restructuring of electicity pricing arenecesary to address the alarming financial position of CEB and to reduce the implicit subsidy onhousehold consumption which is done at the expese of industry. Implementation of this veressential policy measure has proven to be ver dificult so far. Similrly, the Governent hasbeen rductant to address ineiciencies arising from pricing, imports and distribution of petoleumproducts A speedy implmentation of the required tariff adjustments for CEB is essential toaddress its severe financial ibal and improve efficiency. The recently announced 30%incre is, hence, a welcome first step, but further increases are still needed.

2.11 The autonomy of public enterprises in decision-making should be reinforced, andall Government interventions in these companies, particularly on investment and pricing decisions,should be preented and agreed by Parliament and be made explicit in the budget. This measureis necesay to reduce Government interference in commercial decision-making at the remainingstate-owned enterpres Specific resucturing crteria are being drawn up for the SLR, the twoelecicity companies, Air Lanka and the Petroleum Corporation, to include a timetable forincesing internal cash generation and return on assets, and quantitative targets for transfers andborowing from the budget and the banking system. Action plans for the rationalization and/or

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dvestture of the public utihties and tsport companies and for regulatoqy reform need to beprepared.

2.12 Re g the role of the two large and Inefficient state-owned banks is criticalfor pmvate sector development. Even though the market share of the state-owned commercibanks has been declining, they are market leaders in a segmented market. Privatization of thetwo state-owned commercial bank should become an immediate policy objective. TheGovement is Implementig a plan of short-term actions to address key issues in debt recovetylegislation and central bank superision. However, incased competition and reduced stateinter in the bankdng sector can only be achieved when ownesip, management and riskare fidly transferred to the private sector.

B. Publ Expeuditure Ratiolization 2

2.13 Rationalization of public expenditures is important for both prnvate sectordevelopment and poverty reduction. The main areas where pubLic expenditures could berationalized and reduced over the next few years are the Public Investment Program (PIP), bothon- and off-budget, the civil servce wage bill and the safety-net programs.

X14 The Bank is currently undertaking a review of public expenditures. Prellminaiyanaysis suggests that the PIP includes a number of large projects with doubtful coomic.benefit These require thorough review and scrutiny. For example, the cancellation ormodification of the public investment projects for Air Lanka, the Kalu Ganga irrigation scheme,the purchase of some 5,000 semi-assembled buses and investments for the SLR electrification andextensions are likely to substantially improve the aggregate return on the PIP, and free upresources for use by higher priority public projects and by the private sector.

2.15 On the other hand, expenditures for inruct rehabilitation and operationsand maintenance (0 & M) need to be incrad. 0 & M has been particularly inadequate for:rads, water supply, irrigaton, education and health, al beig cnticd for private sectordevelopment and pov reduction. Rehabilitation and maintenance of existing infrastructure areWr more needed, and are prudent alternatives to new inestment. Along with higher financialresources, the planning and execution of maintenance also needs improvement.

2.16 Rising public sector wage bil present an important potential source of budgetaryinstability. A full solution to the problem calls for a comprehensive reform of publicadminration over the medium-tem. Such a reform would need to include a thorough overhaulof the Government's pay and employment policies and a reassessment of the size and functions ofthe civfl servce in light of the changing role of the public sector. Efficiency gains in the civilservice will also be an important determinant of the improvement in the quality of the PIP. Inthe short-term, some initial steps could be taken to contain the growth in the wage bill bypreventing further increases in the wages and pension benefits and imposing a freeze onrecruitment of lower ranidng civil servants, including teachers and health workers. Containing the

iRecommendatons in this area are based on work being undertakn in the context of thepeparation of ERC-I and on a recent public aependiture review mission.

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number of civi setvants is parcularly important, since the i_ne in the wage bfll has takenplace despite a decline in average real wages in the public sector.

2.17 Sri Lanka spends some 2.5% of GDP on safety-net programs. While the objecdveof these programs is to help reduce poverty, there are a number of seious problems concerningthe poor targeting and efficiency of these programs. A careful reasment of these programswould not only help ensure that the truly poor benefit from the progams, but could also consevefinacial resources. A more detailed review of the various safety-net programs, their problemsand recommendations for possible resctung is contained in Chapter 3.

HI REFORM OF THE TAX AND TRADE REGIME

2.18 As noted in Chapter 1, although Sri Lans tax effort (19% of GDP) comparesfavorably with other developing countries, serious inefficiencies resulting from the tax structueremain. Whie some initial steps in reducig the e have been taken during 1990-92, astro refom effort is needed over the next 2-3 yeam The main items of the tax reformageda are: (i) ratioaliation of indirect taxation by introducing a VAT and rationalizaton ofthe excise duty egime; (ii) reform of corporate and personal income taxes; and(ihi) izan of the tax incentives. Tax and trade reforms (see Section V below) will needto be implmented in line with the stabilization program, and the overall tax and trade reformpackage would need to be designed in a manner so as to ensure revenue neutrality.

A. Indhrc Ta_tion

2.19 Implementation of a VAT is the main priority in the tax reform agenda. AnInstitutional Development Fund (IMF) grant is supporting a core group of VAT experts who arehelping with the admistrative measures. The Government, with Bank and IMF assistance isworkingon the covrage of the proposed VAT, the nature of the base, the scope of theexemptions, the treatment of small businesses and the rate structure The IMF has recommendedan imvoe-opeated, destination4based VAT with a uniform rate. The VAT could be introducedas eary as 1994.

2.20 Introduction of the VAT should obviate the need to impose excise taxes on a widerange of products These taxes should be confined to high revenue items such as tobacco, liquorand petroleum products. The legislation governing the exie duties should be revised to reduceabuse. The Gosernnt plans to introduce reforms of the excie tax with the 1994 budget

3L Cwpoate ad P1rso Iwome Tax

2.21 Confekp_ and Euu The pervive use of tax exemptions is a majorsouwe of revenue age and distorted incentives. Ts one prioty reform ar whereprogress has not been very encouragin The Government needs to confine the objectives andfunctiom of the Board of Investment (BOI) to investment prmotion and fcilitation, asrecomrended by the Foreign Investment Advsory Services (FIAS), rather than as the source forgranting tax eemptioms. AD enterprises with BOI (or GCEC) status should be granted a uniquetax identification number (FIN) and be required to fle annual tax returns, starting with the 1993fiscal year, inespect of whether they have taxable income in a gien year. The corporate TIN

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would help identify the transactions of ail firms, including international ones involing goods andthe flow of funds. Preshipment inspecion serices could be used to monitor leakage into thedomestlc market of goods allowed into the country free of taxes for purposes of manufctigeCports Existing tax holidays should not be extended beyond their initial pe New taxincentives, if at all granted, should come into effect from the first year of operation of theenterprise rather than be linked to first year of profit, and be available only to exporting ventures.Mhe Government should also review the coverage and duration of tax incentives, and a reducedtax rate be applied only to export ventues in a nondicretionary manner.

2.22 Corporat Taxtio. 'Me marginal effective tax rate in the manufacturing sector,which ranges from 37% to 52%, is comparatively high by international standards. However, it isnegated for the most part by the pervasive tax incentives There is a need to reduce themaximum corporate tax rate to 35%, inclusive of al surcharges, while also epanding the tax baseby reducing and eventually eliminating tax exemptions. To reduce the risk of a revenue shorallin the near term, the rate reductions will need to be introduced in phases. For 1993, themaximum corporate tax rate is down to 40%. The next step is to establish a unified corporateand personal income tax rate of 35%, exclusive of surcharges, to be introduced with the 1994budget. The surcharges and levies should be eliminated with the intrduction of the 1995 budget,a step that should bring the rate to 35%.

223 Personal Taxatlo Presently, the maxdmum personal income tax rate is 35%. Thesurcharges, however, need to be eliminated in line with the corporate tax reforn, as equityconsiderations require that the taxes have the same rate across tax objects at similar levels ofincome.

IV. TRADE REFORM AND THE DEREGULATION OF ECONOMIC 4CT1VTO Y

224 Sri Lanka has already taken important first steps to ensure an open, market-frindly envionment for private sector activity through trade liberalization and dereplation.Neverteless, the presence of substantial trade protection, especially in agriculture, and theresulting anti-export bias suggests the need to push ahead with further trade reforms. Inpartcula, the distortionary role of NTBs need to be substantially curtailed.

225 The main objecdves of the trade reform would be to reduce the lvel anddispersion of protection, and to reduce and eventually eliminate the anti-export bias of the traderegime

A. Rdwo of the Import Regle

2.26 The ditnbution of tariffs should be further consolidated by raisng zero duties to10% and reducing the maximum rate on the four-band tarifl so that, in 1995, there wfl be athree4band rate with a maxdmum tariff of 35%. The Govemment should ensure that thesereform are consistent with GA[T obligations, and announce the policy for facilitating pnvatesector adjutmen he EDB-dedicated import levy should also be abolished.

227 Import certification, by which the line minstries determine the tariff rate to beapphed on specific import consignments, should be discontinued. Certifications designed to

-19-

permit eporters to acquire inputs for epor actities at wodd prices should be consolidatedinto the duty drawback system in Apil Mme pracdoe of granting waivers administratively shouldbe streamlined.

228 As a part of ongoing reform effort, the Govermuent has been replacing specificduties with ad valorem tarff. Initially the ad valorem rates may not fit wnthin the establishedtariff bandL Higher rates, ranging up to 100%, are being granted for a tansitional period. Adme-boud plan to reduce these tates to the maximum ta shoud be nunced. IbeGovement should replace the import restcto (NTBs) wi an ad valorem t for sugar,rice and other food and milk products Gien the employment implications in sensitive area oflocation of these industnes, a tranitional arrangement ought conit of an agreement that inrportsof sugar, rice and milk be subject to a variable import levy determined on the basis of a specifiedmechanism that reflecs the movement of international prices. A phased program for euminatingthe bonding arrangements for sugar and rice that takes into acoount government concerns withshort-term food security in the war zone, and for lberaliig imports of other staples, should beannounced. As agred under the PFP, the wheat import and distibution monopoly gramted toCWE should be elmiated as soon as posible.

L. Cu Efcmi

229 Me IF and IDA haew supported a GCvement program aimed at revisigCustom policies, simplifying proedures, onation and controls, andcomputerIzing operations. Te results have been le8s impresive than o0aal evisaged. Dutycoectons on 1991 imports implied a weighted aveage tariff of about only 13%, against a"theortical weighted avage of 39%. is discea is only parly explained by the duty-freeimpot associatedw ith exports, certcations and waie. Leakage is significant and mayincrease with the planned simplificatio of the duty drawbac and remission a gn ts Ieresut may be a conflic between facilitation and simpliflCatiOn, on the one hand, and revenuemobilization on the other.

230 To balance revenue geeration and trde facilitation c theGovemment should: (i) move ahead with the plans for contract for the servies of a preshipmentinspection company for a period of three years; and (ii) strengthen the customs reform programWPreshpment inspections would improve revenue collectons by reducing fraud and leakages.Preshipment inspections need to be used for a finite period, providing the opportunity to focus onthe customs reforms to a grter degree than has been possible so far. IDA has provided supportfor setting the tender specifcations and evaluatg bids for a preshipment inspection service

C. lar Reforms

2.31 Deregulation of internal economic aciviy needs to be complemented over themedium-term with an appropriate reform of the laws and pracies that regulate entry, exit andfactor mobility. Reform of the lgal fmeork reulating the formation of companies andbakruptcy is critical to the long-term devlopment of the private sector. Institutionalimprovements in the Dermet of the Registrar of Compnies and in the commercial courts arenecessy to mine the barriers to entry for small busiesses seeking the benefits of

Eit needs to be facilitated by more epeditious and fair procedures for realng

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and distributing the assets of insolvent or defunct companies, while provisions are necessay toallow for the possibility of asset restructuring and rehabilitation of businesses faced withtemporary difficulties. Reforms in this area call for a systematic review of the various underiglaws and retions. Considerable technical assistance may be necessary.

232 The 1987 Fair Trading Act establishes a regulatory framework for competition,including the ivstigation of complaints regarding monopoes mergers and anti-competitivepractices. The vague and all-encompassing charcter of the act could constrain legitimate pmatesector behavior that has been appopate categorized as ucmpetitv PDA has fundedtechnical assistance in this area Based on this analysis, the Government should review the FairTrading Act and define policies to support competition.

2.33 With more than 80o of agricultural iand publically owned, the practices relating tothe alienation of state land are critical to the private sector. The objective is to increse thesupply of land through long-term commercial lease arrangements and allow the development ofland markets Although the land issue is vital to the development of the prvate sector in thelong run, the Government does not have a clear program of reforms in this area. IDA wil helpthe Govemment initiate a small pilot land registration program for rural and urban land.

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3. POVERTY IN SRI LANKA

3.01 Sri Lanka has established an excelent record in social development as evidencedby indicators that compare favorably with much higher income-level economies, especially in termsof life expectancy, infant mortality, school enrolment and adult litercy. However, resource andpolicy constraint threaten to undermine these achievements, wMth deterioration already occumingil some areas (e.g, evidence of rising malnutrition incidence). At the same time, relatively lowincome grwth, especialy the recent stagnation in agriculture, which provides income andemployment to the bulk of the rural poor, raise concern about the sustainability of the povertyalleviation efforts. Clearly, the ability to accelerate and sustain a higher growth rate overall, and astrong growth in agriculture, will be the key determinant of future progress in reducing poverty.Against the backdrop of the recent progress on the adjustment front (Chapter 1) and the priorityareas for further reform that will help Sri Lanka sustain a better gtwth effort (Chapter 2), thischapter looks at the various dimensions of the poverty problem and proposes a policy reformagenda to help Sri Lanka improve its poverty alleviation performance.

L THE NATURE OF POVERTY IN SRI LANKA

3022 Poverty is generally accepted to be muld as measured by a variety ofindicatos A central dimension is income poverty, or income that is too low relative to somedefined norm Other important indicators of human welfare that are correlated with income tosome degree are those related to nutrition, education, health and fertility. Income poverty andthen poverty as revealed by other human welfare indicators are considered below.

A. Ineom Povt

3.03 A number of studies have measured the incidence of inoome povet in Sri Lanka,using an unusually rich data base derived from household surveys conducted since around 1970.3Because of widely different methodologies and defiitions of poverty, and important differences inthe surveys themselves, they do not yield a cohesive picture of the trends in the incidence ofpovey in the past two decades. Nevertheless, they provide useful information for understandingthe nature of poverty.

3.04 Table 3-1 summaizes the basic information from six studies of poverty spanning

The Socio-Eoonomic Surveys of 1969(0 and 1980/81 and the Labor Force andonomic Survey of 1985/86, conducted by the Department of Census and Statistics,

and the Consumer Fmance Surveys of 1978179, 1981/82 and 1986/97, conducted by theCentral BanL Data from the Income and Expenditure Survey of 1990/91, conducted bythe Department of Census and Statistics, have just been released.

.22-

Table 3-1: STUDIES OF ABSOLUTE POVERTY

Year of Source of Definition of Poverty PovertAutbor Estimate Data Line Incideoce a/

AND= 1969/70 Soob-Economlc Monthy househod Income 18% natIonwidSurvey d 1969/O requrd to met minimum caite

needs dnd as Intake fd2.450 cadrIs per day for an adtmate age 29 and PNes for othe ag nd e goups

Vlwsai 01970 S Avee mony pe cOap 43% naronwd,Swvey d 1O60/70 qa R (ood plus non4d" 43% urban

associtd with per capta ntal 44% rural;.780 calos per adut equvet 31% esta.bnIh Is te to be the minmum

(3unare 1978/9 C om Finae Avere mnt per capt food 223% rdsonwkdeSurvey d 197 Vt79 ofd th bottom 40% d 19.4% uban;

omlhndnks rar*ed accordn to 25% nrral;per capa food epedur 7.6% e_tate.

Samn 19601 ScooEoomic Poor ha ou those 20.8% nWowis;Sur- 19a 081 atalnlg lSs enW 80% of 24.5% urban;

ded y calbI Ibnake 20.4% rura;as per WHO no"ms (19,30 1339% esttecaloe per adul male age 2099.an pmro do lmSS for ahrag so se gSroups).

Rouse 19865 Laor Force and Poor rs e aml tfoe 23.5% natow ;Sooconomrdc afttang less ta 80% odady 24.3% urba;Survey of 1985186 calob requrements as per WHO 242% rua;

orms (197. 11.7% estte.

Edrlsk4w 197W Coromw Fhna Averap mm" ahtmhod 24% natIrwide;Surey of t1986/87 e o pku nWooo of 10.5% uban;

