Reort No. 8193CE

Sri LankaRecent Macro-Economic Developmentsand Adjustment PoliciesDecenber 18, 1989

Asia Country Department I

FOR OFFICIAL USE ONLY

Docunn of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the perfonnance of their official duties. Its contents may not otherwisebe disclosed without World Bank authoization.

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CURRENCY EQUIVALENTS(Annual Averages)

Sri Lanka Rupees per US$1.00

1978 - Rs 15.611979 - Rs 15.571980 - Rs 16.531981 - Rs 19.251982 - Rs 20.811983 - Rs 23.531984 - Rs 25.441985 - Rs 27.161986 - Rs 28.021987 - Rs 29.441988 - Rs 31.81

GLOSSARY AND PRINCIPAL ACRONYMS

ARC - Administrative Reforms CommitteeCCP. - Colombo C-.sumer Price IndexCFF - Compensatory Finance FacilityCTB - Central Transport BoardJEDB - Janatha Estates Development BoardNFSP - National Food Stamp ProgramNSB - National Savings BankPEs - Public EnterprisesPMEs - Public Manufacturing EnterprisesSAF - Structural Adjuscment FacilitySCC - Salaries and Cadres CommitteeSPC - State Plantation Corporation

Fiscal Year

January 1 to December 31

FOR OMCIALu USE ONLY

TITLE : SRI LANKA - RECENT MACRO-ECONOMIC DEVELOPMENTSAND ADJUSTMENT POLICIES

COUNTRY s SRI LANKA

REGION : ASIA

SECTOR : COUNTRY ECONOMIC

REPORT TYPE CLASSIF MMLYY LANGUAGE

8193-CE CEM Restricted 12 89 English

UPDATE : 8912

ABSTRACT : This report provides background information on theeconomy and complements the Policy Framework Paperissued in October 1989. It first reviews recenteconomic developments and how they were influencedby Sri Lanka's security situation. Next, itcomments on the Government's stabilization andadjustment program, the steps which have been takenalready as well as those that are to be taken inthe near term. Finally, it analyzes the role thataid has had in financing the balance of paymentsand estimates the aid flows that are necessary in1990 and beyond to ensure the success of the newGovernment's economic program.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

SRI LANRA: RECENT MACRO-ECONOMIC DEVELOPMENTSAND ADJUSTMENT POLICIES

Table of Contents

Page No.

FOREWORD

EXECUTIVE SUMMARY i

I. RECENT ECONOMIC DEVELOPMENTS ...................... 1.......... 1

Growth Performance .... ........................................... 1Fiscal Developments in 1988 and 1989 ......................... 6The 1989 Budget ............................................... 9Monetary and Price Developments ...... ......................... 11Balance of Payments Developments ...... ............... 13

II. THE FORMULATION OF THE 1989-92 ECONOMIC PROGRAM .... ........... 16

The July Stabilization Program ...... .......................... 16The Structural Reforms ..... ... .............. . ................. 17

III. MEDIUM TERM PROJECTIONS AND AID REQUIREMENTS FOR 1989-92 ...... 22

Balance of Payments Projections ................ .. ............. 22The Role of Aid ............. . 24Project Implementation and Disbursements Profiles ........... .. 25Aid Requirements . .............................................. 28

STATISTICAL APPENDIX ............................................... 31

TEXT TABLESPage No.

Table 1 Growth Performance, 1970-88 .................. 2Table 2 Impact of Civil Disturbances on Economic Performance:

Selected Indicators - 1982-88 .... ....................... 4Table 3 Summary of Central Government Operations, 1984-1989 .... 5Table 4 Major Sources of Over-Expenditure in 1988 .. .............. 6Table 5 Major Sources of Deviations from Revenue Estimates

in 1988 ................................................. 7Table 6 Monetary and Price Developments, 1984-1989 ............... 12Table 7 Balance of Payments Summary, 1980-1988 ........ ........... 14Table 8 Debt Indicators, 1978-88 ....... .......................... 15Table 9 Sri Lanka's Living Standards Relative to Low-and

Middle-Income Countries ............... .................. 18Table 10 Medium Term Balance of Payments, 1988-92 ....... .......... 23Table 11 Export Performance Indicators, 1979-92 ........ ........... 24Table 12 Role of Aid Flows in Financing the Current Account ....... 25Table 13 Sectoral Composition of Aid Disbursements ...... .......... 26Table 14 External Finance Requirements, 1988-92 ........ ........... 27Table 15 Composition of Aid Commitments ............ ............... 29Table 16 Summary of Aid Commitments and Disbursements, 1982-92 .... 30

This report was originally prepared for the participants of the October 17,1989, Sri Lanka Aid Group Meeting. The report is based on information gatheredduring a World Bank economic mission that visited Sri Lanka in January-February 1989 consisting of Messrs. R. Zagha (Chief of Mission); Aggarwal(public sector reforms); Berthelot (public enterprise reform); Bradfield(transportation); Maxwell (trade policies); Bowen, Consultant (employment);van Dijck, Consultant (poverty); Teja, IMF (macro-economic developments); andWickramasekara, Consultant (employment). Mr. Shishido prepared the section onAid Requirements. The report is also based on information gathered duringseveral subsequent joint IMF/World Bank missions.

r 1 2

CQUNIRY DATA - SRI LANKA

/J"l RCItIL^TSON !/ ~~~~~DENSITYZU4SSOS eq. km S11 elIt ion (oId-l9S0) 24kmper sq k (1986)

Rate Of Growth: 1.63 (frm 1970-190S) 76 per eq. km e gricultural land (1979)

Cr.rudei roe ae" ~pa 20.2 POLOaton per yelns 8,9e9CrwF Death Rau p r ' 0.1 Population per respital bed: 360intent Morta lty per '000 live births) S0.00/

MIICOIIE OSS I (1981/62) DISTRIIUTION OF LAND OWERSNIP (1978)S ef n eien In"cea, higheat quint) lo: So 6 oWend by top 105 et owners:U of national ince , lowest quintils: 4 X owned by sml lest 10 of oners: -

ACCESS TO PIPED WATER (1980) ACCESS TO ELECTRICITY (1981)5 of populssion - urban: 47 of popula non - urban: 40X of population - rural: 40 3 of population - rural: n.e.

INtUITION (1986) EDUCATION (1981)Calorle Intake: 2,400 Adultlltracy rote: 87%Per capita protein Intake (graw/day): 48 Primary school enrollment S8X

OW PER CAPITA IN 1987: US$400 d/

WOTPUT IN 196B BY SECTOR dANNUAL RATE OF GROWTH (X, constant prices)Value Added

SIll T St S 1970-77 1977-98 1987-98

Agriculture 1,08 20 2.8 8.9 -1.9Industry P 1,629 25 1.7 6.2 6.8Services a O85 49 .7 6.08 2.4Totel / 0,0 IN iT E l

ROSS DOMESTIC PRODUCT IN 198

USS Million x

GOP at Market Prices 7,018 100Investment 10616 28Gross National Savings 1,008 14Current Account Oefit 610 9Exports of Coods and NFS 1,795 26Imports of Goode and NFS 2,617 90

GOVERNMT FINANCE

Central covern"ent(Re Million) X of MrP at Mrkat Prices

lse 195 1984 1938

Revenue 9/ 41,749 17.2 22.1 18.7Current k penditure h/ 40,132 18.8 17.2 20.7Current Surplus -4,J88 -1.1 4.9 -2.0Capital Expenditure l 80,898 7.8 18.6 18.6External Assistance (net) 18,678 8.2 6.4 0.1

A Rglstrsr OGneral's Department.Prowlsional

I World Bank Atlas estlmte.V Manutecaturing, mining and construction.GOP at faeter cost.