the bdomt 40% d houselw*19 28.7 rural;rnked aoOOitn to per capit 11.1% et

diets ydg betwn 80% d100% d the 1comn1ded daiycaloft alowarc (defind as 2750calods per day per ad*

~~~~~~~~~~~~~~~n.el oDefne as umber Of poor IndMual as a perenage of total population

oue Th Word Bank

-23-

the petiod from 1969n70 to A986lS7.4 Athough the studis define the 'pr l" differtly,with one exep y estimate the incdene natonwde within a farly narrow ra of 18-24%. The exceptio b the Vsara sudy, whih yielded a much hiher estmte for 196970 thatmay be attributable to the use of a relatvely high calor normL

3.05 Tle studies rveal no conistent pattern as to whether the incidence is higher inrur or uban areas Hover, they do consistently show that pover is lower in estate area (asort of rural 'enclave") thani in rual or urban areas. Me majority of the por in al the studiesreide in rural (incudin estate) are4s, since the pecentage of the total population in urban areashas been firly smal5

3.06 Most of the studies on povert ideniy the attributes that charcteri por.Some common oanes are a higher dependency ratio (the ratio of members of the household notearing any income to those earning some income) on the part of the poor than the non-poor,comption of fewe years of school and higher iiteracy rates for the poor than non-poor, and atendency of heads of poor households to participate in the labor force at higher rates than doheads of non-poor households (probably a reflection of a ower average reservadon wage forheads of poor households). Ihe studies have also generally found that the unemployment rateamong heads of poor households in the labor force was fiy* low (although hihr than that ofth heads of non-poor households), for example, about 6% in the Rouse stud.'

3.07 Thes findings on the labor markt characteristia of heads of poor householdsuggest that inadequate remuneration is a more important factor than uemployment inexplaining poverty, togetier with the higher dependency ratio of poor households It is sbopossible that adult members of poor households other than household heads may have a owerlabor force participation rate and/or a higher unemployment rate than their counterparts in non-poor households. This point requires furither study, as does the question of the importne ofunderemployment in expaining houehold poverty. The Rouse study, for example, found thatheads of poor households had an u mp nt rate of about 15%, as compared with 9.4%for all heads of householis (whae the underemployed were defined as those usually emplcyedindividuals who had workd less than 180 days in the previous 12 months).

The studies are fakily rpresentadve of the type of work that has been carnied out. Agood surey of povert studies up to around 1985 can be found in 'he Impact of PublicPolicy on the Poor in Sd iLank A Study of Poicis Relating to Incomes, Assets andliving Standards and Their Effects on the Poor, 1970-84," by P. . Alallima (unpubihedPh.D. dissertation, Colombo, 19B8). This chapter draws from that work

Acodi to the Preiminay Report of the Income and Expen Survey of 1990/91,the total estimated population in 1990 was 14.1 million, excluding the Northern andEastern province, broken down as follows: urban, 3 miDlion (213%); rural, 10.2 million(72.3%); and estate, 0.9 milion (6.4%).

The Labor Force and Socio-Economic Suvey of 198S/86, on wbich the Rouse study wasbased, defined persons as gmmpye if they had been economically active (employed,actvely looking for work or a dscouraged worker) for a major part of the last 12 monthsand were mostly unemployed during that period.

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3.08 The Bank is conducting further analysis of poverty incidence and depth and of thecharacteristics of the poor in Sri Lanka in the context of the forthcoming Poverty Asemet.Data from the 1985/86 Labor Force and Socioeconomic Survey and the 1990/91 Income andExpenditure Survey is being used for this purpose. This analysis will provide a more up-to-dateassessment of these important issues.

B. Other Indiators of Human Welfare

3.09 To provide a more complete picture of poverty, it is necessa to examine otherkey indicntors of human welfare Table 2-2 presents recent figures from Sri Lanka for severalindicators, as well as the averages for three categories of countries identified in the Bank's WorldDevelopment Reggorte low-income economies; lower-middle-income economies; and middle-income economies. The table consistently shows that, while the Sri Lankan economy is stillclassified as low-income, its population is much better off in terms of the basic indicators offertility, health and education than are the populations of all three groups of countries onaverage. This remarkable achievement undoubtedly reflects the high prwoty and long-standingcommitment to these sectors in public expenditure programs.

3.10 Also impressive is that Sri Lanka has targeted women as wel as men. Whileiliteracy is more prevalent among women than men (17% venus 7%), a reflection of thedifferential school enrollment rates in the past, currentdy boys and girls are enrolled in primaryand secondary education at about the same rates. This successfu effort to educate a greatmajority of women, together with the success in reducing infant mortalty, appear to have paid offhandsomely in terms of an acceleration of the demographic transition: there has been a sharpdecline in the rate of population gowth since 1965, and the current total fertility rate is close tothe level that would lead to a stationary population.

3.11 As pointed out by Pro£ Amartya Sen in a recent article7, the experience of SriLanka (and the neighboring Indian state of Kerala) challenges the often-aired opinion that adeveloping country cannot afford expenditures for health care and education until it is richer andmore financially sound. Sri Lanka promoted literacy and schooling programs early in this century,it massively expanded medical services in the 1940s Poor countries need not wait to get richbefore they can combat mortality and raise hfe expectancy, and achieve fertiity levels close tothose of developed countnes. Education and health care are labor intensive, and these servicescost much less in a cheap labor economy than they do in a wealthier country. Hence, although apoor country has less to spend on these services, it also needs to spend less on them.

3.12 One dimension of human welfare where Sri Lanka has not fared very well isnutrition status of young children. Evidence from several large surveys indicate that, when SriLankan children are compared to the standard international reference group for the measurementof anthropometric nutrition indices (the standards developed by the U.S. National Center forHealth Statistics around 1970, and later endorsed by WHO), the incidence in young children inthe critical age bracket of 6-36 months of both wasting (low weight-for-height, reflecting acutemalnutrition) and stunting (low height-for-age, reflecting chronic malnutrition) is fairly high. Inthe most recent national survey that collected this sort of information, the 1987 Sri Lanka

71 The Economics of Life and Death by Amartya Sen, in Scientific American, May 1993.

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Demographic and Health Survy, it was found that 15.2% of the children aged 6-11 months,31.1% of those aged 12-23 months, and 34.1% of those aged 24-36 months, were stunted. Forwasting, the correspo-ding percentages were 3.9%, 19.3% and 133%. Malnutrition of pregnantwomen also appears to be widespread; in 1985, 28% of all babies had low birth weight, which washigher than the corresponding figure for Pakistan (25%) and somewhat lower than India (30%o)and Bangladesh (31%).

C. Summing Up

3.13 To summarize this brief review of poverty conditions in Sri Lanka, it may be saidthat Sri Lanka has done extraordinarily well in terms of improving its health, education andfertlity indicators In addition to improving welfare directly, these achievements will be ofimmense value to the country in its current striving to become a middle-income countty. On theother hand, a number of studies using a variety of methodologes have shown that about one-fifthto one-fourth of the population may be considered income-poor. This, in turn, may in partexplain relatively high levels of malnutrition in young children (feeding practices could also bepartly responsible). In spite of such malnutrition, infant and chlfd mortality rates are very low byinternational standards, and the most plausible interpretation of these facts is that under-nourished children do not die in large numbers because of the combination of generally goodlevel of education of the mothers (who can thus recognize life-threatening episodes of illness intheir children) and good coverage of government provided, free basic health services.

IL GROWfif HUMAN RESOURCE DEVE:LOMEnT AND s -NE PROGRAMS

3.14 The general strategy that Sri Lanka should follow to alleviate poverty is similar tothat recommended m the World Banlks W oe nor t 1990 and embodies three keyelements: economic grwh human resource development and the provwon of public safety-netprograms for the severely disadvantaged. As compared with cther developing countries, SriLanka has had a strong emphasis on human resource development and safety-net programs. Itsefforts in human resource development have been very successfuL It has been more difficult toassess the value of the safety-net programs.

A. Gmwth Perfor enau

3.15 Despite strong track-record in improving human resources Sri Lanka's growthprformance has been less impresi Total GDP growth since the mid-1960s has beenconsiderably below the average for low-income countries overall (and, in the 1965-80 period,relative to those countries now classified as middle- and lower-middle-income). However, thedifference narrows when growth of per capita GDP, a more meaningful measure of welfare, isused, since Sn Lankas average annual rate of population growth in the 1965-90 penod was about0.5 percent lower than that of all low-income countries (the difference was even higher withrespect to lower-middle-income countries). In terms of per capita GDP, growth in Sri Lankaaveraged 2.2% per year in 1965-80 versus 2.6% for alI low-income countries; the correspondingfigures for 1980-90 were 26% for Sri Lanka and 4.1% for all low-income countries. In all

of World Development Report 1992, Table 28.

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prbablity, th reduction in Sri Lana's population growth rate reflect the successe in healthand educaton.'

3.16 Table 3.2 also niates that In terms of growth in per capita gross nationalpoduct (GNP), Sri Lanka did as well as the average of all low-inome countries In the 1965-90period (and substantialy better than ether the middle-ncome or lower-middle-icome countries).In genera, per capita GNP i8 a better idicator of a country's welfare than is per capita GDP,since GNP measures the total domestic and forein value added claimed by residents. On theother hand, the higher growth of per capita GNP in Sri TL aW in 1965-90 as compard with GDPmust reflect remittances frm the may labor emigrants.

3.17 As noted in Chapter 1, eonomic reorms taken after 1989 had a positive impacton gowth: GDP growth accelerated to 6.2% in 1990 and continued at 4.8% in 1991 and 4.1% in1992. At the same time the rate of population growth continues to fal, with the avge rate inthe 1989-2000 period exted to be just 1.1% (Table 3-2) and in the 1992-2025 period about0.9%.1 This progress should enable more of the aggregte inome gains to be translated intoper capita gain

3.18 Sucesl continuation and deepening of the economic refom program are key torapid pot Alleviation (see Chapter 2) If Sri Lanka coul for examplfs, sustain an annualaverage rate of growth of GNP of 6% for the 2-year period starting in 1990, its 1990 per capitaGNP of US$470 would reach about US$1,250 in today's dollars by the end of the peiod. An_inrase of this magitude would signifantly reduce povety. Ihe impact on poverty would be

more pronounced the better the evolution of income distrbutiao. A recent study of fIur SouthAsian countries (India, Pakistan, Bangldesh and Sn Lanka) and one East Asian country(Indonesia) eam ed the relationship between the speed of GDP growth and changes in incomedistribution from thy eady 1950s to the late 1980Yu While the data on income distribution areweak, the study shows that, in general, periods of rapid GDP growth have been accompanied byimprovements in income distribution, while perk - of slow or negativ GDP growth have led to aworning income ditibution (the study measurw chnges in income distribution using twodfferent indators-the ii cefficint and the shae of the poorest 40% in total income).nThe same study abo found a strong direct relationship betwen growth in per capita GDP andgowth in real wages of unskld woers: real wes tended to decle when per capita GDP

i The widespread safet-net programs may have conttibuted to accelerating thedemogaphic transition by provding a sense of old-ge security that reduced the desiredfamily size.

J Ihe long-term forecast of the Population Reference Bureau, July 1992.

Gustav F. Papanekl, Mhe Effect of Government Intervention on Growth and Equity:Lessons from Southern Asia, in he State and Maret i Develooment Rivalby oraymyn.Z Louis Putterman and Dietrich Rusdmey (eds.), 1992.

v21 The study alo found that growth was generaly faster when the countries followed moremarket-oriented strategies than when they followed more dirigiste ones.

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Tble. 3- SRI LANKA AND OTHER LOWER AND MDDLE-INCOME COUNTRIES.A COMPARISON OF SOME BASIC INDICATORS

Low-income Ltwer Middle- Income

Indicatots SniLanke Eoonomiae Income Ewoomicsa Bixioea

GNP Per Capita, 1990 (US$) 470 350 1,530 Z2220

Average Annual Rate of 29 2.9 1.5 2.2Growth of GNP Per Capita,1965-90 (Percent)

Average Anmual Rate ofGrowth of GDP (Percent)

a.1965-80 4.0 4.9 5.5 663b. 1980-90 4.0 6.1 2.6 25

Life Expeccy at Birth, 71 62 65 661990 (Years)

Adult Illiteracy, 1990 (Percent)

a. Female 17 52 32 27b. Total 12 40 25 22

Average Annual Rate ofGrowth of Population (Percent)

a. 196580 1.8 2.3 2.4 2.3'. 19090 1.4 2.0 2.2 2.0c 1989-2000 1.1 1.8 2.0 1.9

Total Fertility Rate, 1990 2.4 3.8 4.0 3.7

ft Moity Rate, 1990 19 69 51 48(Per 1,000 lve births)

Praw Education Net 100 68 d 86 89Enrollment Rate, 1989 (Percent)

Seconday Education GrOss 74 38 54 55Emollment Rate, 1989 (Percent)

Sri Lanka is classified as a low-income economy in Wodd Bank statisticu8 Weighted averages.' Excluding China and India

SGun Worfd Deveopm R 1992 The Wod Bank

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roeslowly (1% or less) or declined, andse more than 1% a ytawhenper capta GDPmmmore than 2% a year.

3.19 The study cautions, howeve, that the lnk between grw in per capita GDP andreal wages can break down ff growth is capital-intesive In that case t demand fr unsktedlabor can expand only dowly even if gwwth in per capita income is rapid. Since Sri Lanka is alabor-abundant economy, capital-intensive growth could only ocur If Conmt policiesartificially raise the price of labor relative to capital beyond its effcient level In Implemntingthe agenda for economic reform descibed in Chapter 2, Sri LTank should give high priority topolicy and regulatory reforms that ensure an efficient price of labor relative to capitaLSpecifically, there is a need to: (i) revising regulations and defto Govenment intervention thatraise the price of labor to firms, for example, by makdng it difficult for firm to dismiss woers orby creating paid and unpaid leave entitlements that are unusualy geerous by intenationalstandards; (ii) within tax and trade reform, avoiding reducing the effective rates of taxation anddecreasing the tariffs on capital goods at a rate faster than that for other categories of imports;(iii) not making credit at subsidized rates available to public enterprises for financing theformation of fixed capital; and (iv) enforcing repayment of loan.

B. Emeging Issues in Education and Heath

3.20 To sustain Sri Lanka's good performance in education and health, the Gonmentneeds to continue emphasizing health and education in its public expenditure pgram and shouldallocate funds in line with carel defined priorities. In the case of health, formulation of asuitable regulatory framework for private sector acvitiea important

3.21 Edffo Total Government expenditure on education as a percentage of GDP,exluding transfers under the Mid-Day Meal Program, declined from a peak of 32% in 1989 to2.5% in 1991 and 2.3% in 1992. The latter is low compared with a number of other Asiancountries. In the anticipated constrained fical environment it is imperative that funds be spentwiselY. A number of important issues require attention. (i) In 1992 salaries constituted 97% ofthe recurrent education expenditure of the provinces, which now run most of the generaleducation schools. Uttle room is left for quality-enhancing expenditures such as instrucdonalmaterials and repairs and maintenance of facilties. (ii) There is a wide discrepancy in theresource allocation per student between small and large schools, which Is only partly explained bythe fact that larger schools tend to have a higher proportio of students at the secondary klveL(iii) There are also wide discrepancies in the allocation of education resources across provncesIn general, poorer provinces have proportionally more unqualfied tachem and higher teachershortages, and they tend to spend much less on instructional and teaching materials. (iv) Thenumber of secondary school teachers (grades 611) has increased very rapidly, from about 64,000in 1985 to almost 89,000 in 1991, with a corresponding decline in the student/teacher ratio at thatlevel from 25.3 in 1985 to 21.1 in 1991, a very low ratio by international standards Ie pimaryschool student/teacher ratio in 1991 was also tow-about 31 (although up from 28.7 in 1985).(v) Although the number of university students is presently relatively low compared with otherlow- and middle-income countries, Government spending on university education in real termsincreased by a high annual rate of 12% in the 1987-92 period and is planned to grow at about 9%a year up to the end of the decade. If the present policy of no cost recovery continues, thisgrowth could crowd out higher priority expenditures on general education.