/ Includes capital revenue.hIncludos edvance accounts.

Includes net lnding.

Pago 2 of 2

COUNTRY DATA - SRI LANKA

MONEY. CREDIT AND PRzCES 1980 1961 1082 198J 1084 1986 1986 1987 1988(d of Triod) - --------- --e- -.---_-______

Money and quasi-Money 19,709 24,287 80,249 86,818 41.898 47,067 49,688 66,682 60,024Bank Credit to Public Sector 9,100 12,889 17,286 17,689 13,847 25,423 27,884 84,289 46,708Bank Credit to Private Sector 16,088 20,768 24,9$4 81,456 80,831 84 106 38,605 41,002 49,932

----- -------- … -Percentoges or Index Numbers---------------_______

Money and Quasi-Money as% of GOP 29.6 28.0 80.5 80.8 27.8 29.0 27.7 388. 29.0Ceneral Price Index (1970=100) 189.7 18A.6 182.6 208.2 242.9 246.4 266.6 286.1 320.1Annual Percentage Change In:GnAeral Price Index *26.1 *18.0 *10.8 *14.0 .16.7 *1.4 *7.8 .7.7 .14.0Bank Credit to Public Sector .297.2 *41.6 0 88U7 *2.8 6.8 .34.9 *9.7 .22.8 *83.4Bank Credit to Private Sector .46.8 .28.1 .20.1 .26.7 -1.6 10.6 7.8 12.0 21.8

BALANCE OF PAYMENTS MERCHANDISE EXPORTS (1988)

1986 1987 1088 US$ Million s

Exports of Goods, NFS 1,620 1,722 1,806 Te 386 21.3Imports of Goods, NFS 2,278 2,899 2,668 Rubber 116 6.4Resource Gap (deficit -) -768 -676 -757 Coconut Products 48 2.7

All Other Commodities 1.267 69.6Net Factor Incom -188 -160 -172Net Transfers and Remlttances 284 818 819 Total 1,806 100.0Balance on Current Account -606 -622 410

EXTERNAL DEBT (USS Million) r/Director Foreign Invo t _ nt 29 so 48Not MALT Loans 807 222 324 December December

Disbursemnts 8so 808 411 1987 1988Amortization 78 81 87

Grants 180 180 207 Total Outatanding 6,872 8,265Other Capital (net) 20 -18 -6U Total Outstanding & Disbursed 4,182 4,263Change in Reserves(+ a increase) -70 -80 -92

Gross Reserves (end-year) 848 263 260 DEBT SERVICE RATIO kI (%) 27.6 29.6

IBRO/IDA LENDING. End 1988 (US$ Million)

IBRD IDA

Outstanding and Disbursed 83 668Undisbureed 20 634

Outstanding including Undisbursed 103 1,192

.1 Repayable In foroign currencies and wIth an original maturity over one year, Including private non-guaranteeddebt. Excludes obligations to tho IMF.

/ Ratio of debt service to exports of goods and services. Debt service includes service on MLT debt, ircludingIMF charges and repurchase, and interest payments on short-tarm debt.

EXECUTIVE SUMMARY

Background

i. Since mid-1988, Sri Lanka's security situation has deterioratedconsiderably. Civil disorders have kept growth, tourism, exports and foreigninvestment well below their potential; moreover, the escalation of violence hasalso put pressures on the budget. The direct fiscal effects were of two sorts:(i) taxes which could not be collected because of the security situation; and(ii) increases in defense-related expenditures that had not been anticipated inthe budget. These two effects amounted to 32 of GDP in 1988 and came on top ofexpenditures approved in the run up to general electionr--of which substantialwage increases and subsidies for wheat, fertilizer, bus and railways fares arethe most important ones. As a result, the fiscal deficit in 1988 was almost 16Zof GDP instead of the 122 of GDP indicated in the first-year PFP.

ii. Con.erned with the escalation of social conflict, and convinced that oneof its origins was an increase in the country's level of poverty, the newlyelected government hesitated at first to take the drastic actions that would havebeen necessary to arrest the deterioration of the economy. Except for the priceof oil which was readjusted early in 1989, the go-ernment postponed adjustmentsin other important prices. The 1989 budget also introduced a new and costlypoverty alleviation program. Two of its main components were the Jana SaviyaProgram (JSP), an anti-poverty program based on income transfers to all familiesbelow a certain income threshold, and a mid-day meal program aimed atdistributing free meals to students in primary and secondary schools. Partlybecause of the cost of these programs and partly because of the legacy of thedecisions taken in 1988, the 1989 budget envisaged expenditures at 37? of GDP--i.e. 32 of GDP above the already high level of expenditures reached in 1988--leading to an overall deficit of 14Z of GDP. The 1989 budget, however, turnedout to be overly optimistic on revenue targets (in view of the securitysituation) and a number of expenditure items were underbudgeted.

iii. Expansionary fiscal and monetary policies during 1988 and the first halfof 1989, associated with insufficient adjustments in the exchange rate,conL.ributed to arrest an otherwise improving trend in the balance of payments.After declining from over 102 of GDP in the first half of the 1980's to lessthan 8Z in 1987, the current account deficit increased to 8.7Z of GDP in 1988.The balance of payments continued to deteriorate through the first half of 1989,when gross official reserves fell to the equivalent of three weeks of imports,the lowest level in this decade. Were it not for heavy short-term borrowing,the level of reserves would have been considerably lower. Lack of comprehensivedata makes it difficult to assess whether a US$160 million loss during the firsthalf of 1989 year stems from the current or capital account. Available datasuggest that while imports remain high in 1989, exports have declined, as havereceipts from tourism. It is too early to assess, however, whether this reflectsan excess demand for goods, or is a symptom of capital flight. The demand forimports also reflects increased imports of rice, the production of which sufferedfrom adverse weather conditions. Imports of rice have thus increased, from about100,000 metric tons (MT) in 1987 ,at a US$20 million cost) to 300,000 MT (US$80million) in 1989, not an insignificant drain on the country's foreign exchangereserves, and one of the reasons for the anticipated increase in the currentaccount deficit of the balance of payments to 10.3Z of GDP in 1989.