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3.22 Because of the decline in fertflity, the number of students entering grade 1 hasalready started to fall, an effect that witl cascade up the primary grades (1-5). It will alsogradually reduce the pool of students for secondary schooL These favorable demographic trendsopen up the posstbility of upgrading the quality of general education without incrasing the shareof related spending in GDP. However, upgrading the quality and efficiency of general educationwil require confronting the issues listed above.

3.23 1IaltlF Total Government expenditure on health as a percentage of GDPdeclined from a peak of 1.8% in 1989 to 1.4% in 1991 and 1.6% in 1992; it is exected to beabout 1.5% in 1993. This latter figure is about average as compared with most South Asian andEast Asian countries.- Total (public and private) expenditure on health-related goods andservices as a percentage of GDP was estimated at 3.1% in 1986R97, about average when comparedwith the same group of countries.

3.24 Government health facilities already provide good coverage throughout thecountry. As with education, the decline in ferlity provides an opportunity to use future increasesin per capita Government health expenditure to improve quality. The number of children underfiv - will decline in the 1990s; at the same time, however, those 60 and over will more thandouble, from 1.4 million in 1991 to 2.3 million in 2001. This latter development will increase theburden of diseases with high treatment costs, such as cancer and cardiovascula disease.

3.25 These changes in epidemiological patterns, together with the strong growth ofprivate health services in recent years, call for a thorough polcy review of the sector. Gi thegrowth in private services, a regulatory and superviory framework is needed, but no regulatorybody has been set up. It may also be desirable to redefine the division of labor between thepublic and prinate sectors in both the provision of services and the financing of accesL Forexample, the public sector could concentrate more on preventive care, health education andcommunicable disease control and leave most curative services to the private sector. However,this divsion poses difficult questions about financing access to curative services by the poor ingeneral and by the poor and non-poor in terms of catastroph;: and chronic illness

3.26 A recent Bank review of Govemment health expenditures identified several otherissues: (i) While mortaliq rates continue to decline, the incidence of morbidity from severalpreventable diseases is rising. (ii) The higher level facilities such as teaching and speciizedhospitals and provincial hospitals are overcrowded, while smaller facilities such as district and ruralhospitals are underutilized. Consumers prefer the higher level facilities because the servicesprovided by district and rural hospitals are of insufficient quality. This imbalance could bereduced by providing more adequate funding to the underutilized facilities, which the PIPemphasizes. (iii) There has been a large decline in the ratio of average annual recurrent healthexpenditure to the value of the health capital stock. While it is difficult to determine what levelis adequate, an imbalance may have developed between spending on expanding facilities and onoperations and maintenance. (iv) A particular aspect of (iii) is the clear inadequacy ofexpenditures for maintenance, which in 1990-92 were only about one-third of what was required.

See Charles Griffin, Health Care in Asia A Comparative Study of Cost and Fmancing,'World Bank Regional and Sectoral Studies, Washington, D.C., 1992, Table 4.

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C Safey-Net Proms

3.27 Te Govenment offies an anray of programs for transferring income to certaingroups. 'he main progams, which together spent the equivalent of about 2.5% of GDP in 1992,are described below, along with suggestions for resatruuig them.

3.28 The Poor Relief Food Smp Pom (FSP). Thi program, which accounted for0.7% of GDP in 1992, aims to imnpre the nutritional status of poor households by iceaingtheir disposable income with monthly coupons that can be exchanged for food in specialcooperative stores.

3.29 The .anasalva _ P IS). This program, which accounted for 0.7% of GDPin 1992, has as its basic concept to provide poor households with fixd monthly cash grants for aperiod of two years. This 'breathing space is expected to enable some recipients to setthemselves up as microentepreneurs or to acquire the skills needed to get better paying jobs, andhouseholds can thereby exit poverty. The ISP is being phased in throughout the country insuccesive, geographically-defined 'rounds. A total of 11 rounds is planned; 4 have aleady beenlaunched, and the remaining 7 will be launched within the next seveal yeas. Once the ISP hasbeen started in an area, the FSP is phased out, except that households receiving public assistan(see below) can retai their FSP benefits.

3.30 The monthly grants are fixed at Rs 1,458, comprsng a cash 'consumptionW transferof Rs 1,00C rcleased every month and a 'savin component of Rs 4S8 that households get in alump sum at the end of the two-year period and that is to be used for investment projects. Amonthly grant of Rs 1,458 is farly large by local standards; it is, for example, about nine times theaverage household payment under the FSP (about Rs 167 in 1992). JSP beneficiary householdswere also supposed to get an additional lump sum grant of Rs 25,000 at the end of the two-yearperiod. Because of fiscal constraints this payment has not happened, but a monthly 'interest'payment of Rs 250 per household is being made for the indefinite future to households that havecompleted the two-year period (unless a member of the household get a Government job or ajob in the Government-sponsored 200-garment factory program)

331 Tbe Mid-Da Meal Pa M. DM. program, which accounted for 0.4%of GDP in 1992, is a universal, non-targetd program for all children attedig primary andsenday schooL Its objecives are to improve nutritin sad ire the rturns on educationexpenditure by increasing attendance and student alertness. he program provides a subsidy ofEs 3 per day per child to families of students bringing a meal to shool that meets certin criteriait has to be nutritious and non-wheat flour-based. Te subsidy is given in the form of monthlycoupons that can be redeemed at special cooperative stores (same as the FSP coupons).Teachers make a note of students failing to attnd school or bring a sutable meal, and thecorresponding amounts are deducted from the entitlement at the end of the month.

3.32 TMNurs to the Trol! Needv. Severad programs, accounting for less than 0.1% ofGDP in 1992, fall under this rubricb Since 1989 they have for the most part been managed by theprovices The largest program invlves publc assitance payments to households with incomesof less than Rs 300 per month whose heads of household are disabled, elderly or widows OtherGovernment programs finance custodial care for destitute elderly and orphans and various formsof rebabilitation.

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3.33 -t pRJ d Popu Under this categoty, which accounted for0.6% of GDP In 1992, ae the asstae progrm for famiuies and individuals displaced by theci conflict in the North and East. Ihe Govrment operates 463 camps for displaced persons,prviding dry food rations to the displaced populatons, as wel as to may other displaced peoplehivg outside the camps (some 615,000 tegitered diplae0d prwss live inside and outside thecamps). In addiion, displaced famiies retuning to their orginal place of residence are eligiblefor a range of benefits under the Unified Scheme of Assistance.

3.34 Asseamntof klmm M m array of trasfer programs is impressive giventhe levl of Sri LIans per capita income. bt demonstrates the tradition of helping the weakestsegents of the populadon. At the same time, however, it appears that Sri Lanka has made toobroad a use of safety net progams in the fight against povert, such programs should mainly beviewed as an instrment of last resaort. The present fiscal stringency means, moreover, that evprograms of this nature have to be carefully scrutinized, since they may have a high opportunitycost The FSP, for example, bas not been well-targeted: it stiUl includes many ineligi-blebeneficiaries while ecluding may bona fide potential beneficiaries Given the decline in the realvalue of the benefits per household, it is unclar whether the program is achieving its orginalObjectives.

3.35 In the case of the JSP, there is evidence that the screening of beneficiaries hasbeen better than under the FSP. Howeve, as mentioned, once the two-yea perid is over,benficiaty households are entitled to a payment of Rs 250 per month indeftitely, regardles oftheir economic situation Thi polic to some extent negates the effects of the improvedscreening On the other hand, the paYment of Rs 250 per month does function as a safety net forthose houeholds unable to exit poverty as a result of the JSP but that no longer receive FSPbenefits.

3.36 A lky criterion of the sucoess of the ISP is the proportion of beneficiaryhouseholds able to exit poverty as a result of the progam. The ISP's own defnition of whatedting poverty means is achieving a household income of Rs 1,500 per month. The Women'sBureau of Sri L ank (a nongovernmental oon) nducted a random survey of 299 roundone beneficiar households three months after they had completed the two years Manyhouseholds had ineased ther incomes relative to before the profgam, including a small minorityof about 13% whose incomes rose above the pgam's target of Rs 1,500 per month. Howevoer,some of the apparent gains may bave been the result of inflation, which averaged 12.8% per yearduring round one and/or to undporting of pre-program incomes. On balance, presentevdence indicates that few households will exit poverty as a result of the program and it shouldbe reviewed.

3.37 With regad to the MDMP, it may be argued that the distribution of benefits isregre, at kast at the seondary hool Wel, since secondary enrollment is directly catedwith household income. The nutritiona impact is also dubious, since the daily subsidy issubstantialy belbw the cost of a nutritious meal, and it appears that many teachers are notenfoing hde iddei on meal content (and some may not even be recording students who donot bring meals). Further, it is not clear how the progam has contributed to the decline ina m (absenteeism has been declg since the early 1980s Hence, this program may beyieding few socia benefits per rupee spent (espcally if benefits are weighted in inverseproportion to the income status of bena icris). As in the case of the JSP, the MDMP programshould also be reviewed.

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3.38 The programs grouped above under the label of 'transfers to the truly needy'appear to be seveely underfunded. The Government needs to conduct an in-depth review ofthese programs. It should study the eligibilty criteria and amounts of the entitlements, taldng intoaccount other sources of public assistance for the households (mainly food stamps). At the sametime, it should strengthen accountabflity, especially of the programs devolved to the PovincialCouncis.

339 As to assistance to displaced people, it appears to be generally adequate, but thereare problem The camps were meant to be temporary, but several years after the programstarted the great majority of the families have not been able to return home. Although there areno hard data, the quality of the water and sanitation facilities in many camps is poor. In thecamps outside Colombo, the quality of the housing is very poor and overcrowding rampant. Inthe ar around the camps located in the high-confict areas in the North, whete about half thedisplaced people are, the fighting has disrupted basic health and education services, affecting,inter alia, the displaced population. There are also problems with targeting. many ineligiblepeople are receiving benefits, especially in the Colombo camps. The Government is conducting asurvey to improve the targeting of benefits.

3.40 _w foIU for Restncturln the SafetV-Net . The safety-net programsshould be seen as a package, because of the complementarities among them. Specific reformsmight include:

(i) Ihe MDMP could be restricted to primary school children to reduce the cost andimprove progresity.

(ii) Rescreening of FSP program beneficiares could be caried out immediately inareas where the JSP has not yet arrived. That is, the JSP methods could be usedto prune the rolls of the FSP in the entire country regardless of the phasing ofthe ISP. This measure would reduce the costs and improve progressity. At thesame time, the amount of FSP payments per household could be raised tocompensate for the real decline in value since the program's inception.

(iii) In those areas where the ISP two-year period is over, the open-ended payment ofRs 250 per household per month might be canceled (and the promise of the Rs25,000 grant renounced). Instead, the FSP could be reintroduced with the sameeligibility criteria as in the rest of the country (as suggested in [lij above).

(iv) Tle eligibility cntena and amounts of entitlements under the ansfers to thetruly needy' should be reviewed, and the amounts probably raised.

(v) If , after taking into account the net effect on Govenment spending of the abovesuggested changes, it is concluded that the overall amount of Governmentspending on safety-net programs needs to be further reduced (given the overallfiscal constraint and other spending pnorities), the cuts should come from the JSPprogram. The JSP, if necessary, should be phased out.

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4. THE ECONOMIC OUTLOK ANDEXNERNAL FINANCING REQUJIREMENTS

I MACROECONOMIC TARGM AND POLICIES

4.01 _ k . As indicated in the Government's fifth-year PFP, SriLaka's medium-term macroeconomic objectives are to achieve and maintain a strong rate ofGDP gowth of 6% p.a., reduce the fiscal decit to below 7% of GDP, reduce the externalcurent account deficit to about 5% of GDP and maintain relative price stability, while ensuringthat soci and enironm coucrns are addressd Sri Laks objectives, while ambitious, arefasilbkl With a strong human resource base resulting from 30 years of determined efforts toimprove education and health, and a good naturl resource endowment, Sri Lanka's long-rundevelopment potential is strong. Realizing this full potential has been constrained by annceasisgy costly civil war and the stop-go nature of past policy reform efforts. The medium-

tem prspects, therefore, critically depend upon developments concering the civil war and policyprogress. With sustained peace effos and consistent progress in implementing policy reformsalong the lines dicussed in Chapter 2, Sri Lanka's macroeconomic objecives descnbed above areachievable.

4412 ak d Structaral FoUc YR ef In order to achieve this highgrowth rate, the Goverment realizes that the largest untapped resource is Sri LAnas dynamicprivate sector. The findamental pmiar of its adjustment program is to create an environment thatalows private activity to expand in a sustainable manner. Ihe role of the public sector is beingrcted towad the provision of a stable policy and regulatory environment and pursuit ofGovernment activities that complement private sector activity and investment. A detaied reviewof the medium-term policy agenda was presented in Chapter 2. Below we summarize the keypoits of the policy progam that underle the projectons presented in Secion IL Among themao important tausk to be undertaken are the following

(iJ Sound Macroeconomic Management. A succesful structural adjustment programrequires a stable macroeconomic environment. In Sri Lank, this implies inparticular further progress in reducing the fiscal deficit and improved financialdiscipline in the state-owned enterprise sector. The Government needs to reducethe fiscal deficit to about 66.5% of GDP, mainly through expenditure restraint.Further gains on the renue side are expected to be limited since the current taxeffort of about 19% of GDP is cnierable given Sri L s income leveL Withregrd to public enterpries and other autonomous public agencies, theGovernment needs to ensure that pncimg policies are adequate, cost control isimproved and new investments are carefully screened and prioritized. Improvedfiancial dipline by the broad public sector is crucial to curtail growth in overalllquidity to about 12%-13% p.a, in line with growth and inflation targets.

(ii) Impove Public Expenditure Manaremmf Expenditure restraint is alwas difficlt,particularly when there is a need to increase selected outks to strengthen growth

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prospc by reinrcing the ift e base and preserve gains in povertyalleviation and human capital development Recent improvements in thebudgetty outcome have been large at the expense of public investment which in1992 declined to 6.8% of GDP. In order to meet these development needs, andiace public Iesment to about 9% of GDP, while reducing the fisl defiit,the Govemment needs to restructure curent expenditures along the linesproposed in previous chapter including carl setting of investment priorities,wage restt, expenditure screening for poverty aleviation programs, and, moregenerally, by tapping pivate sector reor and nagement.

(Iii) Am th Incenive Fm In order to achieve the ambitious growthtargets, the imp ent in publc sctor management needs to be complementedby accelerating the implementaton of structral measures designed to increaseextenal and internal competition and efficency in goods and factor markets. Inagiculture, the Governmet needs to make significant progress in elminatingcropping and land-use restrictons, inte picing and trade policies, andifficient marketing by state-owned enterprises. In manufactuing, theGovernment should implement a broad based trade and tariff reform to enhanceefficiency and reduce the anti-eort bias of the trade regime, eliminate direct andindirect bariers to entr and exit, and begin to tackle rigidities in labor legislation.These stutural poleies need to be coupled with a flexible exchange rate policydirected primarily at maintaining eternal competitiveness.

(iv) M l?rdiate Setor hii nd Iuitat. Increased private invetment andsavngs are crucial to increase growth and improve the balance of payments The6% pa. growth target is predicated on increaing the investment to GDP ratio toabout 25%-26%; it is crucial that the 1992 private inmestment effort of 16%-17%of GDP is sustained over the medium-term. Together with the changes in theincentive regime descnrbed above, the trade and foreign exchange liberaliztionmeasures undertaken in recent yea and the Government's privatization effortsshould prmote private ivetment and attract foreign capital. The privatizationeffort if accompanied by apprpriate changes in the regulatory regiWe, will beparticularly important to increase efficien and Inestment in the plantations sub-sctor and in the poiion of tem nions and inrstrucure services.

403 As noted,thnc conflicts, and political violence in the 1980s have been verydetimeal to Sri Lanka's economic performance. Improvments in the political and seuitydsiatio are essential for sustained increase iin priate domestic and foreign investment. If SriLanka I to fufiSll its considerable economic potential, the country needs to experience sustained

IL MACROECONOMIC OUTLAOOK UNDER ADJUSTMENT

404 Sd Lanka's medium-term economic prospects are favorable if the Govenmentsucesfull address the short-term stabilization dalenges and implements stmrtural reformsta pmote prvate sector activity and incease efficiency as described above. The imprvedfinnci poicies of the public sector would reduce public sector browing and fee resources for

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private sector activty. Private sector activty would also be enhanced and made, moe efficien bythe rapid imple tati of the stutural reforms directed at increaing eterm and hImalcompetition and enhancing efficien in resource aoaion Rece gains in preserving eqportcompeftfiveness wod be reifored by, among other tg, the plementation of the trade andtarff reorm that reduces the antieprt bias in the trade egime and integrates agriculture intothe already successful export drive of maauring. Prte investment and extera capitalinflows would remain strong as rates of return stregthen Table 4.1 Illustrates how the maineconomic indicators could perform should the Goverment implement forcefully its adjusment

4105 Under these favorable assumpons, real growth would increase grdually to about6% per yea, while inflation would decline to an annual averg about 6% by 1995. Themanufacturing sector, Pat export Iduste, i eected to continue its present growthmomtum of 8%-9% p.a Agricuture growth perfomance would gradually impre from 0.5%p.a. on average during 1985-92 to about 2%-3% p.a. over the medium-term because ofimprovements in the plantation subsetor resulting from private sector management, and in thesmallhlder subsector, resutng from the eliminatio of the cropping and land use restictions,and chages in the inentiv regim Increasd investment and exports are expcted to be themain sources of growth on the demand ide Export growth i projected to average sine 7%4Wop.a. in volume terms and to be broad- based, althou fh garments will remain the leadig sector.

4.06 Sri Lanka has not alvays been ab' to avoid ma mic di a, andinflation has at times ereeded low two-digit figures. Recent pocy decisios in eady 1993,particulady in the area of public s vin put Sri lanka at risk of repeating pastmacroeconomic imbaIac Unless the Governmettakcorctive measures immediately torestore fisal discipline and fnancial stability, the potental for accelerating inflation and the re-emergence of macrnconmi imbalances is reat. Fiscal discipline is crucial to achie the hightet for private investment, sice public sector domestic borrowing has to be reduced to releasescam re sources to the private sector.

4.07 Monetay policy needs to ensure that growth in overall lquidity is consitet withthe targets for output grwvth and i on. The annual rate of growth of the money supplyshoud be reduced from 17.4% in 1992 to about 12%-13% by 1996. he expected dedine inpubic sector borrowing is cucial to achivig this tget since both the imprvmet in the netforeig assets of the banling system and the demand for credit by the private sector aising fromthe expected high lvel of vtment will put exansionar pressure on the mone supply.Continuous monitordg of the lquidity situation and its causal factors and prompt implmentationof cowective measures are crucial to achving the planed price stability.

4.0 Saving rates wmi need to iease ommeuratel with the inestnt effort forthe latter to be sustainable. Gross domestic saving is projected to rie by about 3% of GDP by1995 largely because of the expcted incas in government saving. A gadual increase in privateaving as a result of higher growth and fincial and extemal sector reforms will further increasedomestic and naond savg and reduce the dependency on oreign savings in maintaing a highleve of inestment.

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Table 4-1: KEY INDICATORS

* Pm

1989 1990 l199 1992 199$ 1994 199s 1

GOP growth rate 2.3 6.2 4.6 4.3 5.3 5.7 6.0 6.0Consumptionlcapita 0.3 1.4 3.6 -1.8 3.1 2.8 3.4 3.4growth rate

inflation rate (average) a/ 11.6 21.5 12.2 11.4 9.0 7.0 6.0 6.0

Debt service ratio bl 24.2 17.8 18.5 16.7 12.9 11.5 10.3 .3Medium- and Long-term 72.5 68.9 67.7 68.7 68.8 68.6 66.6 64.0debtJGDP c/

Gross investmen/GDP 21.7 22.2 22.9 23.7 2&8 24.2 24.7 25.2National savingsGDP 14.6 16.7 15.1 18.3 19.0 19.6 20.5 21.3Public investmentlGDP 10.0 8.7 9.6 6.8 9.6 9.0 9.0 9.2Public savings/GDP -1.2 -1.2 -2.0 -0.6 1.5 2.0 2.6 2.8Pate investment/GOP 11.7 13.5 13.3 16.9 14.2 15.2 15.7 16.0Private savingsGOP 15.8 17.9 17.1 18.9 17.5 17.6 17.9 18.5Ratio of public/private 0.9 0.6 0.7 0.4 0.7 0.6 0.6 0.6investments

Govemment revenue/GDP 21.4 21.1 20.4 20.3 20.6 20.9 21.0 21.2Govemment expendlture/GDP 32.6 31.0 32.1 27.8 28.7 27.9 27.4 27.6Deficit(-) or -11.2 -9.9 -11.6 -7.4 -8.1 -7.0 -6.4 -6.4surplus(+)GDPI

Domestic financingGDP 4.9 5.3 4.3 3.6 2.3 1.2 1.0 1.0

Export vaue growth (SORs) dit 9.8 20.0 5.9 17.5 8.3 7.6 6.7 6.9ExportsGDP dl 27.3 30.2 28.7 32.4 32.0 32.2 32.6 33.0Import value orowth (SORs) dt 4.8 123 13.6 9.6 7.6 5.4 5.7 6.0imports/GDP dV 36.8 38.1 38.8 40.9 40.5 40.2 40.5 4C 9Current account (US$ Mn.) el -494.0 -438.0 -688.0 -529.0 -570.0 -545.0 -546.0 -557.0Current account/GDP -7.1 -5.5 -7.6 -5.5 -5.4 -4.8 -4.4 -4.1Real effective -5.2 1.8 5.3 -4.4 ... ... ... ...exchange rate U

a] Colombo Consumers' Price inde.b/ Debt service/eamings from merchandise expors and seWvices.cl Medium and Long-term central government and government guaranteed debt, Including Fund.d/ Exports and Imports Include goods and non-factor services.

Ratios are in current prices; growth rates are In constant prices.el bocluding official transfer payments (net).U Growth of annual average of Real Effective Exchange Rate

Sowures Sri Laa auh#ue; adMafSf etiat

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IL E OJ AM EKTERNAL N&bNMM REOE_

4.09 The EOMt cluding unepected extera shocks, Sri Iankas externalposition woud strengthen if the adjustment program is implemented forcefiully. The ilustrativescenario indicates that current account deficit would decline to about 5.0% of GDP, whfle theoverall balance of payments would register small surpluses. The prticipal assumptions underlyingthis favorable outcome is prudent demand management policis that restrict the expansion ofimports and the implementation of stuctural measures descnrbed above to promote exports.

4.10 Manufactures are expected to be the most dynamic export sector, but traditionalexports wil also regain an upward trend. Tea and rubber exports in particular should grow as theprivate management strengthens the plantation subsector. Imports wil grow more slowly taexs but will increase faster than of GDP because of the strong dependence of exports onimported inputs Despite the expected increase in service payments following the recentiberaliatx of travel and other service transactions, the service account is expected to improve

from an expansion in tourism and higher workers' remittances.

4.11 Ea FlNDcl Reautreumnts and tle Cautal Acco Under theadjustment scenario dicussed above, Sri LXnka's external financing requirements will be stable ataround US$1.2 billion pa. throughout the projection periol. Ihis level of extnal financingrequirements is within the range of expected donor commitment and private capital flows, andthe need for commerci borrowing seems unlikely. The structure of Sri Lankas capital accowtis beinnig to change. The share of private capital inflows has incased sharply, including FDLThis trend should boost the availabflity of extemal resources. Together with the strong traditionalsupport from official donors, the private inflows will yield small surpluses in the balance ofpayments. As a result, gross official reserves will rise to about four months of imports by 1995,facilitating furthleralzation in the external sector.

4.12 While avaity of xernal financing has been adequate, its effectie utflizatin isan important emerging issue. Extemal assistance committed but undisbursed rose to about USS2,195 million at end 1992 as the public sectors' capacity to implement the development programbecame overstretched. Given the uncertain prospects for continumg inreases in aid transfers as aresult of rising competing demands for these resources elsewhere (eg, the FSU, Africa, etc.), SriLanas suess in atracting increased aid flows would depend increasingly on ir;povements intheir utilizationL

IV. RISKS AND

4.13 Despite Sri Lanks strong potential, the growth scenaDrio presented above facessubstantial risks These risks can be broadly grouped into two categories: domestic !isks andexternal risks Domestic unrest is a vemy real threat that influences investment decis ons as itaffects perceived investment risks and returs. Political populsm also introduces uicertainty as itmay direcwy affect macroeconomic disipline and project performance. On the external front, therisks in prospects are linked to adverse developments related to international prices, export andfinancial markes

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Table 4-2: EXTERNAL FINANCIAL REQUIREMENTS(In million of SDR)

lo8 lowe Inc ml 1992 199 1994 lees 1t9e

EeL p'PujCUOn

Current accoundeicit oexludingoffckl transtes 440 3o0 322 500 375 405 387 388 395

AmortizatIon 193 177 154 137 174 1SO 186 1g8 194Change In gross resfvs -5 17 82 175 173 190 198 171 153IPF repurchasm 64 46 32 64 54 18 9 22 31Private short-term, net -12 -73 -48 -36 -69 -4 -17 -20 -18Short-term liabilities of thebankingsystem 30 -63 64 51 -7 80 110 120 120

Tota financing requImnts 710 494 606 891 700 878 873 879 875

DisbursmentExitingcommitments 710 494 60 891 700 494 415 278 169Lans and gants 458 448 520 652 362 494 415 278 169Loans 304 301 390 504 232 494 415 278 169Mutilaterai 97 111 174 251 153 280 234 163 99

Of which: World Bank 47 46 94 138 54 138 124 89 54ADB 48 63 77 111 96 136 104 70 43

Bilateral 177 166 172 191 58 214 181 115 70Flnancia Instltutlons 29 24 44 62 21 --- --- --- ---

Grants 154 147 130 148 130 --- --- -Government, short-term(net) 22 -22Patecrditors a8 15 24 63 110 --- --- --- ---Foreign direct Investment 32 14 31 69 104 --- --- --- ---Errors and omissions 29 -50 -14 29 34 --- --- --- ---SAFICFF/ESAF 153 67 45 56 112 --- --- ---

Expcted newcommitments --- --- --- --- --- 272 402 601 706Loans and r--- --- --- --- --- 134 267 376 459Loans --- --- --- --- --- --- 127 229 302Mulatera --- --- --- --- --- --- 69 104 165

Ofwhich: WorldBank --- --- - --- --- 45 45 73ADS --- --- --- --- --- --- 24 59 92

Bilateral --- --- --- --- --- --- 58 125 137Grants --- --- --- --- 134 130 147 157

Privat creditors --- --- --- --- --- 13 15 55 57Foreign direct Investment --- --- --- --- --- 125 130 170 190

Total identified financing 710 494 606 891 700 766 817 879 875

Financng gap --- --- --- -- --- 112 56 ---

Possible ESAF --- --- -- --- 112 56 --- ---

Residual financing gap --- --- --- ---- ---

SOL.' Dat pd*~ by On S "LW aughof IMF and Staff pron

'39

A. Doomsesi Risk

4.14 Slips In the policy rea, either related to a wonening of the cvil unrest or thegovernance problem, pose ccia treats to macroonomic prospects The past fperienc Ofstop-go refom Mustrate this rhL In the eet that the implementation of the reform progrmfalte, Sn Lans economic performnce would be c abl weake than that presented inthe adjustment scos t is sitaltentiv scario (see Table 4-3) suggest that withoutapp rpra poliy reforms, macroeconomic Imbalances would weaken and economic growth coulddeclne to arund 3% pa. Tis lower growth path would have serious adverse implicatiom foremployment and por.

Takbl 43: ILLUSTRATIVE ALTERNATIVE SCENARIOS-SELCIED KEY UIDICATORS

FY93-96

Adjustmet Scenario Policy Slippage Scenario

Real GDP Growth (% p.a) 5.8 33Per Capta Growth (% pa) 4.7 22Inetment (% of GDP) 24.5 20.0Naoti Savintg (% of GDP) 20.5 14.0

B. Maabnc

Current Account Deicit 4.4 6.0Budget Deficit 7.0 10.0Infton 7.0 12.0Reser (month of imprts) 4.0 2.5

SourCe: Wold Bank Prjecdon.

B. Exten Ri s8

4.15 External shoclb, such as unexpected changes in international goods prices, intertand exchane rates, or advese d opments in ort popects, are another potential source ofriss At present, fluctuations m intenatonal Interest rates have only a limited impact, as most ofthe countrys extena debt is on concessinal tm with fixed, higl favorable lending rates.Neve lss, Sri Lanks vubilty to interationa interest rates is increasing with theexpanion in foreign portfolio investments. Sri anika is vulnerable to exchang rate fluctuatas most of its exports are denominated in U.S dollars while the currency composition of its debtservice payments reflects a more divse portfolio of Government and Govenment-guaranteeddebt. Chages in intemationad commodity markets, partcula for tea, garments, petroleum,

-40-

wheat and rice, are the major sources of exogenous shockL In paticudar, the garment export sub-sectr, which recorded its highest growth in the recent past, is subject to a quota system, andchanges in the Multifiber Arrangement (MFA) could affect Sri Lanka's exports significantly.

4.16 A 10% deterIoration in the price of garment exports will inrea the currentaccount deficit by about US$88 million, or 1.0% of GDP. Simiarly, a 20% reduction in the priceof tea exports will increase the external current account deficit by about US$84 million, or 1.0%of GDP, while a 20% increase in petroleum import prices will increse the current account deficitby about US $66 million, or 0.7% of GDP. If such eventualities occur, achievement of highgrowth wil depend heavily on the degree and speed of the Government's response in terms ofcompensatory policy reforms. Wie the adverse consequences of small, temporary disturbancescould be absorbed through reserve drawdown, large external shocks would call for an appropriateresponse in terms of a strengthened macroeconomic management and structural policy reforms.Over the longer term, Sri Lanka needs to minimize these risks through export diversification.

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STATISTICALANNEX OF TABLES

-42-

STATISTICAL ANNEX OF TABLES

TABLE NOS. T1TE

1.1: Value-Added Growth Rates of Major Scoots

1.2: Key Economic Variables 1984-1992

1.3: Sectoral Composition and Inacreae in Gross National Product 1980.1992

1.4: Macroecnomic Balances 1985-1992

1.5:E on Gros Domestic Product

1.6: Composition of Gros Capital Formation

1.7: Composition of Public Sector Iestmen

1S. Sectoral Growth Rates and Relative Contrbution to Ince e

1.9. Trns in Principa Agiulual Crops

1.10: Composition of Industria Production

1.11: Performace In the Public Sector and the Prvate Sector

1.12: Annual Rainfall Index

1.13: Drought Impact

1.14: Sumniay of Centrl Goenm t Fica Operadons, 1987-1993

1.15: Composition of Gova ment Editue

1.16. Composition of Govrmnt Revenue as a Ratio of GDP

1.17: Composition of Govenmet Revenue as a Percentage of TotalRevenue

1.1& Monetary Developments

1.19: Relative Contribution to Monetary Exansion by Causal Facton

-43 -

TABLE NOS. TMTE

1.2& fmal Bank Advances to the Private Sector oad PubhcCorporations by Purpose

I21: Credit to Public Corporations

1.22 Compositon of the Fnancial System

1.23: Temuty Bill Markets

1.24: Cotombo Consumen' Price Itdex - CCPI

1.2: Namnal and Real Wage Rate indices

126 Balance of Payments

1.27: EpOrt

1.2& of Expors

1.29 Expt Diesifiction bdex

1.3& Texdles and GwmentsCotbhig

131: Composition of Textiles and amets Exports

132: Real Effectie Exchange Rate Index

133: Comparatve Base Wae Rates Factoiy Workes

1.34: Cost of Capital

1.35: The Public bnvestment Proam in 1992-1996

136: Shae of Detailed n the Public Invtment Proam

137: Cntal Bank Refinance Facilities

TABLE 1.1: VALUE-ADDED GROWTH RATES OF MAJOR SECTORS(Percenftag %)

GDP 3.t 6.2 4.9 2.5 6.2 4.6 4.3 5.0Manufactuft 1 .7 4.6 8.7 4.5 9.5 6.8 9.0 8A4Tree Crop Pro: -1.1 -0.4 3.2 -1.3 8.4 -5.6 -11.2 -3.1Factry Indtry 1.8 66 8.4 8.7 10.2 9.6 13.0 10.9Smal & Othr 4.9 8.6 3.0 -13.2 4.7 5.4 5.1 5.1

Construction -0.3 11.0 0.8 0.6 2.9 3.1 7.0 4.3Agicuture 2.3 4.0 4.0 0.9 8.5 1.9 -1.5 2.9Tea -0.1 -1.8 2.8 -3.1 12.6 3.2 -2.7 -4.8Rubber -0.7 -2.9 -0.4 -9.7 3.0 -8.8 1.1 -1.7Coconuts -2.4 4.7 2.7 7.S 1.6 -13.3 9.0 -1.4Paddy 2.1 6.3 4.0 -3.1 21.3 -5.9 -2.0 3.8Forestryl -0.5 8.2 -0.4 -1.2 -1.7 8.1 3.1 3.1Fisleries