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The 1989-92 Economic Program

iv. By July 1989, it had become evident that without a major stabilizationeffort, a balance of payments crisis was imminent and that the fiscal deficitcould exceed the budgetary targets because of a higher than expected cost ofsubsidies and revenue shortfalls. Thc. prospect of further fiscal deteriorationat a time the balance of payments problem was becoming acute prompted thegovernment to take actions on several fronts. First, it accelerated thedevaluation of the exchange rate and by early September the US$ was at Rs4O/US$,i.e. a 212 increase in the Rs/US$ rate in relation to end-1988. Second, it tooka series of fiscal actions. The main one was to slow the implementation of theJSP. In addition, the price of wheat was increased by 202 and further increasesthat will eliminate the need for subsidy by early 1990 have been decided. Helpedby a decline in international prices, the per unit subsidy on fertilizer wasreduced by about 352 in September and will be eliminated by the end of 1989.Besides this, a 102 across-the-board cut in non-wage, non-interest currentexper 'tures was implemented in August and starting in September, this cut wasincreased to 202. These decisions should not only prevent the fiscal deficitfrom increasing beyond the 14? envisaged when the budget was prepared but shouldalso help to bring it down to 12.5? of GDP. However, the government has deferredto early 1990 a substantial cut in transportation subsidies, pending arestructuring of the Central Transport Board. As the restructuring may takelonger than what is envisaged, this may create more pressures on the budget.

v. In the more medium term, the goverment has also decided to make the speedof implenentation of the JSP conditional on the fiscal situation and to containoverall expenditures on the JSP, National Food Stamp Program (NFSP) and mid-dayaal to no more than 3.5? of GDP. These decisions, together with the new tax:evenue measures envisaged in 1989 and 1990 which are described in detail in the2FP, should allow a gradual reduction in the fiscal deficit to 10.4Z of GDP in1990, 92 in 1991 and 8? in 1992. On the monetary front, the central bank hasdecided to reduce its financing of the central government deficit; it has alreadyreduced its purchases of Treasury bills, and allowed interest rates to increaseto 18-20Z during September. More restrictive fiscal and monetary policies,together with a more active exchange rate policy, should allow the currentaccount deficit to decline to 9.3? of GDP in 1990, 7.8? in 1991 and 6.3? in 1992.

vi. Having dddressed the most crucial stabilization issues, the government isnow able to focus on longer term structural adjustment problems. The first yearPFP had recognized the need to extend to the public sector the principles of the1977 liberalization of the economy. At the heart of the structural adjustmentoutlined in that paper were reforms focussing on the public sector, itsefficiency, its size, the claims it puts on resources and its use of suchresources. The reforms could not be implemented in last year's environment butthe second year PFP outlines again an ambitious program of structural reformsin the public sector. While little progress in implementing policies has beenmade during the first-year PFP period, a number of studies were completed andpolicies formulated. The result is that the program outlined in the second-yearPFP is much more focussed than the previous one. There is some question,evidently, as to whether the implementation of the program will be delayedbecause of the uncertain political situation as was the case with the first-yearprogram. While there are obvious risks, all indications are that, in addressing

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structural issues, the government will continue to show the firmness demonstratedafter July in stabilizing the economy.

vii. The program specifies five main areas of reforms. The first is the reformof the civil service with a view to creating a smaller and better paid civilservice. The second is the rationalization of public expenditures with a viewto eliminating waateful programs and increasing the efficiencl of spending inremaining programs. Improving PEs' efficiency is the third major area of reform.for which the program adopts a three-pronged approach consisting of privatizingwhen this can be done immediately; restructuring and commercializing whenimmediate privatization is not possible; and liquidating when a public enterpriseis not inherently viable. Reducing impediments to private sector activity isthe fourth important area of reform. There have been numerous and recurrentcomplaints from the private sector against excessive regulation or bureaucraticbarriers, most of them put in place before 1977 when the economy was highlyregulated and which are now creating unnecessary costs and delays. In additionto deregulating foreign investment, the program also intends to institutionalizechannels whereby the private sector can demand and propose changes in theregulatory framework and bureaucratic procedures. Last but not least, tradereforms are the fifth important area of reforms envisaged in the PFP. It shouldbe highlighted that Sri Lanka's trade regime is virtually free of quantitativerestrictions and non-tariff barriers. The gist of the reforms envisaged in thesecond-year PFP is to reduce levels of effective protection and to reduce thedispersion of rates, an objective that should increase the country's cxportorientation.

viii. The last World Bank Country Econcmic Memorandum on Sri Lanka had made adetailed analysis of Sri Lanka's public spending. The program outlined in thesecond-year PFP addresses most of the concerns expressed in that report; itshould be recognized, however, that the task of increasing the efficiency ofpublic expenditure programs has become much more complex than before as a numberof new public expenditure programs have been created in 1988 or early 1989. TheJSP is obviously the most important one. As originally structured, the JSP wasnot an effective anti-poverty program becaure it was poorly targeted: it didnot address the long term causes of poverty; and finally it was too costly.The government's decision to restructure the JSP has avoided the numerousbudgetary and economic pressures, as well as the social tensions, that the largescale implementation of the JSP would have inevitably brought about. It alsohad the indirect effect of ensuring the continuation of the NFSP, a program thatsuffers from serious mistargetting problems, but which has a proven strongpositive impact on the living standards of the poor. In the future, it wouldbe probably desirable not to discontinue the NFSP, but to improve its targetting.The mid-day meal and the subsidy for bus transportation are two other largeexpenditure programs that need to be restructured. The most serious problem ofthe mid-day meal program is that, in addition to its lack of targetting and cost(almost 1Z of GDP), it fails to reach the population which is most nutritionallyat risk, i.e. pre-school children. The subsidy for bus fares has the undesirableeffect of weakening the private bus industry finances. As fares in the publicsector (both buses and railways) have not increased since 1982, private buseshave found it difficult to raise their fares and remain competitive even thoughtheir fares have been deregulated since the early 1980s. While there may bea case for subsidizing public transportation, it is important that the systemas a whole be viable; thus, increasing bus fares ahead of improvement in servicesis an alternative that needs to be considered.

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ix. The second-year PFP outlines other important reforms in several areas butthere is little to add to what is already in the paper on financial sector,agriculture, energy and other sectors' reforms. On the whole, the 1989-92economic program is well articulated and addresses the country's most fundauentalconstraints to growth. It is the result of several years of studies, policypapers, and the work of high level government committees which in severalinstances have been supported by multilateral or bilateral institutions. Itholds the promise of a more balanced, dynamic and equitable growth process inthe medium term while, in the short run, it should ease some of the costs ofstructural inefficiencies in the public sector. Needless to say, its successor failure will hing8 on whether or not stabilization issues are addressed asthey emerge, on the maintenance of a realistic exchange rate policy, and on atimely implementation of the 1989-92 policy agenda.