Other 6.2 4.1 4.9 3.3 7.8 8.0 0.4 5.3Sewices 3.8 7.4 5.1 6.1 4.3 6.2 5.3 5.3Utity 6.1 14.5 8.0 6.1 10.2 7.1 5.4 7.5Transport 2.5 6.8 5.3 2.5 3.8 7.8 6.0 5.9Commercial 2.5 7.4 4.6 4.3 3.8 7.8 5.8 5.7Financhl 9.8 11.9 8.4 10.9 6.3 4.2 6.0 5.5Housing 2.7 5.2 1.8 2.7 1.5 1.5 0.9 1.3Public Admin: 5.9 6.9 14.7 11.4 3.5 -0.8 2.3 1.7Other 5.2 7.2 -1.4 3.8 9.1 8.4 6 7 8.0

Source: Cenra 8n* of SdLet"

TABLE 12 KEY ECONOMIC VARIABLES 1984-1992

NmnlA eW Echanoe Rate fasuSX 25;4 27.2 2&0 29.4 31.8 36.0 401 41.4 4 P"alEHervee ehnnpe(l980"10C) 124.8 118.7 103.9 93.0 90.9 8B.1 877 Q 99Annual ChMeIn 1.2 (b) 11.2 -6.5 -11.0 -10.5 -2.3 -5.2 1.8 5.3 1.82. Real Inter Rate (pe annum %)

t2mondpost - 12.9 5.2 2.6 -2.3 1.6 -3.0 3. 3.6Commec Ledn 2 19.4 123 10.5 4.2 6.9 -4.0 7.4 83Tream"y Buis (a months) -2.6 10.7 3.1 3.3 5.1 5.9 -3.6 4.8 5.8

3. PrkesandRealWagesAnnual Change In Consumer Price Index (%) 16.6 1.5 8.0 7.7 14.0 11.6 21.5 12.2 11.4AnnualC ne In GNP Oeftor () 17.4 0.7 5.5 68 11.5 9.9 20.0 10.5 9.9MIn Wum WagenxWa W s Boards(1978-1OD) 98.8 105.8 103.2 101.8 107.9 112.0 107.6 109.7 112.0GovernmentWage ndes(1978-100) 1066 121.2 117.5 109.1 125.4 121.9 113.2 11&2 106.0

4. Nationa Income & ExpendiureGrowth ofGP(atconh tprlep )*) 5.1 5.0 4.3 1.5 2.7 2.3 6.2 4.6 4.3GNP Per Cpta US $ 344 337 354 360 375 367 417 460 494InWestment3DP RstI o(%) 24.3 21.3 237 23.3 228 21.7 222 22.9 23.7ometc8 bavingsm PRatio (%) 19.9 11.9 12.0 12.8 12.0 12.2 14.3 12.7 15.3

5. PublIc FnanceGOvt. Revenueas% of GDP 2Z2 22.3 20.7 21.4 18.8 21.4 21.1 20.4 20.3Go v. Curran Expenditure as % of GDP 16.0 20.1 1t9 20.1 20.8 2Z6 22.3 225 21.0GoL CaPlMt Expndlureas % ofGOP 15.1 14.0 14.0 124 13.7 10.0 8.7 9.6 a8BudQl Deftlc as%of GOP -9.0 -11.7 -12.2 -11.1 -15.7 -11.2 -9.9 -11.6 -7.4Oomnae Etank lorrownas % ofGDP -1.4 2.9 1.7 1.8 4.6 -1.3 0. -0.2 -0.5

6. Money Credt (Anu Increase)Growth in Broad Money(M2) () 18.6 11.5 5.1 14.5 16.6 11.3 20.5 22.1 17.4Growt hInD Imut Credt t(b) 1.3 18.6 8.2 16.9 28.8 5.1 14.6 10.2 127Growth In Public Sector Borwiag (%) -14.7 32.5 10.1 23.5 37.4 5.5 4.2 -3.0 -3.3Growth In Pdvate Setor CredN (%) 14.1 10.3 6.9 12.0 21.7 4.7 24.3 20.5 19.6

7. ExtenalTradeIndicaorsExport Volum Index (1985-100) 96.7 100.0 105.2 103.8 101.4 103.0 120.0 125.0 1438Import Vdume Index (19851I00) 104.6 100.0 100.8 101.0 95.6 90.0 95.2 107.7 11a8Expor Pdce Index (1965m100) 112.7 100.0 89.5 109.4 127.8 150.7 1830 188.4 211.4Import Prce Index (1985-100) 92.1 100.0 100.2 110.9 137.5 164.8 209.4 217.5 237.8Terms ot Trade (1985-100) 122.1 100.0 89.3 98.7 9&0 91.4 87.4 85.7 88.9Share of Non-traditional Expots () 4a3 1 60.4 6S3 64.0 887 68. 73.6 81.4Cunton Account DOeflc as9% d GOP -0.9 -9.9 -9.6 -8.0 -8S -7.1 -5. -7.6 -5.Om"a SBOP SurplusOe klt-) US$ Mn. 304 -111 -70 -80 -86 -86 181 209 182ExtednD DObSwe Racet o(qb%) 17.5 21.0 262 27.5 28l6 24.2 17.8 18.1 15.7

8. Population Growth Rate() 1.2 1.5 1.8 1.5 1.4 1.3 1.1 1.5 0.9Sow~ Cenl SW* of Sd L8nka SW Dwent of Cm ad StatWcs

TABLE 1.3: SECORAL COMPOSI AND INCREASE IN GROSS NATIONAL PROMT 19O-1992(At Contn (1OM pries)

1. I4ttt f , C , & FM 24 2M 3M 3W7 301121 24M 259| 2 6| 2.A 14.4 9A 4AW41 1 2077t1 24604 25Mg 25841 25M1 21.9 22.4 1 t.X 19.2 W 8. 143 & . -S

Tea | 2418 | 27tl 3004 3100 |2303 | 6 25 1 3 123 1.16 | l. te|-1 Rubber 770 851 718 6ss55 682 .8 0. 0.6 0.5 0.5 -0.2 -1.1 WCo Au 3288 3828 3281 2827 3081 a4 3. 2.5 12.1 2.2 0.0 -T7. 4.4Pad 5484 O 6788 78 o602 5882 5.8 6.2 4.9 4*4 4.2 LO2.6 -3 -21011S W8S9S 10283 12888 13357 13410 193 9 9.6 199 9.5 102 e ,6 MO9

ForeWy 1710 0823 200 2107 2149 1.8 1.8 1.6 .6 1.5 0.9 1.3 0.7Fbhbng 2468 1989 2252 2S22 2625 2.6 1.8 1.7 1.9 1.9 -0.7 4.5 1.8

a Mlnt amuarryln 2288 26 3001 3511 300 2.4 2.3 3.0 2.6 2.3 4.8 -65 8T.73.anuacoudn 13601 16193 222 2399 28106 14.4 14.8 17A 17.7 151 25. 25. 375 &

Tree Crp Proceue 2846 3222 35O0 3882 2959 30 2.9 2.7 2.5 2.1 2.0 4. -Fatory |dusty 8777 10811 1705 870 21140 9.3 9.9 13.2 1&3 15.0 240 27.2V 42.3Saa & OtOhew ustry 197n 2160 1612 1909 2007 2 t 0 1.4 1 4 1.4 -0.5 1.6 1.7

4. CoVuc| 795 6070 8761 9038 9665 84| 741 68 6.7 6| 2.3l 4.6 11.0& servIe 45917 54455 64144 68141 71M7 48.5 49.7 4L6 5Q04* 509 52.7 67.1 63&2

EecWtr WMal w w yan 8lwSvles 1089 1s81 1681 18001607 1.2 1.2 1.3 1.3 1.3 1.7 2.0 1.7Tra,nsport, a &o | cammtOwil i6 12959 14410 15534 16468 11.3 11.8 11.1 11.5 11.7 10* 1. 16.2Wholbs aands Rl Trade 19|94 22925 289 28556 30215 20.8 20.9 20.5 21.1 21.4 | 197 34.5 28.8Ban_ Pking urate & ReEstae 3715 4975 6556 681 7241 3.9 4.5 5.1 5.1 5.1 6.2 4.6 7t1Ownship or Dwngs 3250 3432 3705 376m 3795 34| 3.1 2.9 2.8 2.7 .3 0.9 0.6Pubic Admlnstalon & Defse 2899 4432 65 6304 6449 3.1 4.0 4.9 4.7 4.8 10.l -0.9 2.5O r SevIs 4604 4419 4940 5355 5714 4.9 40 3.8 4.0t 41 1.0 7.0 6.2

6. GOP 9469 109570 129244 135204 140960 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.07. NMt Factor Income from Aboad| -1959 -2829 -2816 -2990 -2868 -2.1 -2.6 -2.2 -2.2 -20OI. GNP 92720W 106741 12I4261 1322I41 130971 97.91 97.41 97.8 97.8 1 9o0 -

SOww CWWl aN* of 8d LO"

TABLE 1.4: MACROECONOMIC BALANCES 1985-1992(roent of GDP at Cufent Market Pdke ())

1.Foreign Savinp 10.6 9.5 B. .671 . 785.

2. Private Sectr2.1 Gros s ODomest tment 9.9 9.6 10.9 9.1 11.7 13.5 13.3 16.9

(olw Change in Stocks) 0.1 0.1 0.1 0.3 0.2 0.3 0.3 0.22.2 Prvate (Natonal) avIg 11.0 12.4 14.0 16.2 15.8 17.9 17.1 1892.3 Inve"tme minus Savings -1.1 -2.8 -3.1 -7.1 -4.1 -4.4 -3.8 -2.0

3. Cetral Govemmnt3.1 Capital ExendItue 13.9 14.1 12.4 13.7 10.0 8.7 9.6 6.8(Indclung ne lening3.2 Curent Savins 2.2 1.8 1.3 -2.0 -1.2 -1.2 -2.0 "0.6a3 lnvetntminus avlns 11.7 12.3 11.1 15.7 11.2 9.9 11.6 7.4

4. Total4.1 Gross Domestic Investm 23.8 23.7 23.3 22.8 21.7 22.2 22.9 23.74.2 Domeste Savinrs 11.9 12.0 12.8 12.0 12.2 14.3 12.7 15.34.3 Natol Savings 13.2 14.2 15.8 14.2 14.6 18.7 15.1 183

Memorandun ItemShare of Gross Dometc Invesmet 44.5 40.1 34.3 37.7 32.7 24.8 34.1 22.8Financed b ForeiWgn Savings (%) I__I__ I__ I_ I ___ I_

SoeCw"Hula*ofSdL&7k

TABLE 1.6: EXPENDfTURE ON GROSS DOMESTIC PRODUCT

Rs MillsGross CapiW Formation 42463 45900 50562 54722 71455 85156 100507

Public 25177 24782 2 26767 26145 31451Governnt 884 11174 13125 14391 12665 15883 16189Public Corporations 15593 13606 13107 12376 13480 15568

Prive 17286 21118 24330 27956 45310 53705 84318lw Change In Stock 137 148 601 473 1038 950 1000

Conumptio 157850 171487 195306 221090 275692 325096 358640Prhvae 139370 151949 173457 194680 244288 288214 318530Govenmment 10480 19538 21849 26410 31404 36862 40110

Gross Domestic Expendture 200313 217387 245868 275812 347147 410252 4S9147Exports G8NF8 42568 49559 57885 68666 97117 107016 137167Inpots G8NFS 63407 70223 81771 92587 122481 144674 173024GDP at marke prkes 179474 196723 221982 251891 321783 372594 423290

Percent of GOP at Current Ma Pd ()Gross Capital Formation 23.7 2&3 22.8 21.7 22.2 22.9 23.7

Puble 14.0 12.6 11.8 10.6 8.1 84Govement 5.3 5.7 5.9 5.7 3.9 4.3 3.8Public Corporations 87 6.9 5.9 4.9 4.2 4.2

Prvte a9 10.7 11.0 11.1 14.1 14.4 19.9WwC tiun InStock 0.1 0.1 0.3 0.2 0.3 Q3 0.2

Consumplon 88.0 87.2 88.0 87.8 85.7 87.3 84.7Prvate 77.7 77.2 78.1 77.3 75.9 77.4 75.3Govenmen 10.3 9.9 9.8 10.5 9.8 9.0 9.5

Gross Domesilc EXpendiure 111.6 110.5 110.8 109.5 107.9 110.1 108.5Exprs G & NFS 23.7 25.2 26.1 27.3 30.2 287 32.4lmpottG & NFS 35.3 35.7 36.8 36.8 381 38.8 409National Savings 14.2 15.3 14.2 14.6 18.7 15.2 18.3Dometic Savings 12.0 12.8 12.0 12.2 14.3 12!7 15.3Public 1.8 1.3 -2.0 -1.2 -1.2 -2.0 -0.6Prvate 10.2 11.5 14.0 13.4 15.5 14.7 15.9

Net Facto bncome -2.2 -2.2 -2.4 -2.3 -2.1 -2.0 -1.8Nbd Prvate Transfers 4.4 4.7 4.6 4.7 4.5 4.5 4.8

Memo Items3rowth Pate %

Consumption 10.3 8.6 13.9 13.2 24.7 17.9 10.3PopuLion 1.5 1.5 1.4 1.3 1.1 1.5 0.9Col: Cons' Pri In: (CCPI) &0 7.7 14.0 11.6 21.5 12.2 11.4Real Per Capita Consumption 0.8 1- .-. 61 -1.4 1 0.3 2.6 3.6 -1.8*- Ivmen daa ohe ilc copation seciorarid ih privae sector are not avalb eeatyIn1992

Souce: Cew Dan* of Sd Lanka

TABLE 1.6: COMPOSMON OF GROSS CAPfTAL FORMATION

R1M O1. Gross Capital Formation 22465 30527 42483 45900 50562 64722 71455 85156 100507

Fixed Cxapit Formation 20845 30279 42326 45752 49961 64249 70417 84206 99507Chanes hI Stocks 1620 248 137 148 601 473 1038 950 1000Owne0 :iPublic Secto 13370 15902 25177 24782 26232 26767 26145 31451

Governentf 5689 4944 9584 11174 13125 14391 12665 15883 16189Publc Corporations 7681 10958 15593 13608 13107 12378 13480 15568

Prvat Sector 9095 14625 17286 21118 2430 27955 45310 53705 843182. Fxed Capital Fomaton 16136 25413 32692 34536 37156 39943 57910 68368 83373

Priv & Publlc CorporatonPlantng, Roplaing & Land Develpmen 264 433 1126 965 1201 1365 1448 1493 1162Building & Other Construction 6270 8988 17346 18686 20931 22521 35239 38270 46388PlFnt & MaChIney 3831 6329 8534 9842 9965 9152 12309 15143 11047Transport Equpmefnt 4549 7063 1931 1973 1841 2730 5730 9208 14398Other Capital Goods 1222 2600 3755 3070 3218 4175 3184 4254 11378

Relative Composilion (%)3. Gross Captl Formation 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Fixed Capita Fomation 92.8 99.2 99.7 99.7 98.8 99.1 98.5 98&9 99.0Changes In Stocks 7.2 0.8 0.3 0.3 1.2 0.9 1.5 1.1 1.0Ownership:Pubic Sector 59.5 52.1 59.3 54.0 51.9 48.9 36.6 36.9

Government 25.3 16.2 22.6 24.3 26.0 26.3 17.7 18.7 16.1Public Corporations 34.2 35.9 36.7 29.6 25.9 22.6 18.9 18.3

Prvate Sector 40.5 47.9 40.7 46.0 48.1 51.1 63.4 63.1 83.94. Fbxed Capital Fomation 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Prvate & Public CorporationPlantng, Replanting & Land Development 1.6 1.7 3.4 2.8 3.2 3.4 2.5 2.2 1.4Building & Other Constructon 38.9 35.4 53.1 54.1 56.3 56.4 60.9 56.0 54.4Plant & Machnry 23.7 24.9 26.1 28.5 26.8 22.9 21.3 22.1 13.3Transpor Equipment 28.2 27.8 5.9 5.7 5.0 6.8 9.9 13.5 17.3Other CapitW Goods 7.6 10.2 11.5 8.9 8.7 10.5 5.5 6.2 13.6

TABLE 1.6: COMPOSITION OF GROSS CAPITAL FIORATION

RelaieComoson()5. Govwrmt Capitl Expendtu 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Fno Cl on:Genal Public Servic 4.8 6.4 4.7 6.5 9.9 9.4 13.5 7.4 9.6Soidal Serce 17.2 9.9 10.0 11.3 11.4 18.8 11.3 9.1 19.7Education 3.5 2.9 4.9 3.5 3.6 5.7 3.9 3.6 6.2Heamlt 4.7 1.1 1.6 3.8 5.4 4.7 4.8 3.4 6.3HousIn 8.1 5.3 2.2 1.9 2.1 3.0 1.9 1.6 3.7Econoic Servces 72.1 83.6 84.8 81.2 77.2 73.7 71.6 79.6 66.4Agculte & lfption 36.6 65.2 29.4 31.3 23.3 19.6 19.5 18.6 16.6Manuacturng & Minng 4.7 5.0 3.1 4.5 1.2 1.8 0.4 0.5 0.4Eneg & Water Supply 4.4 4.5 9.8 12.6 19.5 17.7 24.3 19.2 17.6Transport & Communlcaton 15.0 13.2 29.5 21.7 22.4 25.0 16.1 32 24.1Trade & Commec 1.1 1.5 1.7 1.2 0.4 0.2 0.8 0.7 1.1Otes 5.9 0.0 0.6 1.1 1.5 3.1 3.6 3.8 2.3- Iwvstment data of the public corporaon sector and the prvate sector are not aadWe seperately In 1992.

So.w Ceta Bank of 3d Lanka

TABLE 1.7: COMPOSfflON Of PUBLIC SECTOR INVESTMENTS

1.Apicure & FPWbs 7910 7739 8161 am7 7201 6578 6550 72472. Indusrl, Tousn & Trtad O 003 So 12t6 1728 2 9

3. Human Stlmnts 1582 44 gm6 1647 167 3600 5384 7226

4. Ecnomlc kratuctu 5944 9710 11644 15463 9671 15294 1840 19172

5. Soca tdrariuctur 1272 2066 2974 2347 2306 2867 3402 4707

6. MLsoeflansau 3664 4683 2161 1406 4392 2832 3283 4458

Ttda 20362 25671 27M00 28612 260 326 4045 4392

1. Al9douIr&Fhwlw 68 8u 29.6 24.0 273 al.0 162 1s2.Indwelis.Tbursm 0. 0. 2.2 .1 4.8 5. 7.1 t1. "Wmasottiunt 7.8 56 75 65 7.0 10.9 14 1

4. Economb, frliui@ 22 30 42.2 54.0 35. 46.5 46.7 43.85. whilrastructu 62 6.2 1" 62 86 8. 10.86 MIscalno 17.9 17.9 7.8 5.2 16.4 &. &1 10.2

TOtW 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0Pron tofe DPatc ntdaa P (4b)

1. Agrkult &Flshwreo 4.9 4.3 4.1 &1 2.9 2.0 1.8 1.72 lndustrl. TourIsm 0.0 MO 0.3 0.3 0.5 0.5 0.8 0.2& Human S uttlem 1.0 0.8 1.0 0.8 Q7 1.1 1.4 1.74. Ecomic Infrasnrcture 3.7 5.4 5.9 7.0 3.8 4.8 5.1 4.5S. socl"llSucwo 08 1.2 1.5 1.1 Q9 0.9 09 1.16. Mscelafou 2.3 2.6 1.1 0.7 1.7 09 0. 1.1

Total 12.5 14.2 14.0 12.9 10.6 10.2 10.8 103.SOtMe: ODpaitmt Of Natia Plmnng

TABLE 1.8: SECTORAL GROWTH RATES AND RELATIVE CONTRIBUTION TO INCREASE

1. Agiculture, Forestry & Fishkng 8.S 1.9 -1 .5 1.9 23 .9 31.2 9.4 -7.9 lt.l 14.8 0Q9A9rFUmo 1 0.4 0.8 -2.3 2.0 2. .8 32.2 3.6 -10.5 9.9 14.3 -3.3Tea 12.6 3.2 -25.7 -0.5 2.7 -4.8 4.5 1.6 -13.0 -0.2 1.7 -6.0Rubber 3.0 -8.8 1.1 -1.5 -0.9 -1.7 0.3 -1.1 0.1 -0.2 -0.2 -0.5Cooonuts 1.6 -13.3 9.0 -0.6 0.0 -1.4 0.7 -7.3 4.4 -0.4 0.0 -1.5Paddy 21.3 -5.9 -2.0 0.7 1.9 3.8 14.9 -8.3 -2.1 0.9 2.6 -4.2Oter 7.8 8.0 OA 4.3 4.3 6.3 11.8 16.6 0.9 9.9 10.2 8.9

Foresty 2.3 3.8 2.0 2.3 2.2 2.7 0.6 1.3 0.7 0.9 0.9 1.0Fishing -5.0 12.0 4.1 0.6 -1.2 3.5 -1.6 4.6 1.8 0.3 -0.7 32

2. Mining and Quarrying 9.1 -10.0 -6.0 4.0 7.2 -2.6 4.3 -6.5 -3.7 2.3 4.8 -5.13. Manufacturng 9.5 6.8 9.0 6.7 6.5 8.4 25.8 25.5 37.5 27.0 25.5 31.4

Tree Crop Processng 8.4 -5.6 -11.2 0.4 2.7 -3.1 3.6 -3.3 -6.5 0.2 2.0 -4.9Factory Industry 10.2 9.5 13.0 9.2 8.7 10.9 21.1 27.2 42.2 26.7 24.0 34.6Smaf & Olher lndusty 4.7 5.4 5.1 0.1 -1.1 5.1 1.1 1.6 1.7 0.1 -0.5 1.7

4. ConsuctIon 2.9 3.1 7.0 2.0 1.2 4.3 3.3 4.6 41.0 3.7 2.3 7.75. SevIces 4.3 6.2 5.3 4.6 4.3 5.3 35.4 67.1 63.2 55.9 52.7 65.1ElecticIty, Gas, Water & Sani"SrySvcs. 10.2 7.1 5.4 5.7 5.6 7.5 2.1 2.0 1.7 1.7 1.7 1.8Transport, Storage & Communication 3.8 7.8 6.0 4.4 3.8 5.9 7.0 18.9 16.2 12.5 10.8 17.5Wholesale & Retai Trade 3.8 7.8 5.8 4.4 3.8 5.7 12.1 34.5 28.8 22.7 19.7 31.7

Banking, Insurance & Real Estate 6.3 4.2 6.0 6.9 7.4 5.5 5.2 4.6 7.1 7.6 8.2 5.8Ownership Of Dwellings 1.5 1.5 0.9 1.6 1.7 1.3 0.7 0.9 0.6 1.2 1.3 0.8Public AdministratIon & Defense 3.5 -0.8 2.3 8.3 10.3 1.7 2.9 -0.9 2.5 7.7 10.0 0.8Other Services 9.1 8.4 6.7 2.2 0.9 8.0 5.5 7.0 6.2 24 1.0 6.6

6. GDP 6.2 4.6 4.3 4.1 4.0 5.0 100.0 100.0 100.0 100.0 100.0 100.07. Net Factor Income from Abroad 0.6 -2.9 2.2 -2.0 -2.5 -. 4

8. GNP 6.4 4.8 4.5 4.1 4.0 5.1 100.5 97.1 102.2 98.0 97.5 99.6

Sourcea Ce** Da* ofSd Lanta

TABLE 1.9: TRENDS IN PRINCIPAL AGRICULTURAL CROPS

Pleducft Mn L 191 214 213 227 20J 233 241 179R dme odd urxwd teik Hoeta 24744 231650 22149 22168 221110 221750 22t6M 2211W

Sld WI8m '000 MIt. tons 109.9 M49 1310 1310 VA 134.1 117.9 loYbid per hwetat (a) KC m 24 96 102 l 3Z 01 107 7Cost of p podon RsLK9. 1 35.00 3999 43.98 49.70 57.65 58.41 82.43AVerg pric- CAW"3 net RSlf 17.73 35.39 38.06 41.59 52.10 65.72 57.13 60S.- Export ne RJKg 33.41 60.62 52.97 55.95 6691 91.78 84.12 81.50Replned annual Hectares 2156 1672 1503 1592 1551 1568 1m 1417planted cumulati Hectares 36217 45082 46203 49795 51346 59 54705 56122

2. RubberPloduction Mn. Kgs 133.2 137.5 121.8 122.4 110.7 '13.1 103.9 105.0Regered extent under rubber Hectares 227335 204293 201861 200248 199648 199048 198451 176156Fertilizer Msss 000 Mt. tons 22.0 24.2 23.4 25L. 226 22.2 13.7 127Area under tapping Hectres 185673 154436 147464 145496 147285 146325 147048 148250Yied per hectars KgL 718 894 826 841 752 m 706 708Cost d production RsKtg 8.20 13.67 13.95 13.41 15.06 17.92 19.1 2L0.6Avweage prie- ClomboZ adt RLstg 10.62 15.90 19.87 24.40 22.63 22.93 23.59 29.28- Export ne Rbt4 21.42 21.34 27.63 37.33 36.18 35.50 3353 35.06Repauntd annual Hbetares 5434 6694 5635 4167 6147 5202 5190 1722Repaned cumnulatin Heclares 149948 178747 190293 194460 200607 20MM09 210999 21272

& CoconutProducton Mn. nmts 2026 2958 2291 1936 2484 2532 2164 2380Fertlilzer issues '000 Mt. Ions SS.8 41.0 42.2 42.0 38.5 23.6 28.8 33.8C4ot of production RS/nut 0.40 0.64 0.73 0.81 0.85 1.11 1.70 1.97Avrage eport price l.o.b.(b) Rsnut 3.15 2.55 2.64 4.00 3.36 3.63 4.54 8.61

4. PaddyProduction 000 MLt tons 2133 2661 2128 2477 2063 2538 2389 2335Area-sown '000 Hectares 845 882 781 868 727 7 817 803- Harvested '000 Hectares 816 865 679 816 690 82n 791 761- Under Improved varltes '000 Hectares 683 882 796 843 739 08 744 627Fertilier issues '000 Mt. tons 145.1 153.0 151.0 204.0 156.2 143.6 179.3 193.3Yied per hectare Kgs. 2927 3465 3564 3413 3374 3453 3398 344.7Guaranteed price Rsibushli 50.00 7Q000 7.0 80.00 80.00 110.00 136.00 138.00Purchas underK PS (c) 'OOO Mt. tons 211 101 64 105 5 31 44 7

(a) Estimated as: d - oplr d areaO) Onl mawo threee

(c) Guaranteed Price SchemeSorce Cent Bank of Sd Lanka

TABLE 1.10: COMPOSITION OF INDUSTRIAL PRODUCTION

llu~~~~~~~~~~IMlol 1. Food, BwandaMTobaooo 5246 10497 12129 12962 14675 184SB 21965 30003 34157 2A4 21W2. Texdike WeaOng Apparel & Leather Products 3863 O505 12068 15428 18166 22073 27930 33854 482 44.2 41.73 Wood and Wood Product 3s1 705 632 6n 640 w m 802 1005 0.6 0.54. Paer and Papar Producs 725 1187 1289 1372 1492 1458 1880 2214 2586 1.8 1S5. Chetcals Petroleum, Coal. 13099 13104 11088 13477 13681 12041 21215 20140 21217 8.0 10.2

Rubber and Pastc Products

6. Non-nmetalc Miner Producs 1370 1854 2053 2158 2267 6007 7554 8181 9892 U 10.37. Basic Mealo Products 262 123 281 307 487 792 10086 1264 1417 1.1 1.3& FabrIdced Metal Productu MachInry 904 1592 1757 2006 2477 3182 4199 5093 5948 4.9 4.7

& Trsport Equipments9 Others 74 125 136 155 178 231 2986 2373 2658 2.5 34

Tota 25904 38692 41453 48540 54063 64907 8S756 103924 127809 1000 100.0

1. Food. BeveragOs and Tobacco 20.3 27.1 29.3 26.7 27.1 28.4 25.3 28.9 28.2. Toxfte WeaOing Appare & Leate Producs 14.9 24.6 29.2 31.8 33.8 34.0 32.2 32.6 3833. ood and Wood Producte 1.4 1.8 1.5 1.4 1.2 1.0 0.8 0.8 0.84. Pp and Pap rProducts 2.8 3.1 3.1 2.8 2.8 2.2 2.2 2.1 2.05. Chemtial Petroeum. Coad. 50.6 3&9 26.7 27.8 25.3 18. 24.5 19.4 16.6

Rubber and Psc Poductx6. Non-metallc Minrwal Products 5.3 4.8 5.0 4.4 4.2 9.3 8.7 7.9 7.77. Easic Meta Products 1.0 0.3 0.7 0.6 0.9 1.2 1.2 1.2 1.18. Fabricated Metal Products. MachIney 3.5 4.1 4.2 4.1 4.6 4.9 4.8 4.9 4.7

&Transpo EquIpmefts

9. Others 0.3 0.3 0.3 0.3 0.3 0.4 0.3 2.3 2.1

, ., . . ........... ______ __ tOO100.0 100. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 .

SowNe Cetl Ba,* Of Sd Lank

TABLE 1.11: PERFORMANCE IN THE PUBUC SECTOR AND THE PRIVATE SECTORIndex 1982.100

A. Output VOUo ltnd rmX of Me*r Cro 0:TotalTea 100.0 114.0 112.6 113.6 120.8 110.2 124.2 128.2 96.3Rubber 100.0 109.8 110.1 97.3 97.8 88.4 00.3 83.0 83.9Coconut 100.0 117.3 120.5 90.9 76.8 98.6 100.4 8.6 94.4Paddy 100.0 123.4 120.0 98.7 114.9 95.7 117.7 110.8 108.3Pubic SectorTea 100.0 103.8 99.7 06.8 99.1 91.4 95.6 95.5Rubber 100.0 95.3 97.4 92 1 93.0 80.2 90.0 86.5CVoonut 100.0 145.6 1338 91.2 68.6 111.1 1031 87.2Pivate SectorTea 100.0 148.9 156.5 171.8 195.1 174.6 221.9 239.8Rubber 100.0 117.4 116.7 100.0 100.2 92.7 90.0 81.1coconut '100.0 16.8 120.3 90.9 76.9 98.3 100.4 8.6 . aPaddy 100.0 123A 120.0 98.7 114.9 95.7 117.7 110.8