Aid Requirements

x. External assistance requirements have been projected taking into account:(i) the US$85 million that will be provided by the IMF in 1989 in the contextof the SAF expected to be approved in the first half of October; (ii) thereduction in the current account deficit of the balance of payments from 10.32of GDP in 1089, to 9.3Z in 1990, 7.82 in 1991 and 6.31 iu 1992, in the contextof the 1989-92 Economic Program; and (iii) the slow down in projectimplementation. About US$2.4 billion in disbursements will be necessary over1990-92 to finance the current account deficit, repay the central bank short termdebt contracted during 1989, amortize the foreign debt, and restore reserves toa modest 1.4 month of imports by the end of the adjustment period. About US$1billion is expected from disbursements out of already existing commitments fromdonors on concessional terms, and US$430 million on non-concessional terms. Overtwo-thirds of the latter are expected to consist of official bilateral guaranteedcredit to finance purchases of wheat. Besides this, the IMF is expected todisburse US$60 million in 1990. The remaining US$1 billion will have to befinanced out of new commitments.

xi. Based on historical disbursement patterns, US$2.5 billion of commitmentsduring 1990-92 would have been more than sufficient to ensure this level ofdisbursements and would have allowed a more rapid build-up of reserves. But,with the project implementation problems that have emerged in the last few years,this would not be enough unless there is a change in the historical mix betweenproject and program type assistance. About US$800 million of the US$2.5 billionshould thus be in the form of quick disbursing adjustment loans if Sri Lanka isto avoid balance of payments problems in the next few years. The US$2.5 billionof overall commitments that are necessary in the next three years (US$780 millionin 1990; US$841 million in 1991; and US$912 million in 1992) are roughly in linewith the levels of aid provided to Sri Lanka in the recent past after excludingthe exceptional financing thet was obtained in 1988 for the ReconstructionProgram and represent no increase in real terms over the average for 1985-87.Therefore, what is necessary at this stage in Sri Lanka is not so much anincrease in the level of aid, but a change in its composition. The projectpipeline has increased substantially from US$1.3-1.4 billion throughout the earlyand mid-1980's to about US$2.2 billion at present; a further substantial buildup would not be consistent with the overall macro-economic framework and fiscalconstraints. While aid in support of the balance of payments has normallyaccounted for about 162 of commitments, it now needs to be increased to 402 in

1990, and to about 302 in 1991-92 to meet the exceptional near-term liquidityproblems and to assist the government's efforts to effectively implement theadjustment program outlined in the PFP. Thus, increased support in the form ofcommodity aid or general import financing will be essential in the next fewyears. There is ample scope to increase commodity aid. Sri Lanka importsrelatively large quantities of wheat, fertilizer, sugar and milk. In addition,there is a need to rebuild stocks of rice which have been depleted in the lastfew years and are now at a mere one-month level of domestic consumption. Whilesources of financing for imports of wheat have already been identified, this isnot the case for other commodities.

xii. The above recommended levels of assistance assume the continuation ofan extremely careful and consistent economic management on the part of thegovernment and that stabilization issues will be addressed as required to protectthe country's already low level of foreign exchange levels. The country cannotafford any further loss of foreign exchange reserves after the heavy lossesexperienced in 1988 and the first half of 1989. The government's willingnessto pursue actively appropriate fiscal, monetary and more particularly, exchangerate policies, will be essential in that respect.

I - Recent Economic Developments.

Growth Performance

1. Sri Lanka's recent growth performance reflects the interplay of threefactors: (i) the legacy of liberalization in 1977; (ii) the large role that thepublic sector still plays in the economy; and last but not least (iii) the civilconflict. In the case of agriculture, the liberalization of the economy in thelate 1970's with its freeing of agricultural prices and liberalization ofdomestic trade, particularly that of rice--a state monopoly, prior to 1977--hasallowed agriculture to grow at much faster rates than in the past. The statedominated tree-crops sector, i.e. tea and rubber, however, performed poorly.In the case of tea for example, two-thirds of the country's planted area ismanaged by two large estate corporations: the Janatha Estate Development Board(JEDB) and the State Plantation Corporation (SPC). 'While improvements in theirmanagement and large investments in rehabilitation (financed by the Wor.d Bank,the ADB, ODA, USAID, and the Netherlands), have helped to arrest t.he twocorporations' declining production trend, most increases in the country's teaoutput originated in the private sector. In 1988 for example, in spite of thecivil disturbances, tea production, at 227,000 tons, was .he highest since 1965.Three quarters of this increase originated in the private sector estates theproduction of which grew by 142 in 1988 (after growing by 10 in 1987) while thecombined output of JEDB and SPC grew only by 3Z in 1988 (after declining by 3Zin 1987). Production in the two state corporations was disrupted on severaloccasions by terrorist activities while that in the private sector remainedrelatively unaffected, and this may account for some of the differences in recentperformance. It is widely recognized, however, that obstacles to efficientmanagement remain the main cause for the two state corporations' sluggish growthperformance.

2. The dynamic growth of private sector output accompanied with sluggishnessin the public sector, can also be observed in the case of manufacturing. Thereduction of barriers to entry, better access to credit (after financial marketswere deregulated after 1977), better availability of inputs (after quotas onimports were replaced by tariffs), and the opening of export markets (after anti-export biases were reduced) have all contributed to private sector manufacturingoutput to grow by over 102 a year since the late 1970's. While this rate isnot uncoamon for a manufacturing sector at its initial stage of development, ithighlights the potential of Sri Lanka's manufacturing sector, how it has beenresilient to civil disturbances and, in contrast, how poor the public sector'sperformance has been (Table 1). Again in this case it should be recognized thatin the recent past, the public manufacturing enterprises (PMEs) have been muchmore affected by terrorism than the private sector. As in the case of the twoestate corporations, however, obstacles to efficient management are the PMEs'main cause for stagnation.

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Table 1: GROWTH PERFORMANCE, 1970-88 (Z)

Memo ItemsSectoralContributionto Growth Share in

1970-77 1978-82 1983-88 1986 1987 1988 1982-88 d/ GDP,1988-----Annual Averagep ----

Agriculture 2.3 4.0 2.0 2.6 -5.8 2.1 13.5 23.5Paddy 2.1 5.3 2.4 -2.5 -18.0 16.4 3.4 5.3Tea -0.1 -1.8 3.1 -1.3 1.0 6.4 2.1 2.5Rubber -0.7 -2.9 -1.4 0.6 -10.6 0.6 -.- 0.6Coconut -2.4 4.7 -4.9 2.8 -24.6 -15.7 -3.1 2.1Forestry andFishing -0.5 a/ 8.2 0.4 5.4 8.3 -4.2 0.1 3.5Others 6.2 a/ 4.1 3.8 6.1 1.7 1.4 11.1 9.5

Manufacturing 1.7 4.6 6.4 8.4 6.8 4.7 25.8 19.3 b/

Public Sector n.a. 4.6 -1.1 9.5 -0.4 -1.5 n.a. n.a.Private Sector cl n.a. 4.6 13.9 7.3 14.0 10.9 n.a. n.a.

Construction -0.3 11.0 1.1 1.5 1.8 1.5 2.2 7.1

Services 3.6 7.4 4.2 4.3 2.7 2.2 58.5 50.1

Utilities 6.1 14.5 5.1 7.1 3.0 3.5 1.8 1.3Transport 2.5 6.8 3.8 3.2 1.2 0.6 12.6 11.4Commercial 2.5 7.4 4.0 3.9 2.8 2.7 23.4 21.1Financial 9.8 11.9 7.6 4.0 6.1 6.0 9.0 4.9Housing 2.7 5.2 1.7 1.9 1.5 1.5 1.5 3.0Public Admn. 5.9 6.9 10.4 -18.9 3.1 0.5 11.0 4.6Others 5.2 7.2 -0.2 -4.0 2.7 1.5 -0.8 3.8

GDP 3.1 6.2 3.6 4.3 1.5 2.7 100.0 100.0

a/ For the period 1973-77.

b/ Includes mining.

c/ Estimated assuming that half the value added in manufacturing isproduced in the public sector.

d/ Defined as the increase in the sector's value added between 1982 and1988 divided by the increase in GDP in the same period.