S. Industrial OWut Index (St Cotant Pries 1802)

Tota 100.0 105.0 117.6 127.0 134.6 142.7 162.7 179.0 200.4PiubI 100.0 94.0 101.6 100.5 99.5 78.8 89.8 82.4 91.5Private 100.0 120.0 138.0 158.7 176.2 202.6 230.9 263.3 308.0

C. Investment Value Index (at Consunt Prices 1982)

Total Investnents 100.0 87.9 92.9 96.3 93.8 88.0 95.2 102.6 108.7Publi¢ 100.0 99.1 105.7 99.8 93.4 82.7 66.9 72.7 aGovernment 100.0 109.3 129.4 144.7 150.3 143.0 104.2 118.2 108.1Corporaftons 100.0 94.5 95.0 79.5 67.7 65.5 50.0 52.3 A&

Private 100.0 75.7 78.9 92.4 94.2 93.9 126.0 135.1 147.6- Comparable data for 1992 are not yet available due to privatlsation of the management of estates ownedby the JEDB and SLSPC In July 1992.- Investent data of the pubic corporaton sector and te prhate sor are not availa separately In 1992.

SK800.: Coe"a* Ofnk d Lanka

TABLE 1.12: ANNUAL RAINFALL INDEX(Milmetrs)

Wet-Zone

Cobmbo 2528 1457 2451 2036 2268 1967 2097 2575Ratapura 3742 3547 3013 3912 3734 3280 3321 3536Kandy 1885 1723 1629 1685 1848 2035 1768 1516Dlylawa 1662 1795 1683 1620 1487 1570 1515 1273Nuwara-Eliya 2045 2153 2678 1742 2214 1758 1836 1842Dry-Zone

Anuradhapura 1355 1115 1197 812 1104 1299 1457 940Trlnoomalee 1618 1522 596 1062 1302 1387 1288 1599Hambantota 1074 973 890 585 826 1193 1284 603

Inebx 1951-80 100We-Zone

Colombo 100 58 97 81 90 78 83 102Ratnapura 100 95 81 105 100 88 89 94Kandy 100 91 86 89 98 108 94 80Dlyatalawa 100 108 101 97 89 94 91 77Nuwara-Eliya 100 105 131 85 108 86 90 90Dry-nieAnuradhapura 100 82 88 60 81 96 108 69Trlncomae 100 94 37 66 80 se 80 99Hambantota 100 91 83 54 77 111 120 56

Source: Oep_rtme of Meteooogy

TABLE 1.13: DROUGHT IMPACT

A. Production:

1. Tea Production Mn. Kgs. 211 213 227 207 233 218 241 179 -23.2 -18.0

2. Rubber Production Mn. Kgs. 138 122 122 111 113 121 104 105 -7.1 -13.4

3. Coconut Production Mn. Nuts 3039 2291 1936 2484 2532 2456 2184 2380 -6.0 -3.1

4. Paddy Production '000 Mt. tons 2588 2128 2477 2063 2538 2359 2389 2335 -8.0 -1.0

5. Tree Crop Processing Rs. Mn. 3225 3340 3273 3257 3530 3325 3332 2959 -16.2 -11.0(At Constant (1982) Prices)

6. Electrcity Total Mn.kWh 2652 2708 2800 2858 3150 2834 3377 3539 12.3 24.9Hydro 2645 2178 2598 2802 3145 2674 3116 2900 -7.8 8.5Thermal 7 530 202 56 5 160 260 639 12680 299

B. Extemal Sector

1. Export VolumesTea Mn. Kgs 208 201 220 204 216 210 212 182 -15.7 -13.3Rubbet Mn. Kgs 110 106 99 86 87 98 76 79 -9.2 -19.1Coconut Mn. Nuts 1105 538 224 572 508 589 367 412 -18.9 -30.1

2. Import VolumeRice '000 Mt. tons 231 113 210 316 172 208 133 237 37.8 13.7Wheat '000 Mt. tons 681 578 612 726 577 635 670 709 22.9 11.7

Source: Centrl ank of Sri Lanka

TABLE 1.14: SUMMARY OF CENTRAL GOVERNMENT FISCAL OPERATIONS, 1987-93

Tolal Revenue adGnf 482 4837 888 74681 809 9497 1102ToWa Revenue 42145 41749 53979 67964 7B179 86117 101977Tax 36119 35946 47513 61206 66157 76692 94377Non-tax 7026 5803 6466 6758 8022 9425 7600

Grant 4677 6588 6407 6697 7870 8280 8950

Tota Ex. & Net Lendlng 63894 76532 82164 99814 119527 117627 141917Curret 39560 46132 56884 71771 83756 8B726 97437Cmapta & Net Lending 22816 22878 20750 19529 25804 28020 35436Net Lending 1518 7522 4530 8514 10467 88l 9044

Current Account SurlDef(-) 2585 -4383 -2905 -3807 -7577 -2609 4540

Defit (efoe rants) -21749 -34783 -28185 -31850 -43348 -31510 -39940

De"ii (aftr gants) -17072 -28195 -21m -25153 -35478 -23230 -30989

FInaMni 17072 28195 21778 25153 35478 23230 30989

Foreign eorowings 6716 7128 5926 11644 19329 7984 19489DIsbursements 10406 12337 11668 16550 25969 14569 25600A mortiations -4690 -5209 -5742 -496 -64 -6 -6111

Net Domnestc 11356 21067 12373 16986 16149 15246 11500Bank finanng 3541 10153 -3286 374 -876 -2321 -1500Non-bank financing 7815 10914 15659 16612 17025 17567 13000

Afrears 0 0 3478 -3478 0 0 0

TABLE 1.14: SUMMARY OF CENTRAL GOVERNMENT FCAL OPERATIONS, 1987-O

Percent of GOP at Ctfrrnt Market Pdos (9b)

T'a Revenue and Grants 23.8 21.8 24.0 23.2 22.6 22.3 22.4Total Revnue 21.4 18.8 21.4 21.1 20.4 20.3 20.6Tax 17.9 16.2 18.9 19.0 18.3 18.1 19.1Non-tax 3.6 2.6 2.6 2.1 2.2 2.2 1.5

Grants 2A 3.0 2.5 2.1 2.1 2.0 1.8

Toal Exp. & Net Leng 32.5 34.5 32.6 31.0 32.1 27.8 28.7Current 20.1 20.8 22.6 22.3 22.5 21.0 19.7Caplt & Net Lendig 11.8 10.3 .2 6.1 6.8 6.8 7.2Net LendIg 0.8 8.4 1.8 2.6 2.8 0.2 1.8

Current Account 8urlDef(-) 1.3 -2.0 -1.2 -1.2 -2.0 -0.6 0.9

Defc (before Wafs) -11.1 -15.7 -11.2 -9.9 -11.6 -7.4 -8.1

Deft (after grant) -8.7 -12.7 -8.6 -7.8 -9.5 -5.5 -6.3

Ficng 8.7 12.7 8.6 7.8 9.5 5.5 6.3

Foreign Borrowings 2.9 3.2 2.4 3.6 5.2 1.9 3.9Disbursemnt 5.3 5.6 4.6 5.1 7.0 3.4 5.2Amozaftons -2.4 -2.3 -2.3 -1.5 -1.8 -1.6 -1.2

Net Domestic 5.8 9.5 4.9 5.3 4.3 3.6 2.3Bank financing 1.8 4.6 -1.3 0.1 -0.2 -0.5 -0.3Non-bank financing 4.0 4.9 6.2 5.2 4.6 4.2 2.6

Saurw Cea a*k an T0Reawy

TABLE 1.15: COMPOSITION OF GOVERNMENT EXPENDITURE

Parer of GOP at Currar ak P06 (Ob)E*efure 42. 330 33 3L6 31.1 34.0 33&0 32.5 34.5 3Z6 31.0 32.1 2. a

Cunent l&S 17.2 18.5 18.1 160 20.1 t8.9 20.1 20.8 2Z6 22.3 22.5 21.0 19.CapP"l t18.2 12 1.5 13.0 13.0 13.3 129 11.6 10.3 8.2 .1 68 6.6 7.2

Lendng - Repamn 5.9 2.5 -0.3 1.5 2.1 0.7 1.1 0.8 3.4 1.8 2t 2t 0.2 1.8Operatona 7.5 61 6.5 6.3 60 10.0 8.4 9.4 9.3 10.1 9.4 9.6 9.2 8.7Ss and 5.0 4.2 4.6 4.0 3.6 4.2 4.5 4.1 4.5 5.7 4.9 4.8 4.9 4.7Other Goods 26 1.9 2.0 2.4 2.4 5.8 4.0 5.3 4.8 4.4 4.5 4.8 4.3 4.0

Inleest 3.4 4.4 S. 1 5.4 4.4 4.6 4.9 5.2 5.7 5.7 6.4 5.9 6.0 6.2Foreign 0.6 0.8 0.9 1.0 1.1 1.2 1.2 1.3 1.3 1.3 1.1 1.1 1.1 0.9DomesIc 2.7 9U6 4.2 4.4 3.3 9.4 9.7 3.9 4.4 4.4 5.3 4.8 4.9 5.3

Curent Tram: 7.6 6.7 68 6.2 5.7 5.5 5.6 5.6 5.8 68 6.5 69 5.7 5.2PUbic Enterrse 0.6 04 1.0 1.5 1.1 0.3 1.0 0.6 0.7 0.9 08 0.5 0.4 0.3statuory Bod"e 03 02 0.3 0.1 0.1 0. 0.6 0.5 0.6 0.7 0.6 0.4 0.3 04LocalGoernment G2 0.2 Q3 0.3 0.3 .3 0.3 0.3 0.4 0.4 0.4 0.3 0.3 0.2Hosehod 6.1 5.7 5.1 4.3 4,2 4.3 3.7 4.2 4.1 4.8 4.7 5.8 4.7 4.3Pension 1.1 1.1 1.4 1.5 1.4 1.7 1.7 1.6 1.9 1.9 1.4 2.4 1.9 1.8

Peent of Total G(overnment Spenditure Sb)Expedlture 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0Curet 434 a23 54.7 55.5 51.5 59.1 57.4 61.9 6Q3 69.2 71.9 70.1 75.4 68.7CapIta 42.7 40.2 460 40.0 41.6 39.0 39.3 35.7 29.9 25.3 19.6 21.2 23.8 25.0

Lnding - Repamt 13.9 7.5 -a8 4.5 6.9 1.9 3.4 2.4 9.8 5.5 a.5 8.8 0.7 6.4Opaoal 17.7 18.6 19.4 19.4 19.2 29.5 25.6 28.9 27.0 31.0 30.2 30.0 33.3 30.2salaries and 11.6 128 13.6 12.1 11.6 12.5 13.6 12.5 13.1 17.6 15.8 15.0 17.7 16.3Other Goods 60 5.9 5.8 7.3 7.6 17.0 12.0 16.4 13.9 13.5 14.4 14.9 15.6 13.9

ServisInterest 7.9 13.3 15.2 16.7 14.1 13.4 14.8 15.9 16S 17.5 20.7 18.5 21.5 21.8Foreign 1.5 25 2.7 3.2 3.4 3. 3.7 4.0 38 4.1 3,7 3.4 4.0 3.2Domestc 6.4 10.8 12.5 13.5 10.7 9. 11.1 11.9 12.7 13.4 17.0 15.0 17.5 18.5

Current Trams 17.8 20.3 20.1 19.0 18.2 18.2 17.0 17.1 16. 20.7 21.0 21.6 20.7 16.Public Endterprses 1.4 1.3 2.9 4.5 3.7 0.9 3.0 1.8 2.1 2.8 2.6 1.5 1.5 1.0Statutory Bos 0.8 Q7 Q7 0.4 0.2 1.7 1.7 1.4 1.8 2.1 1.8 1.2 1.3 1.3Local Goveirnent 0.6 0.6 0.9 1.0 0.9 0.9 1.0 1.0 1.2 1.1 1.2 0.9 0.9 08Househos 14.3 17.3 15.0 13.2 113 12.7 11.2 12.9 11.8 14.8 15.3 16.1 17.0 14.9Pendon 2.5 3.2 4.2 4.6 4.6 4.9 5.0 5.1 5.41 5.8 1 4.5 7.4 6.81 B4

Soame: Cena am* Of S, Laa

-i z

TABLE 1.16: COMPOSITION OF GOVERNMENT REVENUE AS A RATIO OF GDP(Percentage Values (9))

Tax Revenue 18.3 1B.1 14.9 16.4 19.5 18.7 17.4 17.9 16.2 18.9 19.0 18.3 18.1 19.1

I. Income Tax 3.1 2.4 2.9 2.8 3.6 3.4 2.7 2.5 2.1 2.0 2.3 2.8 2.7 2.5Personal 0.6 0.7 0.8 0.7 1.1 0.9 0.8 0.8 0.7 0.9 0.9 0.9 1.1 0.9Corporate 2.6 1.7 2.1 2.0 2.4 2.6 1.8 1.7 1.4 1.2 1.4 1.7 1.7 1.7

II. Taxes on PropeFry 0.4 0.3 0.3 0.3 0.3 0.3 0.4 0.8 0.8 1.1 1.0 1.0 0.7 0.7l11. Taxes on Central Bank 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.9 0.8 0.8 0.6 0.3

HoldWs of TBsIV. Taxes on Goods & Services 5.3 5.7 6.4 7.2 7.1 8.2 8.2 8.0 7.7 8.3 8.9 8.6 9.1 10.8

General Services & 2.5 3.3 4.1 5.1 5.3 6.3 5.6 5.4 5.6 5.8 6.3 5.8 5.8 6.4Tumover Tax

ManufacturIng 1.6 2.0 1.8 2.2 2.0 2.3 1.8 1.9 1.6 1.8 2.1 2.1 1.9 2.3 -'

Non-ManufacturIng 0.9 1.3 1.5 1.6 1.3 1.6 1.3 1.2 1.5 1.2 1.2 0.8 0.8 0.7Imports 0.0 0.0 0.7 1.3 2.1 2.4 2.5 2.3 2.4 2.8 3.0 2.8 3.0 3.5Defenoc Levy 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.9 1.1Excise Tax 2.7 2.3 2.1 1.9 1.7 1.8 2.5 2.4 2.0 2.3 2.5 2.8 2.5 3.0Liquor 1.0 0.9 0.8 0.7 0.7 0.7 0.8 0.8 0.8 0.8 0.8 0.8 0.9 0.9Tobacco 1.5 1.3 1.3 1.2 1.0 1.2 1.6 1.6 1.2 1.5 1.7 1.8 1.3 1.7Others 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.3 0.3Licence Fees 0.1 0.1 0.1 0.2 0.1 0.1 0.2 0.2 0.1 0.1 0.1 0.0 0.0 0.0

V. Taxes on International Trade 9.5 7.6 5.2 6.11. 8.5 6.8 6.2 6.6 5.6 6.5 6.0 5.3 5.1 5.0Imports 3.9 3.2 2.8 3.3 4.3 5.0 5.2 5.6 4.8 5.9 5.2 5.0 4.9 4.8Exports 6.6 4.4 2.7 2.8 4.2 1.8 0.9 1.0 0.8 0.6 0.8 0.3 0.2 0.2

Tea 3.0 2.3 1.6 1.8 3.3 1.4 0.6 0.6 0.4 0.2 0.5 0.1 0.1 0.1Rubber 2.1 1.7 0.8 0.7 0.7 0.2 0.2 0.3 0.4 0.3 0.2 0.1 0.1 0.1coconut 0.3 0.3 0.2 0.2 0.2 0.2 0.1 0.1 0.0 0.1 0.0 0.0 0.0 0.0Others 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Non-tax Revenue 1.3 1.3 1.5 2.8 2.7 3.6 3.3 3.6 2.6 2.6 2.1 2.2 2.2 1.5

Total Revenue 19.6 17.4 16.3 19.2 22.2 22.3 20.7 21.4 18.8 21.4 21.1 20.4 20.3 20.6Source: Cnra Bank of Sa Lanka

TABLE 1.17: COMPOSmON OF GOVERNMENT REVENUE AS A PERCENTAGE OF TOTAL REVENUE

Tax Revenue |93.4 92.7 90.9 |86.4 87.9 84.0 |84.0 |83.3 86.1 | 8.0 |90.1 |89.5 89.1 |92.6

1. Income Tax 16.0 13.8 18.0 14.4 16.1 15.4 12.9 11.6 11.1 9.5 10.8 12.8 13.4 12.2Personal 2.9 3.9 5.0 3.8 5.2 3.9 4.1 3.7 3.5 4.1 4.4 4.6 5.2 4.2Corpwate 13.1 9.9 13.0 10.6 10.9 11.5 8.8 7.9 7.8 6.4 6.4 8.1 8.3 8.0

11. TameonPropewt 2.0 1.9 2.0 1.7 1.4 1.4 1.7 3.7 4.3 5.0 4.6 4.6 3.3 3.4L Taxes on Central Bank 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.3 3.9 4.0 2.3 1.4

Hokling of TBsIV. Taxes on Goods & Services 26.9 33.0 39.0 37.4 32.0 36.9 39.7 37.2 40.8 38.6 42.3 42.1 45.0 51.2

General Services & 12.6 19.2 25.0 26.7 23.9 28.1 27.1 25.2 29.5 27.2 29.9 28.1 28.3 31.2Tuer Tax

Manuft 8.1 11.7 11.1 11.7 8.9 10.4 8.8 8.7 8.6 8.3 10.0 10.4 9.6 11.1Non-Manuactur 4.5 7.6 9.4 8.1 5.7 7.1 6.6 5.8 8.1 5.6 5.5 3.9 4.1 3.4Imports 0.0 0.0 4.5 6.9 9.3 10.6 11.8 10.7 12.8 13.3 14.4 13.8 14.6 16.8Defence Levy 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.3 5.5ExdseTax 13.6 13.2 13.1 9.9 7.5 8.2 11.9 11.2 10.6 10.8 12.0 13.9 12.3 14A4Liquor 5.2 5.1 5.0 3.7 3.0 3.0 4.0 93. 4.2 3.6 3.9 4.1 4.4 4.6Tobacco 7.7 7.6 8.1 6.1 4.5 5.2 7.9 7.3 6.4 7.1 8.0 9.0 6.6 8.2Ofhes" 0.7 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.8 1.4 1.6Licano Fees 0.6 0.6 0.9 0.8 0.6 0.5 0.8 0.8 0.7 0.7 0.6 0.1 0.1 0.0

V. Taxes on Internaonal Trade 48.5 44.0 31.9 31.9 38.4 30.3 29.7 30.8 29.9 30.6 28.5 25.9 25.0 24.3Imports 19.8 16.5 15.7 17.4 19.6 22.3 25.3 26.2 25.8 27.6 24.7 24.4 24.1 23.3Exports 28.7 25.8 16.2 14.5 18.8 8.0 4.4 4.6 4.4 2.9 3.8 1.5 0.9 1.0

Tea, 15.5 13.3 9.8 9.5 14.7 6.1 2.7 2.7 2.1 1.2 2.4 0.6 0.4 0.6Rubber 10.6 9.7 S4.6 3.7 3.0 0.7 0.8 1.3 2.0 1.4 1.1 0.6 0.4 0.4Coconut 1.7 1.6 1.2 1.0 0.9 0.9 0.6 0.4 0.2 0.2 0.2 0.2 0.1 0.0Others 0.9 0.9 0.6 0.3 0.3 0.3 0.3 0.2 0.1 0.1 0.1 0.1 0.0 0.0

Non-tax Revenue 6.6 7.3 9.1 14.6 12.1 16.0 16.0 16.7 13.9 12.0 9.9 10.5 10.9 7.5

Total Revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0Source Cnta Ban Of Sd La""

TABLE 1.1& MONErARY DEVELOPMENTS

Not Foreg Asaf 3.2 0.3 -1.8 5.8 16.0 25.2MontZry AUftIs 0.0 -2.1 -3.4 0.8 13.7 23.4Comfwa lBans 2.7 2 3 1.8 S. 2.3 1.8

Not Domftes¢t Assets 54.7 67.8 76.8 84.7 94.7 104.6Domestc Credit 74.8 96.3 101.2 116.0 127.8 144.0Public Sector 33.8 46.4 49.0 51.0 49.5 47.8Govenwt (ne) 26.4 35.6 35.1 35.4 35.4 33.1PubGc Crporos 7.4 10.8 13.9 16.6 14.1 14.8

Prvate Sector 41.0 49.9 52.3 65.0 78.3 98.2Ot Ithms (not) -20.1 -29.0 -24.4 -31.2 43U.1 -4.4

Monetary UabWtes 57.9 67.5 76.2 90.5 110.6 129.8Money 24.9 32.2 35.1 39.9 47.1 50.5Currency 13.5 18.5 19.7 22.1 24.9 27.3DmandDeposkts 11.8 1&9 15.7 17.8 22.2 28.2

Quas-on 33.0 35.4 40.1 50.6 63.5 79.3

Net Forelgn Assets 0.6 -2.1 -3A 0.8 13.7 23.4Net Domestic AsseM 18.7 27.6 26.8 30.8 26.4 21.5Reseve Money 19.3 25.6 26.8 31.6 40.1 44.9

Percnt Chwn of YVau(%)Total Domesic Credit 16.9 28.8 5.1 14.6 10.2 12.7

Credt to Public sector 23.5 37.4 5.5 4.2 -3.0 -3.3Govemnment (net) 16.8 34.8 -1.5 0.7 0.1 -8.6Public Eneprses 55.4 46.4 28.5 12.8 -10.0 4.8

Credt to Prvate Setor 12.0 21.7 4.7 24.3 20.5 19.6Broad Money (M2) 14.5 18.6 11.3 20.5 22.1 17.4

Narrow Money 183 29.1 9.1 12.8 17.7 7.4Currency 16.6 37.0 6.3 12.6 12.4 9.8Demand Deposts 20.8 19.8 129 13.2 25.0 4.5

Quas-money 11.8 7.1 13.3 26.2 25.5 24.9Monetary Authories

Not DomSec Asset 14.1 47.7 9A 14.9 -14.3 -18.6Resere Money 6.9 32.6 4.8 17.9 26.9 12.0

Monwy Mutplifor M2 3.0 2.8 2.8 2.9 2.8 2.9Velofyt 3.6 3.S 3.S 3.6 3.4 3.3Sam= Coa" W* oft Lan"

TABLE 1.19: RELATIVE CONTRIBUTION TO MONETARY EXPANSIONBY CAUSAL FACTOFRS(Peentw vaue N)

1976 100 30 66 29 3 34 31977 100 150 64 -12 26 49 -1141978 100 87 87 -52 32 107 -741979 100 29 103 25 24 54 -321980 100 -66 226 126 16 83 -591981 100 -15 178 83 8 87 -631982 100 -8 139 72 3 64 -311983 100 10 102 6 -4 101 -131984 100 110 10 -48 -4 62 -201985 100 -15 187 116 6 65 -711986 100 0 199 90 12 97 -991987 100 1 153 60 35 58 -551988 100 -30 224 96 35 93 -941989 100 -25 65 -6 40 31 601990 100 48 96 2 11 83 -441991 100 51 59 0 -8 66 -91992 100 48 85 -12 4 93 -32

Averawe:

1977192 100 24 120 34 14 72 -441980188 100 -1 158 67 12 79 -561989192 100 31 76 -4 12 68 -61990192 100 49 80 -3 2 81 -28

M2 - Broad Money CPC - Credit to Pubic CorporaonsNFA - Net Foreign Assets CPS - Credit to Pdvate SectorTDC - Tota Domestic Credit OIN - Oher Items NetNCG - Net Credit to GovernmentSource: Cen SBank of Sd Lanka

TABLE 1.20: COMMERCIAL BANK ADVANCES TO THE PRIVATE SECTOR ANDPUBIJC CORPORATIONS BY PURPOSE

_ _ ~~~~~~~~~~~~~~~Ft$. MUDonAdvances by pun30se 38184 462 575B7 66738 81108 89168 100548Commnrdal 18958 24859 28511 31924 37285 37925 41726FInancial 730 1022 1208 1674 2220 2891 4538Agriculture 3540 6207 S630 6581 9639 12012 11275Industra 9056 10227 13352 15980 17609 18080 19297Tourism 819 807 890 737 804 963 1764Housing 2869 3953 4782 6066 8296 10393 11958Consumption 645 850 1166 1522 2155 2939 4190Other 1568 1625 1824 2251 3099 3965 S799

Advanoe by MaturityShort-term 26979 33814 38750 45702 53925 55897 61596Mediun-term 7399 8126 10439 9999 12769 17156 20668Long-term 3806 6663 8379 11038 14414 16115 18284

Ana Change %)

Advances by purpose 9.4 8.7 184 15.9 21.5 9.9Commerdal 9.2 21.9 14.7 12.0 16.8 1.7Financial -7.4 25.9 18.2 38.6 32.6 30.2Agiculture 4.5 23.5 12.0 12.9 46.5 24.6Industial 5.2 10.1 30.6 19.7 10.2 2.7Tourism 1.2 10.3 -17.2 9.1 19.8Housing 13.8 14.9 21.0 26.9 36.8 25.3Consumption 34.3 33.4 37.2 30.5 41.6 36.4Other 34.4 24.6 12.2 23.4 37.7 27.9 _

TABLE 1 20: COMMERCIAL BANK ADVANCES TO THE PRIVATE SECTOR ANDPUBUC CORPORATIONS BY PURPOSE

Percent of Total Advance (iAdvances by purpoConnnclal 49.B 5t .1 49.5 47.8 48.0 42.5 41.5Financial 1.9 2.1 2.1 2.5 2.7 3.2 4.5AgriCulture 9.3 10.7 10.1 9.9 11.9 13.5 11.2IndustrIa 23.7 21.0 23.2 23.9 21.7 20.3 19.2Tourism 2.1 1.7 1.5 1.1 1.0 1.1 1.8Housing 7.5 8.1 8.3 9.1 10.2 11.7 11.9Conswmpion 1.7 1.7 2.0 2.3 2.7 3.3 4.2Other 4.1 3.3 3.2 3.4 3.8 4.4 5.8

Total 100.0 100.0 100.0 '100.0 100.0 100.0 100.0

Advance by MaturityShot-term 70.7 69.6 67.3 68.5 66.5 62.7 61.3Medium-tenn 19.4 16.7 18.1 15.0 15.7 19.2 20.6Lo-term 10.0 13.7 14.6 16.5 17.8 18.1 18.2

Sour: Ce, rlO Dan of & Lana

TA3LE 121: CREDIT TO PUBUC CORPORATIONS

Rs. Millon

1. Ceylon Ekctct Board (CEB) 136 184 40 42 56 1369 1768 21872. Ceylon Ptroleum Corporation (CPC) 1937 2447 1s56 4219 3344 2520 3114 30363. Coorporatve Holesa Estabment (CWE) 1364 2632 3856 2836 2349 2054 2334 20524. State Plantation Corporation (SPC) 2054 2898 2935 1273 1823 1878 2011 19215. Janawasama (JEDB) 1805 2350 2960 2215 2710 3080 3222 30646. Ceon Cemet Coroaton 422 769 525 498 505 962 310 5157. Cc3lon Stee Corporation 288 813 289 186 166 293 113 788. Sr lana Ship Corporation 143 121 138 237 256 384 69 1480. Ote Copoations 268 2348 7 2571 2744 2533 2221 1749

Total 10787 13862 15636 14077 13753 15073 15152 14750

Total Domestic Credit (TDC) 96300 101200 115965 127752 127012 133301 135175 144008Corporation Credit as % of TDC() 11.2 13.7 13.5 11.0 10.8 11.3 11.2 10.2

As Percnt of Tota (46)

1. Ceylon Ecicly Board (CEB) 1.3 1.3 0.3 0.3 0.4 9.1 11.6 14.82. Ceylon Peroem Corporatin (CPC) 18.0 17.7 10.0 30.0 24.3 16.7 20.6 20.63. Coorporatlve Hosal Eablishment (CWE) 12.6 19.0 24.7 20.1 17.1 13.6 15.4 13.94. State Plantaion Corporation (SPC) 19.0 19.5 18.8 9.0 11.8 12.5 13.3 13.05. Janawasma (JEDB) 16.7 17.0 18.9 15.7 19.7 20.4 21.3 20.86. Ceylon Cement Corporation 3.9 5.5 3.4 3.6 3.7 6.4 2.0 3.57. Ceylon Steel Corporation 2.7 2.3 1.8 1.3 1.2 1.9 0.7 0.58. Sri Lanka Shiping Corporaton 1.3 0.9 0.9 1.7 1.9 2.5 0.5 1.09. Ote Corations 24.5 16.9 21.3 18.3 20.0 16.8 14.7 11.9

Total 100.0 100.0 100.0 | 100.0 100.0 100.0 100.0 100.0Source: CAl Bank of Sd Lanka

TABLE 1.22: COMPOSTON OF THE FINANCIAL SYSTEM

A. Banking Sector 49,433 73.1 251,196 60.61. Central Bank 22,832 33.8 96,835 23.12. Commercal Banks 26,601 39.3 155,381 37.5

State Banks 20,244 29.9 100,582 24.3Private Banks 6,357 9.4 54,779 13.2

B. eosit Taking Inst 6,300 9.3 45,934 11.13. NSB 5,329 7.9 30,081 7.34. Fiance Companies 636 0.9 9,062 2.45. Rural Banks 335 0.5 4,572 1.16. RRDBs - 1,419 0.3C. Long-Term Lending lnst: 405 0.6 13,882 3.37. Dev: Fin: Ins: 278 0.4 10,688 2.8

DFCC 278 0.4 3,701 0.9NDB - - 6,987 1.7

8. SMIB 127 0.2 3,194 0.80. Conractl Savings Inst: 7,711 11.4 61.191 14.89. Insurance Ins: 2,660 3.9 6,056 1.5

State Corporations 2,660 3.9 5,154 1.2Private Ins: Companies _ - 902 0.2

10. EPF 5,051 7.5 49,174 11.911. ETF - - 5,961 1.4E. Specialized Financial Inst 3,796 5.6 42,283 10.212. FCBUs 3,796 5.6 39,365 9.513. Leasing Companies - - 1,028 0.214. Merchant Banks - 1,212 0.315. TCCs - 678 0.2

Total 67,645 100 414,486 100

Source Cwa BAr* of Sd Lankt

TABLE 1.23: TREASURY BILL MARKETS

~~~~* T - S.

Amount of Treasury Bils. Rs hmon

1. Oustandng Lel (Book Value) 21142 28943 41985 50738 61175 64875 76066

2. Holding by Cntral Bank 18520 20866 30222 29119 27034 29854 217953. Holding by Commercial Banks 963 3850 4857 6113 11237 9899 106534. HoldingByNon-BankingSector 1659 4227 B906 16506 22904 25122 43618

Per Amtnn (%)5. Relative Share of Holdn

Central Bank of Sri Lanka 87.6 72.1 72.0 57.4 44.2 46.0 28.7Commercial Banks 4.6 13.3 11.6 12.0 18.4 15.3 14.0Non-Banking Sector 7.8 14.6 16.4 30.6 37.4 38.7 57.3

6. Yield on TBs Primary Market (per amum %)Nominal es on TBs3-Months 13.01 12.36 23.76 18.10 17.41 16.33 17.7012-Months _- - 19.10 18.36 17.43 19.00Real Yied on TBs3-Months 11.51 4.66 9.76 6.5 -4.09 4.13 6.312-Months _ 7.5 -3.14 5.23 7.6

6. Deposit Rates (per annum %)Savings:NSB 12.00 12.00 12.00 14.00 16.20 14.00 14.00Commercial Banks

Maximum 13.50 11.00 11.00 14.00 14.00 14.00 14.00Mlnlmtwn 10.00 6.00 5.00 5.00 5.00 4.73 3.25

12-Fixed DepostNSB 15.00 13.00 13.00 15.00 17.00 17.00 17.00Commerca Banks

Maximum 18.00 14.00 15.50 20.50 21.00 20.00 20.00Minimum 12.00 8.50 9.00 11.00 11.00 10.00 13.50

Sote: Cent iWl nkof Sd Lanka

TABLE 1.24: COLOMBO CONSUMERS' PRICE INDEX - CCPI(1982-100)

Wowifs 100.0 61.9 9.4 4.3 5.7 18.71975 Annua 47.7 45.4 76.0 29.0 100.0 50.9 6.71978 Annual 48.2 44.9 77.3 32.5 100.0 54.0 1.21977 Annual 48.8 46.1 81.7 31.5 100.0 65.3 1.21978 Annual 54.7 52.7 82.0 32.1 100.0 59.6 12.11979 Annual 60.6 58.5 84.4 40.2 100.0 66.9 10.81980 Annual 76.5 75.4 87.6 69.1 100.0 77.9 26.11981 Annual 90.2 88.7 94.2 94.1 100.0 91.7 18.01982 Annual 100.0 100.0 100.0 100.0 100.0 100.0 10.81983 Annual 114.0 112.4 106.3 133.2 100.0 115.0 14.01984 Annuad 132.9 132.8 112.3 157.1 100.0 131.8 16.81985 Annual 134.9 132.9 118.4 163.2 100.0 139.1 1.51986 Annual 145.6 142.4 136.8 165.1 100.0 159.0 6.01987 Annual 156.9 154.8 146.4 166.4 100.0 172.6 7.71988 Annual 178.8 178.1 153.3 188.0 100.0 196.9 14.01989 Annual 199.5 196.4 179.0 210.5 100.0 228.1 11.61990 Annual 242.4 242.2 222.9 236.9 100.0 270.8 21.51991 Annual 271.9 270.9 247.8 275.9 100.0 303.9 12.21992 Annual 302.9 303.3 264.3 285.9 100.0 349.7 11.41992 Jan. 291.6 294.5 259.2 281.7 100.0 318.3 11.9

Feb. 288.2 287.8 260.8 281.7 100.0 326.4 11.7Mar. 290.1 288.2 281.9 281.7 100.0 336.8 11.3Apr. 294.3 293.8 262.6 281.7 100.0 338.7 11.0May 299.2 300.8 263.6 281.7 100.0 339.1 10.7June 309.8 315.6 264.0 281.7 100.0 340.9 10.6July 304.1 305.2 264.6 288.2 100.0 347.2 10.6Aug. 301.7 298.9 265.3 290.5 100.0 359.5 10.4Sep. 305.9 304.3 265.8 290.5 100.0 362.9 10.6Oct. 307.9 305.8 267.2 290.5 100.0 368.0 10.7Nov. 315.5 314.6 267.6 290.6 100.0 378.4 11.0Dec. 326.5 330.1 268.6 290.6 100.0 379.9 11.4

Source: Deanent of Cus and Staistcs and Cetal Dn* of Sd Lank

TABLE 1.25: NOMINAL AND REAL WAGE RATE INDICES(1980=100)

Nond"u ROOe FIendices (I 980-1 00)

1980 100 100 100 100 100 100 100 100 100 100 100 100 1001981 100 109 112 103 112 111 103 112 127 127 125 128 1261982 118 118 130 119 143 139 97 121 137 146 133 146 1401983 129 118 136 128 162 157 88 138 162 162 161 163 1601964 163 132 146 155 184 176 89 157 176 176 174 177 1771985 178 147 146 188 210 206 94 164 182 190 187 191 1881986 166 162 146 177 220 208 104 177 194 202 197 202 1961987 197 1865 151 189 220 206 100 189 191 217 212 218 2141868 248 196 176 242 289 278 100 214 222 242 236 239 2401969 284 241 168 263 314 306 92 234 232 279 277 272 2781990 337 m 205 308 349 337 102 300 331 327 339 321 3461991 376 331 258 352 387 370 113 340 399 368 404 383 4071992 432 368 280 401 403 386 120 373 438 434 456 434 463

Real WagRate lnds (1980=100)1980 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.01981 84.9 92.2 95.1 87.6 94.8 93.9 103.2 95.3 107.7 107.5 105.6 108.5 107.21982 90.2 88.7 99.4 91.3 109.6 106.0 97.3 92.6 104.7 111.4 101.9 111.8 107.01983 86.8 78.9 91.4 86.0 109.0 105.1 88.5 92.8 108.8 108.7 107.8 109.2 107.51964 93.7 76.0 84.1 89.4 105.7 101.3 89.4 90.3 101.2 101.6 100.0 101.9 101.81985 93.5 77.1 78.7 88.4 110.2 108.1 94.0 92.9 103.3 108.0 105.9 108.2 106.61986 91.4 78.8 71.2 86.5 107.0 100.4 104.1 93.1 101.8 106.0 103.7 105.9 104.21987 84.2 79.0 64.4 80.8 93.9 88.1 99.9 92.2 93.2 105.9 103.3 108.1 104.51988 94.4 75.0 67.4 92.6 110.7 105.8 100.0 91.5 94.8 103.4 101.9 102.1 102.51989 89.5 76.1 59.4 83.1 99.2 96.6 91.9 89.6 89.1 106.8 106.2 104.1 106.71990 94.7 76.9 57.7 86.6 98.1 94.7 101.7 94.7 104.4 103.1 106.9 101.2 109.21991 95.0 83.6 65.1 68.9 97.8 93.6 113.1 95.5 112.3 109.3 113.5 107.8 114.41992 101.1 86.0 65.5 93.6 94.1 89.9 120.1 94.2 110.6 109.4 115.0 109.4 116.8

SNw 0wa of Cmen" and stalltos ad CeOa Bn of Sit Lank

TABLE 1.25: NOMINAL AND REAL WAGE RATE INDICES(1980-100)

Nkmnnbu Wage Rate Indices (I980100)

1980 100 100 100 100 100 100 100 100 100 100 100 100 1001981 100 109 112 103 112 111 103 112 127 127 125 128 1261982 118 116 130 119 143 139 97 121 137 146 133 146 1401983 129 118 136 128 162 157 88 138 162 162 161 163 1601984 163 132 148 155 184 176 89 157 176 178 174 177 1771985 178 147 146 168 210 206 94 164 182 190 187 191 1881986 188 162 146 177 220 206 104 177 194 202 197 202 1981987 197 185 151 189 220 206 100 189 191 217 212 218 2141988 248 196 176 242 289 276 100 214 222 242 238 239 2401989 284 241 188 263 314 306 92 234 232 279 2m 272 2781990 337 273 205 308 349 337 102 300 331 327 339 321 3461991 376 331 258 352 387 370 113 340 399 388 404 383 4071992 432 388 280 401 403 385 120 373 438 434 456 434 463

Real Wage Rate Indkes (1980-100)

1980 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.01981 84.9 92.2 95.1 87.6 94.8 93.9 103.2 95.3 107.7 107.5 105.5 108.6 107.21982 90.2 88.7 99.4 91.3 109.8 106.0 97.3 92.6 104.7 111.4 101.9 111.8 107.01983 86.8 78.9 91.4 86.0 109.0 105.1 88.5 92.8 108.8 108.7 107.8 109.2 107.51984 93.7 76.0 84.1 89.4 105.7 101.3 89.4 90.3 101.2 101.6 100.0 101.9 101.81985 93.5 77.1 76.7 88.4 110.2 108.1 94.0 92.9 103.3 108.0 105.9 108.2 106.61986 91.4 78.8 71.2 88.5 107.0 100.4 104.1 93.1 101.8 106.0 103.7 105.9 104.21987 84.2 79.0 64.4 80.8 93.9 88.1 99.9 92.2 93.2 105.9 103.3 106.1 104.51988 94.4 75.0 67.4 92.6 110.7 105.8 100.0 91.5 94.8 103.4 101.9 102.1 102.51989 89.5 76.1 59.4 83.1 99.2 96.6 91.9 89.6 89.1 106.8 106.2 104.1 106.71990 94.7 76.9 57.7 86.8 98.1 94.7 101.7 94.7 104.4 103.1 106.9 101.2 109.21991 95.0 83.6 65.1 88.9 97.8 93.5 113.1 95.5 112.3 109.3 113.5 107.8 114.41992 101.1 86.0 65.5 93.6 94.1 89.9 120.1 94.2 110.8 109.4 115.0 109.4 118.8

Soue: Oq rep t of Census WdStfstcs tad Cen Bnk of Sd Lnka

TABLE 1.26: BALANCE OF PAYMENTS(US $ Milion)

Trade Balance -886.6 -722.0 -763.5 W7.0 -702.7 -993.4 B.btsO 10OB4.7 1316.0 1476.0 1560.4 1 975.9 2040.3 21Q

ImpoU 2051.3 2038.0 2239.5 2227A4 2878.6 3033.7 3477.0Servces, et 51.9 -134.9 -153.0 -157.7 -97.2 -90.3 -26.8

Recepts 278.5 328.2 410.5 403.1 534.1 600.7 686.1Payments 226.6 463.1 563.5 560.7 631.3 691.0 712.9