Sources Central Bank of Sri Lanka.

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3. The services sector has also benefitted from the liberalization of theeconomy in 1977. Deregulacion of the financial sector increased the number ofbanks and insurance companies. both foreign and domestic. The financial sectorgrowth accounted for almost one-tenth of total GDP growth between 1982 and 1988.Deregulation and elimination of the state monopoly in transport has been anotherimportant source of growth; 122 of the total GDP growth between 1982 and 1988was generated in the transport sector. The increase in public sector outputaccounts for another 12Z of total GDP growth in the last five years, most of iton account of the build-up of the armed forces after the eruption of the ethnicconflict in 1983.

4. Civil disturbances have had a complex impact on the economy and are oneof the main reasons for the decline of GDP growth to below 5? in the last threeyears. A number of sectors, however, seems to have kept relatively immune andhave had higher growth rates after the ethnic conflict began in 1983, or evenafter the outbreak of terrorism in the South. Tea and private manufacturing arethe most notable examples. In the case of paddy, floods and droughts areprobably as important as the civil disturbances in explaining the modest growthin production since 1983 (Table 2). Foreign investment has also not beenentirely deterred by civil disturbances and even reached a relatively high levelin 1988 (Tablk 2), one of Sri Lanka's worst years in terms of disruptions.Tourism itself, while declining from 400,000 arrivals a year in 1982 to less than200,000, stopped declining in 1988. Exports of garments, after stagnatingsomewhat in 1986, grew at a relatively high growth rate after the exchange ratebegan depreciating more rapidly. while exports of gems expanded rapidly in recentyears after export restrictions were eliminated. Even at the height of thedisturbances in 1988, new markets were being opened for exports (gems andgarmentc. and tourism (Japan) and two new domestic banks recently begunoperations (one in 1987 and one in 1988). In the case of garments, however, theclosure cf the Colombo port in the latter part of 1988 meant severe delays inshipments, which, in an industry where timeliness is essential, meant in turnthat a number of orders were lost. In this context, it is noticeable thatgarment exporters were able to maintain the 1988 level of export at its 1987level. The outlook for 1989 is unclear, however. Preliminary data suggest thatthe continuation of violence in the South in the first half of 1989 has seriouslydisrupted the production of tea, exports, and manufacturing production. Growthin 1989 is thus expected to be only 2Z. While this rate is low and less thanwhat was achieved in 1988, it is not insignificant.

5. On the other hand, it is clear that production in the North and East hassuffered. The main economic activities of the Northern and Eastern provincesare fishing and agriculture. Fishing has been constrained by the destructionof boats during the height of the ethnic conflict in 1987 and by tne prohibitionof fishing imposed by the army to prevent the movement of terrorists as well asweapons afterwards. In spite of a modest increase in production, the 1988 outputof the fishing sector was still below that reached prior to 1983. Agriculturalactivities have been disrupted by the displacement of farmers, interruption oftransportation services and destruction of essential pieces of infrastructuresuch as irrigation facilities, storehouses, feeder roads, etc. The productionof rice during the main season, the Maha winter season (harvested in March ofeach year), thus declined from 28 million bushels in 1983 to less than 20 millionfrom 1985 onwards. In 1983, the Northern and Eastern provinces accounted for

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33Z of the country's rice production, but only slightly over 20Z in 1988.Likewise, production of chillies, traditionally, one of the main agriculturalproducts of the Jaffna district, fell from 11,000 metric tons in 1983 to 6,000tons in 1985, the last yea- for which this datum is available.

Table 2: IMPACT OF CIVIL DISTURBANCES ON ECONOMIC PERFORMANCESELECTED INDICATORS - 1982-88

1981 1982 1983 1984 1985 1986 1987 1988

Total Paddy Production(Million Bushels) 53 65 85 65 84 81 67 73of which North andEast (Million Bushels) 15 19 29 13 24 18 17 17Share of North & East (2) 29 30 34 20 30 23 26 23

Foreign Investment(1980 US$) 47 61 37 33 25 24 45 31

Exports of Garments(Million Pieces) 53 76 81 124 159 167 185 186

Exports of Gems andDiamonds (1980 USS) 32 32 40 25 31 55 69 83

Tourist Arrivals ('000) 371 407 338 318 257 230 183 183Western Europe 246 232 176 191 153 143 121 111Asia 89 135 125 90 79 66 43 54North America 14 16 15 15 10 9 7 6Others 22 24 22 22 15 12 12 12

Source: Central Bank of Sri Lanka.

6. In essence, civil disturbances have affected the country's differentsectors and areas in different ways and degrees. In the North and East,development has simply stopped and the economy is functioning at well below thelevels it used to. While GDP at the regional level is not estimated in SriLanka, there are clear indications that the North and Eastern provinces haveexperienced substantial declines in incomes. Further, the pace of implementationof most development projects financed by aid agencies in the two provinces hasalso slowed down considerably and often stopped altogether. On the other hand,disruption in the South have affected production in a number of areas,particularly in 1989. On the whole, however, the economy has continued todevelop and to respond to incentives, even though at a rate considerably belowits potential. All in all, the resilience of the economy, its ability to weathera high level of disturbances and its responsiveness to improved incentives areremarkable. They highlight the gains in productivity brought about by theliberalizatinn of the economy after 1977 and support the Government's view, asexpressed in the second-year PFP, that with adequate economic management andincentives it should be possible to maintain the modest GDP growth rates thatthe economy has been able to achieve until recently, in spite of very adversecircumstances.

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Table 3: SUMMARY OF CENTRAL GOVERNMENT OPERATIONS, 1984-1989(Rupees Million)

1984 1985 1986 1987 1988 1989Budget Actual Budget Revised

a/

Total revenne 34,061 36,249 37,238 42,697 46,223 41,749 58,119 53.156Tax 29,939 30,442 31,272 35,119 39,738 35.945 49,334 44,723Non-tax 4,122 5,807 5,966 7,578 6.485 5,803 8,785 8,434

Total expenditure andnet lending 47,837 55,234 59,190 64,444 72,535 76,531 92,322 84.408Current expenditure 24,630 32,644 33,968 39,560 40,549 46,132 56,618 57,804Capital expenditure 19,915 21,530 23,235 22,816 27,017 22,878 28.695 19.599Net lending 3,292 1,059 1,993 2,068 4,969 7,521 7,009 7,005

Overall deficit -13,776 -18,985 -21,958 -21,747 -26,312 -34,784 -34,203 -31.251Grants 3,293 3,306 3,753 4,677 5,000 6.588 5,600 6,989Foreign 6,492 7,110 9,061 5,716 12,520 7,085 12,004 8,273Domestic 3,991 8,569 9,143 11,356 8,787 21,111 16,599 15,989Bank -2,760 7,212 3,047 3,540 2,574 9,048 3,395 4,000Non-Bank 6,752 1,357 6.096 7,815 6,213 12,063 13,204 11,989

(Z of GDP)

Total revenue 22.2 22.3 20.8 21.7 20.7 18.7 23.2 21.3Tax 19.5 18.7 17.4 17.9 17.8 16.1 19.7 17.9Non-tax 2.7 3.6 3.3 3.9 2.9 2.6 3.5 3.4