Goods and Services, net -934.7 -56.9 -916.5 -824.7 -799.8 -1083.8 -993.2

Tmsfer (Net) 274.7 440.4 526.5 518.7 642.4 603.6 648.1Prvae Transfers, net 136.7 265.8 319.4 330.6 366.3 400.9 464.9

Reeipts 152.3 292.0 357.0 357.9 402.4 442.0 542.4Paynwts 15.6 26.2 37.6 27.3 36.1 41.1 77.5

Offficia Transfers, net 138.0 174.6 207.1 188.1 176.1 202.5 183.2Current Account -660.0 -416.5 -390.0 -306.0 -257.4 -480.3 -345.2

(rcent Of GDP) (-17.5) (-9.9) (-4.5) (-7.1) (-5.5) (-7.6) (-5.5)

Non-Montary Capital, not 398.3 333.2 259.7 289.8 463.2 650.0 480.4Direct Imonsmet 43.0 24.9 43.1 17.6 32.0 62.9 119.8Prvate Long-term, net 19.5 31.3 -44.0 -44.2 -43.2 -24.6 25.4

Inflows 31.2 89.7 51.1 19.1 32.4 84.8 155.0outflows 11.7 58.4 95.1 63.3 75.6 109.5 129.6

Short-term. net 178.3 3.4 16.1 92.9 64.5 80.7 122.6Govemment Longtrm, net 157.5 273.7 244.3 223.6 409.9 499.5 243.7

Inflows 261.6 347.0 408.6 385.5 536.6 633.6 418.4Outflows 104.1 73.3 164.3 161.9 126.7 134.1 174.7

Govenment Short-term, net 0.0 0.0 0.0 0.0 0.0 31.5 -31.0SOR Aflocaton 15.6 0.0 0.0 0.0 0.0 0.0 0.0Errors and Omission 45.7 -28.1 44.3 -70.0 -25.1 39.7 47.9Overall Balance -200.4 -111.4 -86.0 -86.2 180.7 209.4 183.2SouW: Cenl aN* OtSd Lank

TABLE 1.27: MERCHANDISE EXPORTS

Total P p US. $Mn. 139269 1475.Q4 156D.41 1975.93 ?S 71 251Q86ArtR 45P.0 4710 4P930 590i 01 41.3 60tXTea US $ Mn. 361.52 3W53 37.22 49430 491.88 33&82P br $1sl 4 -1.80 1.76 1.6 2.29 2.04 1.87Voune, Mnk k 201.12 219.80 204.20 215.99 212.40 181.70

Rubber US. S Mn. 99.43 116.52 86.41 7B.81 6.0 67.48ce, SPerg k. 0.94 1.17 1.00 0688 0.83 0.86

Vdume, Mn ks. 106.02 99.30 86.00 8680 7640 78.0Coconu US. MS. 4.23 28.00 59.33 45.95 42.69 6086Price, So nMt mo9 0.13 0.09 .09 0.12 0.15Volume, Mn nuts 538.00 234.10 571.00 507.70 36690 411.70

Other cocontd products US $ MnS 24.31 20.16 27.43 23.46 20.53 23.39Ote agl prducts US $ Mn. 58.19 60.51 679 78.71 82.8 110.31Pdrce,$ a 1.46 1.44 2.17 1.37 156 2.01Volume, Mn kOL 39.74 55.96 30.78 57.30 52.0 54.80

industl Prduct U S Mn. 6.83 12.72 790.19 1035.39 122.48 172894Ga_rmets $S Mn. 437.68 44822 489.47 62893 804.06 1199.78Pd w plece 238 142 2.37 254 2.82 321Volume. Mn pleces 185.20 185.60 20688 247.09 25.O 376.43

Petrum Products US S Mn. 87.92 71.23 62.31 98.06 79.50 6328Pdrc $ew ML ton 138.88 103.69 106.76 15662 151.89 154.13Volwme, 000 ML ton 64242 6865 58360 6250 523.20 410.10

Procesed diamonds UsS MIS 39.57 51.21 90.34 91.87 67.87 107.07Other ndusti products U8$ Mn. 113.65 142.60 148.07 217.53 275.04 35883

Gems US$ 1. 49.13 65.05 61.15 73.14 57.06 56.4Pdce,$r eara1 806 4.16 3.59 3.3 4.26 4.83Volum, 000aerats 5411 15627 17052 20167 1342 11486

Otr exports us $ Mn 73.05 65.45 95.89 14816 114.51 123.42Traditonal Expors US $ Mn. 509.2 531.1 519.0 617.1 5385 468.2Non Tradona Epqmots USS Mn. 88351 9439 1041.5 13569 1501.3 2047Shareo Non-atona Expofts % 63.4 64.0 667 66. 73.8 81.4Value Indices (1987-100)

Total ewS 100.0 105.9 1120 141.9 145 180.3Tradmonal e¢P*m 100.0 104.3 101.9 121.2 105.8 91.Non-trtffonal Bports 100.0 105.8 117.9 15&8 169.9 231.2

Seaw~ Uank ~17 L*9 2a

TA3LE 12. COMPOSITO OF EXPORTS

1. AWU"E - t 79 el 58 54- 53 46 - 43 _ 3_ 31 2TIOa 55 49 5 35 9 90 33 42 33 2 B 2 24 25 21 4RubbW 22 16 14 15 14 11 11 9 7 8 7 8 6 4 3 3Coconut 15 13 7 7 7 7 8 6 9 7 5 3 5 4 3 3OlW Agufckturol 3 3 5 5 7 7 6 4 4 4 4 6 4 4 4 4

2.bmdwtWsExp 2 12 15 31 35 39 35 34 39 47 49 48 51 52 60 69Food. 8seragus, Tobbao 0 1 2 2 2 3 2 2 1 2 2 2 2 2 2 2T euaWdGannnt 0 1 2 10 14 16 19 20 22 28 31 30 31 32 39 46ChemIcal 0 0 0 0 0 1 0 1 1 1 1 1 2 1 1 1Petrobum 1 10 9 18 16 15 11 9 11 7 6 5 4 5 4 3 aLew.r Rubber. Ceramlctc. 0 0 0 1 1 2 2 2 3 3 4 5 5 5 7 60ectron,. Mechnialp 0 0 1 0 0 1 1 1 1 1 1 1 1 3 3 3Oter 0 0 1 0 0 0 0 0 0 3 3 4 6 5 4 5

3.& MaE2ats 1 5 5 5 4 4 5 2 3 3 4 6 5 4 3 2Gema 0 5 4 4 3 3 4 2 2 2 4 4 4 4 3 2Ot 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0

4. Urlanlflbd 2 2 1 3 4 3 2 3 6 4 5 3 5 7 5 5

Ttal - 100 I 100 100 100 100 100 100 100O 100 110 000 100 100 100 100 100

SDII CmtraWa*nof&I4 Lan

TABLE 1.29: EXPORr DIERSIFICATION INDEX

1977 0.437 0.76B1980 0.557 0.7461981 0.586 0.7121982 0.597 0.7311983 0.574 0.7401984 0.509 0.7101985 0.567 0.6971986 0.580 0.6811987 0.569 0.6841988 0.574 0.6991989 0.579 0.6911990 0.574 0.6961991 0.535 0.6731992 0.486 0.623

Dfetra$fion IndwX I - 0Wt

Where; A a E vport vaof Ith potX a Tota expot vaue

TABLE 1.30: TEXTILES AND GARMENTS/CLOTHING

.. .... .... of T.xtile& Garments. Im.orts of T..". .. . , - _ . . - .-.... ,j., .j ..... ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. . . . . . .

Vai St.e -in Volume Value Ne Unit V" ain v gi. w V: u .tlcs .. ......TOt*EX; Indkf idex Ttl 1em : Pried - k ;:la~$DRMmm !b i85vu10 198$um100 19065a10 SORIPlecp BO Mn. % ie.ir1$1U L-( 0-O

1980 84.9 10.4 800 5't 39.3 77.6 50.6 94.21981 133.3 14.4 103.0 6.4 56.2 93 5 60.2 77.31982 152.4 163 94.3 5.2 52.8 78.5 68.1 61.91983 188.3 18.9 108.3 6.0 67.4 82.2 82.5 57.51984 290.1 20.3 114.0 6 3 74.7 88.8 84.9 39.319eS 288.1 22.0 100.0 100 0 100 0 137.5 7.0 1000 100.0 100.0 100.0 47.71986 292.7 28.3 111.1 121.0 108.9 1 75 193.1 11.6 160.4 16/.2 104 3 104.4 66.01987 338.5 31.4 121 4 162.0 133.5 1 83 212.2 13.4 185.3 212.8 114.9 116.2 62.71988 333.5 30.4 120.7 179.2 148.4 180C 205.7 12.4 155.7 231.5 148.7 99.8 61.71989 381.8 31.4 1205 221.5 163.9 1.85 216.1 12.4 114.0 262.7 230.5 79.8 56.61990 462.4 31.7 137.0 316.1 230.8 1.87 247.2 12.5 118.2 354.1 299.7 77.C 53.51991 587.6 39.4 158.8 417.9 263.1 2.06 364.1 16.3 163.0 542.5 332.9 79.0 62.01992 851.6 47.8 192.3 660.7 3436 2.28 17.6 192.6 705.3 366.2 93.8 51.0

Source: Central Bank of Sn Lanka

TABLE 1.31: COMPOSMON OF TEXTILES AND GARMENTS EXPORTS

1980 85.9 U2 8.8 0.0 QO 100 0.2 0.1Q Q19881 1I9M 1.1 130Q4 0.8 0.9 1 00 0..t. 6 0.71982 152.4 08 149.9 09 1.0 100 0.4 96.3 0.6 0.71983 188.3 1.2 164.3 1.3 1.6 100 0.6 97.8 0.7 0.81964 290.1 3.1 2621 1.9 3.0 100 1.1 97.3 0.7 1.01986 268.1 4.7 2m7 1.4 3 100 1.6 96.7 0.5 1.21968 292.7 5. 281.6 3.4 2.7 100 1.7 96.2 1.2 0.9198? 336. 4.5 325.1 5.0 &8 100 1.3 96.0 15 1.11988 33" 7 316.3 7.3 4.1 100 1.1 95.4 2.2 1.21989 381.7 24 8.2 6.8 6.2 100 0.6 95.9 1.8 1.61990 462.4 1.8 446.3 10. 4.4 100 0.4 96.5 22 0.91991 567.6 4.2 559.1 15.2 .0 100 0.7 96.1 2.6 11992 851.6 11.1 797.1 24.1 19.4 100 1.3 93.6 . 131

Sow.: Cont dWnk odf Lan

TABLE 1.32: REAL EFFECTIVE EXCHANGE RATE INDEX (1987=100)

SfLanka 100 96.6 101.3 103.8 109.2Maly,* tOO~~10 90.7 89.0 88.8 83.4lnd ~~~ ~ ~~100 9I8 97.3 99.3 98.t

Plwhe$. 100 98.0 102.2 98.8 6.8IndonesIa 100 95.4 96.1 96.8 92.2Pakian 100 77.2 77.6 72.3 71.5Inda 100 92.2 86.0 77.0 63.3iangladesh 100 97.9 99.0 106.2 N.A.

TABLE 1.83: COMPARATIVE BASE WAGE RATES FACTORY WORKERS(Factoy Works - Monh Averg)

Sdrlak 1750 Rupee 40.25Paklfan 1610 Rupee 54.14India 1725 Rupee 66.09Bangkeh 1613 Taka 40.22Thailand 3450 ht 133.72Indonesia 80500 Rupiah 39.61Philippines 2300 Peso 82.8Malaysia 719 RinM 276.77

Some: fL4U

TABLE 1.34: COST OF CAPITAL

Malaysia 9~~~~~~~~1.0|

Thaknd 13.8Indonesia 15.4sIngpor -5.1

Sorm FlAS

TABLE 1.35: THE PIBUC NVESTMNT PROGRAM 1N 1192-1996(in mlllof 81 Lana R.e)

I A7O* M90 7m1 O1h" w0 7m w78 650 724 7 1ow I28 0lOd M 4 4 3M 4 . 0 t2 271 S M Oft)O"! %mb 619 1022 1526 1012 710 ON 76 1140 1211 1446 1207 6(C) POmi 42 562 812 484 312 490 3 405 362 742 an 29(d) Lad 0 0 0 0 0 0 0 6s6 7 336 36 397(0) FiWd,ExW CiU 661 413 725 9 6S7 6 6 1003 9w 1t02 67 44(QLlstock 45 so 82 100 93 100 134 51 43 124 115 110(g) Fbrs 110 214 193 182 243 120 as 16? 424 07 574 52(h) Planto 511 we 299 6 62 1250 1466 1123 736 ins 1390 1341

2 kdusW1G8,T0utmu&Tad 0 0 6 000 1276 172B 286 9 1048 610 993 HumaSeumnt 1562 1443 2962 1847 1870 3600 5394 7226 55 16187 13719

(a) owdng 504 50o 410 426 373 262 399 294 545 741 6t. 597(b)Utkban ftastnhcue, 0 0 203 276 112 494 253 712 1282 1621 1712 1712(C) Othr Conuur 260 254 206 267 280 136 3s 157 233 229 123 135(d) En 6Meua Mana _mut 7 3 3 4 1 4 32 168 143 142 103 5S(e) Water supty&SantaO 791 686 1233 864 754 656 160 2517 2977 3672 9113 7902M PR*K1a_ O_MMW DMMWPWdNA 0 0 7 8 186 1412 2255 2696 2420 2258 2220 2120(ID WPP 0 0 0 0 164 636 620 662 956 1092 1104 1194

4 EconoeulolasMxntr 5944 9710 11684 1545 9571 15294 1684 19172 22411 25945 21879 1613(a) TNut 512 1061 1064 1480 1436 3405 59 5063 5624 7037 82 60(b) Pow & Enoegy 540 1040 1986 4348 3758 5061 5098 4285 5955 6141 3330 475(C) Posts S Tecommunlatln 479 630 940 1671 1181 613 1512 3319 2286 490 1409 265(d) Other EconomkcOc Ovads 274 293 297 510 95 205 1094 1211 2195 2937 2695 2774(a) AdmtaIOverhead 4139 6686 7349 7455 3101 6020 5739 5294 5351 4923 6120 5819

s Soclallnh k1272 2006 29f4 2347 235 2657 3402 4707 5304 5100 57M0 S2W7(a) lducatlui 905 1180 1143 1096 991 1043 2220 2660 2962 2690 8235 2950(b) MOM 248 2 398 1313 111O 1195 1677 1069 1767 2033 I836 1972 1930(c)Others 119 516 518 141 119 137 123 280 339 382 493 387

6 Hosdmmc _owmw 3654 4563 2161 1495 4392 2632 3263 4465 2856 2000 1800 2000TOTAL 2036 25C71 2760 2621 26705 32888 40346 43739 47526 54185 5724 48127

Son: Aisty of PA_ abm*W ad

TABLE 1.36: SHARES OF DETAILED SECTORS IN THE PUBUIC 1VESTMENT PROGRAM(hi pwrmitap ponts)

t ~~~~~~~_ ~~~~4.9 4.3 4.1 3.1 2.9 2.0 1.8 1.7 1.6 1.9 2.0 1.Mahaw_ 3.3 2.7 2.3 t. 1.8 0 0.7 0.6 0.5 0Q 1.1 .()Odo I_gdo QS 0.6 Q.8 0.6 0.3 0.3 0.2 0.9 0.2 0. 029 Q1(c) f ore 0.3 0.3 0.4 0.2 0.1 0.2 0.2 0.1 0.1 0.1 0.1 0.0(d) Land 0.0 0.0 0.0 M0 0.0 0.0 0.0 0.2 0.2 0.1 0.1 0.1(e) FPId,Export Cfops 0.4 0.2 0.4 0.4 0.3 0.2 0.2 0.2 0.2 0.2 0.1 0.1M Lhvstoku 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0(g) R_ie 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.1 0.1 0.1 0.1(h) Plantallons 0.3 0.3 0.2 0.3 0.2 0.4 0.4 0.8 0.1 0.3 0.2 02

2 kndusrleTourlssnA Trad 0.0 0.0 0.3 0.8 0.6 0.5 0.6 0.2 0.2 0.1 0.1 0.13 HuMano6eM 1.0 0.8 1.0 0.8 0.7 1.1 1.4 1.7 1.7 1.8 2.5 2.0(a) Housing 0.8 0.3 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

(b) Ura irastruchue 0.0 0.0 0.1 0.1 0.0 0.2 0.1 0.2 0.3 0.3 0.3 0.2(C) O0 CN"cton 0.2 0.1 0.1 0.1 0.1 0.0 0.1 0.0 0.0 0.0 0.0 0.0 2(d) %X in is M _nagwaM 0.0 0.0 0.0 0.0 0.0 0.0 0O 0.0 0.0 0.0 0.0 0.0(a) WaW 8uppt Sankagm 0.5 0.4 0.6 0.4 0.3 0.2 0.4 0.6 0.6 0.7 1.5 1.1MPro_ DdFROU'R-A-m- evelopnent 0.0 0.0 0.0 0.0 0.1 0.4 0.6 0.6 0.5 0.4 0.4 0.3(9) WIDPP 0.0 0.0 0.0 0.0 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2

4 EconoMIC Inatructure 3.7 5.4 5.9 7.0 3.8 4.8 6.1 4.5 4.5 4.7 8.6 2.8(a) Transport 0.3 0.6 0.5 0.7 0.6 1.1 1.4 1.2 1.1 1.8 1.3 0.9) Power L Enewgyr 0.3 0.6 1.0 2.0 1.5 1.6 1A 1.0 1.2 1.1 0.S 0.1

(C) Posts & Te _ roommu*Zoons, 0.3 0.4 0.5 0.8 0.5 0.2 0.4 0.8 0.5 0.9 0.2 0.0(d) Ottw Economkft 0vedt 0.2 0.2 0.2 0.2 0.0 0.1 0.3 0.3 0.4 0.6 0.4 0.4(e) A*dsfta"_ Ovwheaft 2.5 3.7 3.7 3.4 1.2 1.9 1.6 1.3 1.1 0.9 1.0 0.8

5 Socal nfrastuue 0.8 1.2 1.5 1.1 0.9 0.9 0.9 1.1 1.1 0.9 0.9 0.8(a) Ed_cton 0.6 07 0.6 0.5 0.4 0.3 0.6 0.6 0.6 0.5 0.5 0.4(b) Hea h 0.2 0.2 0.7 0.5 0.6 0.5 0.3 0.4 0.4 0.3 0.3 0.3(c) Ohers 0.1 0.3 0.3 0.1 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1

6 Need Mbeegano 92.3 2.6 1.1 0.7 1.7 0.9 0.9 1.1 0.6 0.4 0.3 0.3TOTAL 12.5 14.2 14.0 12.9 10.6 10.2 10.8 10.3 9.6 9.8 9.3 6.9Smo Atsyof Poy Pdafa g &W

TABLE 1.37: CENhRAL BANK REFINANCE FACIL115ES

1989 1990 1991 1992

Short-Term Rs MIL 2,740 4,785 1,394 923IgTerm Rs Mn. 1,2 25 3,50 4,856Total Refinance Rs Mo. 4,312 7,330 S,344 5,763Total as % of Resaw Mon 16.1 23.2 133 12.8Effective Ledg Rate (% pap.GPS Purchasing 3.05 3.05 9.05 11.05CaJtion 9.0 12.0 16.0 16.50Export - Traditionl 14.0 14.0 20.0 19U50Exot - No h-Traditional 9.8 9.8 15.8 16.50Medim & Long-Term Credit Fund 9-14 7-10 9-14 11-16Prime Lendig Rate (%) 1.6 18.6 19.6 20.0

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