Total expenditure andnet lending 31.1 34.0 33.0 32.8 32.5 34.3 36.9 33.8Current expenditure 16.0 20.1 18.9 20.1 18.2 20.7 22.6 23.1Capital expenditure 13.0 13.3 12.9 11.6 12.1 10.3 11.5 7.8Net lending 2.1 0.7 1.1 1.1 2.2 3.4 2.8 2.8

Overall deficit -9.0 -11.7 -12.2 -11.1 -11.8 -15.6 -13.7 -12.5Grants 2.1 2.0 2.1 2.4 2.2 3.0 2.2 2.8Foreign 4.2 4.4 5.0 2.9 5.6 3.1 4.8 3.3Domestic 2.6 5.3 5.1 5.8 4.0 9.5 6.6 6.4Bank -1.8 4.5 1.7 1.8 1.9 4.0 1.4 1.6Non-Bank 4.4 0.8 3.4 4.0 2.8 5.4 5.2 4.8

Hemo ItemDefense & Public Order 1.4 2.8 3.4 4.8 3.2 4.5 3.6 3.6

al After Policy Measures.

Source: Central Bank of Sri Lanka

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Fiscal Developments in 1988 and 1989

7. The Deterioration of Fiscal Performance in 1988. Large fiscal deficitsaveraging well over 1o0 of GDP have been the primary reason for Sri Lanka''smacro-economic imbalances in the last decade. Reducing the fiscal deficit tobelow 102 of GDP was one of the most important objectives of the first-year PFP.This was to be achieved mostly through a reduction in expenditure. At ovez 202of GDP, government revenues already absorbed a large share of the country'sresources and, given the narrow tax base, raising them further may haveundesirable effects on tax evasion or output. However, instead of the envisageddecline, the central government's fiscal deficit increased from 112 of GDP in1987 to almost 162 in 1988. Although revenue collections did fall short ofbudgetary expectations (by 22 of GDP), it was supplementary expenditures(amounting to 4.71 of GDP) that contributed most to the increase in the overallfiscal deficit. Thus, while there was a substantial amount of underexpendituresin the capital budget on account of the security situation (see para 10), thiswas more than compensated by supplementary recurrent expenditures.

Table 4: MAJOR SOURCES OF OVER-EXPENDITURE IN 1988 a/(Rupees Million)

Total Identified sources of Over-expenditure 10,415 (4.72 of GDP)

Discretionary 5,035 (2.3Z of GDP)

Teachers' salaries 670Pension 610Transfers to Central Transportation Board 590Employment creation 95Interest payments 450Transfer to cover losses of Food Commissioner 650Loans to public servants 500Free textbooks program 180Airport development (capital) 980Provincial councils (curreLt and capital) 310

Conflict Related 4,040 (1.82 of GDP)

Defense (current and capital) 2,750Telecommunications 760Central Electricity Board (capital) 530

Drought Relief 1,340 (0.62 of GDP)

a/ Deviations from 1988 Budget.

Source: Central Bank of Sri Lanka and Ministry of Finance.

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8. About half of budgetary overruns in 1988 were related to the securitysituation and can thus be considered outside the authorities' control(nexogenous" in Table 4), while the other half are the result of government'sdiscretionary octions. The supplementary provisions for defense totalled Rs2.8 billion (1.22 of GDP), while higher capital expenditures by the CeylonElectricity Board and by the Telecommunications Department (Rs 1.3 billion, i.e.0.62 of GDP) were undertaken to repair power and communication lines broken bythe terrorists. Another expenditure item that can be considered outside theGovernment's control is Rs 1.3 billion for drought relief operations. All inall, exogenously determined increases in Government expenditures reached 2.32of GDP.

Table 5: MAJOR SOURCES OF DEVIATIONS FROM REVENUE ESTIMATES IN 1988(Rupees Million)

Total Revenue Shortfall -4,075 (1.82 of GDP)

Discretionary -1,740 (0.82 of GDP)

Tea tax -440Tmport duty -500Turnover tax on imports -710Export duty on tea and coconuts -90

Exogenous -2,335 (1.02 of GDP)

Tobacco tax -1,220Liquor excise -180Turnover tax on manufacturing -130Receipts fromRailways -255Postal services -150Telecommunications -400

Memo Items:

Additional revenues as a result ofmeasures taken in the second half of 1988 -1,195 (0.52 of GDP)

Rubber duty +175Stamp duty on letters of credit +200Turnover tax on non-manufacturing +550Interest from corporations +260

Sources Central Bank of Sri Lanka and Ministry of Finance

9. Wage increases were the second most important source of over expenditures.Wage increases were budgeted in the 1988 budget and were granted to Central

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Government employees under the expectation that they would be quickly followedby reductions of staffing levels in the central government to the levelsrecommended in the Administrative Reforms Committee (ARC) reports. In lastyear's tArmoil, the preparatory work necessary to implement the ARC'srecommenuations could not be completed, however. In addition, wage increasesin the central government triggered wage demands throughout the public sectorand brought in their wake higher transfers to (and lower taxes from) publiccorporations hard-pressed to finance the wage increases. The two mostsignificant cases in this regard are the Central Transport Board (CTB) whichrequired Rs 600 million supplementary and the two estate corporations (JEDB andSPC) which, to remain afloat, required a reduction in taxes on tea (Table 5) aswell as new loans from the state banks which in mid-1989 had reached close to12 of GDP. The wage increases also brought about other unforeseen expendituressuch as demands to review the teachers' salaries (at a Rs 670 million cost),readjustment in pensions of those already retired, and automatic increase in thelevel of lending that civil servants are entitled to (since the latter is afunction of their salary) (Table 4). In addition, the rapidly rising stock ofdebt as well as higher interest rates on Treasury bills required Rs 450 millionadditional to cover payments on the Government's debt. The increase in theinternational price of wheat and the Government's decision not to pass this onto consumers in an election year required Rs 600 million to cover the losses ofthe Food Commissioner, a state agency in charge of importing and marketing wheat.

10. The 1988 capital budget was Rs 27 billion while actual expenditures turnedout to be only Rs 23 billion (Table 3), Most of the underexpenditures were theresult of capital projects which could not be implemented because of thc securitysituation (see paras 47-49 on project implementation). Chief among these wasthe reconstruction and rehabilitation program for the North and the East forwhich Rs 4 billion were allocated in the budget but only Rs 1.6 billion werespent. The Re 4 billion shortfall in capital expenditures would have been evenhigher had it not been for higher than anticipated expenditures for certainprojects. The most significant item in this regard is the Rs 1 billionsupplementary for the expansion of the international airport.

11. The shortfall in revenue in 1988 can also be divided between exogenous anddiscretionary tax changes. The most important discretionary changes were the Rs710 million shortfall in receipts from turnover taxes because of a reduction ofrates for imports with strong impact on the cost of living (pharmaceuticals,wheat); the Rs 500 million shortfall in taxes on tea exports that resulted fromraising the threshold price above which tea is taxed (as indicated earlier, thismeasure was mostly motivated with a view to accommodating substantial wageincreases in public sector plantations); and the elimination of import dutieson a number of items such as bicycles, motorcycles, etc.

12. At the same time, revenue collection was severely undermined by thesecurity situation in the South. In particular, terrorist activity inhibitedthe collection of tobacco and liquor taxes, and the turnover tax onmanufacturing. Likewise, the revenues on the railways, postal services andtelecommunications fell on account of the disruption of these areas and becauseof a virtual cessation of billing during the last quarter of the year. Thesedisruptions resulted in a revanue loss of Rs 2.3 billion (12 of GDP) as comparedwith the original budgetary forecast.

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13. Thus, discretionary and exogenous deviations from the budget inexpenditures and taxes amounted to 6.52 of GDP, while underexpenditures andhigher than budgeted tax collections accounted for 2.52 of GDP. Thus, the fiscaldeficit was 42 of GDP higher than envisaged in the budget. In the middle of theyear, the Government took some revenue measures amounting to 0.52 of GDP but.in the absence of more determined efforts to control expenditures, theseincreases in revenues proved insufficient to contain the fiscal deficit to areasonable level. In addition, in the run-up to elections, most remainingvacancies in the civil service were filled towards the end of the year astemporary positions were regularized; the Food Stamp Program was doubled; anda second wage increase was granted to all civil servants; developments whosefuture implications by far outweigh their modest effect on the 1988 outturn.In terms of its financing, net foreign borrowing fell considerably short of whatwas anticipated under the budget on account of delays in the commencement of thereconstruction program. This implied change in the composition of domesticexpenditure also implied a shift in financing from foreign to domestic sources;the entire excess of the actual deficit over and above what had been budgetedwas financed by domestic bank and non-bank credit.

The 1989 Budget

14. Fiscal management in 1989 has been complicated by (i) the legacy of thedecisions taken towards the end of 1988; (ii) the decision not to pass on toconsumers substantial increases in the international price of wheat andfertilizer; and (Iii) the Government's decision to launch a comprehensive povertyalleviation program, (the Jana Saviya Program, JSP) and a mid-day meal programto reach all the schools in the country . The first has meant a risinggovernment debt that now absorbs close to 62 of GDP in interest payments; a wagebill estimated at 5.3Z of GDP in 1989 (up from 4.22 in 1987); and a food stampprogram that now requires 1.22 of GDP (0.72 of GDP in 1988). Second, not passingon to consumers the increases in the price of wheat and fertilizer meant (beforethe price of wheat was readjusted in July and the international price offertilizer began to decline) subsidies which would have reached 12 of GDP in thecase of wheat and 0.52 in the case of fertilizer. Third, the 1989 budgetallocated Rs 8.8 billion to the JSP and the mid-day meal (Rs 6.8 billion for JSPand Rs 2.0 billion for the mid-day meal). The 1989 Budget announced on March16, 1989 (instead of November of the preceding year) because of the generalelections, thus envisaged total expenditures at 37Z of GDP (342 in 1988) withrevenues at 232 of GDP (192 in 1988), i.e. a 13.72 overall deficit, with abouthalf to be financed from domestic sources and the remaining from foreign sources.in view of the security situation, the 1989 budget turned out to be overlyoptimistic on revenue targets and a number of expenditure items wereunderbudgeted.

15. The 1989 budget envisaged government revenues increasing by Rs 16 billion,i.e. an almost 402 increase over 1988. This ambitious revenue target containsseveral items of a one-time nature, e.g. collection of arrears and a tax amnesty,disposal of the Food Commissioner food stocks, and introduction of a 92 tax onCentral Bank's holdings of Treasury bills (which effective'y shifts CentralBank's profits which would have accrued to the central government as 1990 non-tax revenues into 1989 tax revenues). These one-time measures amount to as much

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SRI LANKA

MONETARY DEVELOPMENTS, 1984-89

40 40

FACTORS AFFECTING RESERVE MONEY30F (Billions of Sri Lanka rupees) , 30

},~~~3

20- Reserve money 20

==- -Net domestic asses 10

Net foreign assets' ;

10 ~~~~~~~~~~~~~~~~~~~~~~~~~101984 1985 1986 1987 1988 1989

50, 50GROWTH OF DOMESTIC CREDIT 2

40 _ 40

30 I '. Total public sector

20 - 20

10 - ~~~~~~otal domesic creit 1

0 1 0

10 _ ^ ,/ _210201 II, I .I 1 , .,.,.,.20

1984 1985 1986 1987 1988 1989

35 - 25GROWTH IN MONETARY AGGREGATES 2

3020

25t 20 ~~~~~~~~~~~Reserve money .. ' ,~15

2- o

1984 1985 1986 1987 1988 1989Source: Data provided by the Sri Lanka authorities.1/ Excludes vuluation adjustments.2/ 12-month percent change.

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as Rs 5.5 billion. Without these measures the increase of revenues over 1988levels is 25Z and largely results from increases in excise duties, in the ratesof turnover taxes and customs duties, and the introduction of a withholding taxon interest from Treasury bills and other government securities. Thesediscretionary measures are estimated to yield another Rs 4.5 billion. Theincrease in nominal GDP expected during 1989 and the effects of the devaluationon the tax base account for the remaining Rs S billion increase in revenues.

16. On the other hand, the 1989 budget envisaged a 22Z increase in expe~ndituresover 1988 levels (from Rs 77 billion to Rs 92 billion) to accommodate the newexpenditure progr-ms but there are questions as to whether this programmedincrease was adequate. First, at Rs 8.2 billion, defense spending is budgetedat about the same level as in the 1988 budget, i.e. about 1OZ less in real terms,which may prove to be overly optimistic. Since 1984, the security situation hasalways required supplementary allocations for defense and it is uncertain whetherexpenditures in 1989 can be contained within the limits set in the budget.Second, delaying lprice adjustments for wheat, fertilizer, bus and railways faresmeant that the budgetary allocations for these subsidies were underfunded and,without the measures taken in July (see para 28), they would have required almost2Z of GDP of supplementary budgetary allocations.

Monetary and Price Development

17. Fiscal developments dominated the evolution of major monetary and creditaggregates through 1988 and the first half of 1089. Reserve money growthaccelerated steadily--increasing to 33Z by end-1988--despite the decline in themonetary authorities' net foreign assets. From the chart and table 6, it isevident that the main cause of this acceleration in the growth of reserve moneywas higher central bank credit to go.'ernment. The pressure on governmentborrowing was greatest in the second half of the year, partly on account of theintensification of the civil strife, but also as a result of the expendituredecisions taken in the run-up to the December elections. Associated with thislarge increase in tbe monetary base, the growth of most money and creditaggregates also accelerated in 1988. Credit to public corporations grew byalmost 50Z in 1988, a development that was to a large extent driven by thefinancial stresses created by the substantial wage increases granted during theyear.

18. In the course of 1988, the central bank did make several efforts to reducethe rate of monetary expansion. The central bank attempted to reduce itsholdings of government securities by allowing interest rates at the wveklyTreasury bill auction to rise from about 11Z per annum at the start of the yearto about 19Z towards the end of 1988. Similarly, the central bank also issuedsome Rs 500 million worth of its own securities in the second quarter of 1988.However, these measures proved inadequate given the sheer value of governmentborrowing. The central bank credit to government increased by 35S in 1988, insharp contrast with 1987 when it had expanded by mere 3S. In a further attemptto reduce monetary growth, the central bank raised the reserve requirement forcommercial banks in February 1988 from 1OZ of total bank deposits to 132.However, since all of the 3Z increase could be held in the form of Treasurybills, the measure did not really serve to reduce money grow in as much as it

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Table 6: MONETARY AND PRICE DEVELOPMENTS, 1984-1989(Rupees Million)

June1984 1985 1986 1987 1988 1989 cl

Monetary Survey

Net Foreign Assets 6,129 5.330 3,668 3,216 -331 -5,694Net Domestic Assets 35,769 41,737 46,020 53,346 66,355 72,610of which Credit

to Public Sector 18,847 25,423 27,884 34,239 46.708 50,038to Private Sector 30,831 34,106 36,605 41,002 49,932 50,070

Money (M2) 41,898 47,067 49,688 56,562 66,024 66,916Ml 16,647 18,661 21,051 24,901 32,158 31,749Quasi-money 25,251 28,406 28,637 31,661 33,866 35,167

Monetary Authorities

Reserve-money 13,705 16,894 18,031 19,273 25,583 24,806Net Foreign Assets 4,053 3,647 1,629 563 -2,649 -9.225Net Domestic Assets 9,652 13,247 16,402 18,710 28,212 34,031of which Net Creditto Government 13,950 20,640 23,135 23,921 32,242 35,433

--------------12 Month Percentage Change---------

Total Domestic Credit 0.9 19.8 8.3 16.7 28.4 21.1Public Sector -14.7 34.9 9.7 22.8 36.4 31.2Private Sector 13.7 10.6 7.3 12.0 21.8 12.5

Money (M2) 16.6 12.3 5.6 13.8 16.7 9.7

Monetary Authorities NetCredit to Government -20.9 48.0 12.1 3.4 34.8 9.9

Memo Items

Colombo Consumer Price Index a/ 10.2 1.5 9.1 10.2 15.0 11.1Three Month Treasury Bill

Rate (2) 12.0 14.0 11.0 10.8 18.9 15.4Exchange Rate b/ (Ru/US$) 26.28 27.41 28.52 30.76 33.03 34.48

a/ End of period, on a point-to-point basis

bl End of period.

cl Estimates

Source: Central Bank of Sri Lanka.

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shifted the composition of bank credit from the private sector to the government.A similar ordinance was issued in September 1988--raising the required reserveratio to 152--with similarly minor consequences for the growth of monetaryaggregates.

19. Although the growth of domestic credit has decelerated somewhat duringthe first half of 1989 (212, twelve-month change) from the very high ratesexperienced last year (281), the continued excessive expansion of domestic credithas contributed to a further weakening in the balance of payments. Totalliquidity growth decelerated to 10 in the first half of 1989 compared with 162in 1988; the deceleration was almost entirely on account of a decline in netforeign assets (Table 6).

20. Reflecting the expansionary aggregate demand policies and the shortagesin supply brought about by the disruption in transportation, the Colombo ConsumerPrice Index (CCPI) grew gradually from a 102 rate of annual increase in 1987 to15? per annum towards the end of 1988. With the sudden decline in violence afterthe December Presidential elections, and more normal food supplies, inflationdecelerated to 10-112 in the first half of 1989. On the whole, however,inflation during the last year and a half has been remarkably modest given thelarge fiscal imbalances and the rapid increases in money supply. This developmentcan be explained by excess demand spilling into balance of payments in thepresence of a relatively fixed exchange rate. Between September 1988 and June1989, the period during which fiscal imbalances anu foreign exchange losses werethe most severe (about US$160 million in the first half of 1989, see para 22)the exchange rate was devalued by a mere 4S--from Rs 331US$ in September 1988to Rs 34.41US$ in June 1989. Thus, the cost of a moderate rate of inflation inthe presence of large fiscal imbalances and rapid monetary expansion was anincrease in the current account deficit in the balance of payments from 7.81 ofGDP in 1987 to 8.7? in 1988 and an estimated 10.3? in 1989.

Balance of Payments Developments

21. Since the early 1980's, Sri Lanka's balance of payments has been a matterof concern. Mirroring the large fiscal deficits prevailing at the time, thecurrent account deficit was as high as 201 of GDP in 1980 and 15? of GDP in 1982.Since then, helped by a temporary boom in tea prices (1984), more restrictivedemand management policies and a more rapid devaluation of the exchange rate,the deficit declined gradually to slightly less than 8S of GDP in 1987; theGovernment's intention as stated in the first year PFP was to reduce it furtherto about 6? of GDP by 1990, a level slightly below net aid inflows. It wasexpected that this strategy would allow the country to liquidate the relativelylarge loans contracted on commercial terms in the early 1980's--one of the mainreasons for the rapid increase in the debt service ratio in recent years (Table8)--and to increase reserves, which, at less than two months of import equivalentby the end of 1987, were at critically low levels.

22. As indicated earlier, expansionary fiscal and monetary policies during 1988and the first half of 1989 as well as insufficient adjustments in the exchangerate, contributed to arrest this improving trend, however. The current accountdeficit increased by 1? of GDP to 8.7? of GDP in 1988 and the balance of paymentscontinued to deteriorate through the first half of 1989, when gross official

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Table 7: BALANCE OF PAYMENTS SUbOMRY, 1980-88(US$ Million)

1980 1982 1984 1985 1986 1987 1988/d

Exports (G+NFS) 1.297 1,305 1,741 1,560 1,520 1,722 1,806(Merchandise fob) (1,065) (1,014) (1,462) (1,316) (1.209) (1,393) (1.471)

Imports (G+NFS) 2,205 2,205 2,140 2,290 2,273 2,398 2,563(Merchandise cif) (2,051) (1,990) (1,928) (2,038) (1,970) (2,073) (2,241)

Net Factor Income -26 -94 -133 -127 -138 -160 -172(M&LT Interest Payments) '-33) (-69) (-103) (-111) (-114) (-120) (-123)

Net Current Transfers La 136 264 277 267 284 313 319

CURRENT ACCOUNT -798 -730 -255 -591 -606 -522 -610Net Direct Investment 46 66 33 25 29 58 43Official Grants 138 162 203 175 180 180 207Bilateral and Multi-

lateral Loans (net) 151 170 250 279 307 222 324Disbur.sements (190) (204) (299) (335) (380) (303) (411)Amortization (39) (34) (49) (56) (73) (81) (87)

Private Loans (net) lb 84 222 78 -3 8 -54 -85Disbursements (96) (263) (128) (61) (100) (84) (51)Amorti4aticn (12) (39) (50) '64) (92) (138) (136)

Other Capital /c 159 89 -5 3 12 36 29Change in Net Reserveb(- indicates increase) 220 21 -304 112 70 80 92

------------------------- Zof GDP------------------------Current Account -19.8 -15.3 -4.2 -9.9 -9.4 -7.8 -8.7Official Grants 3.4 3.4 3.4 2.9 2.8 3.1 3.0Bilateral & Multilateral

Loans (net) 3.8 3.5 4.1 4.7 4.8 3.3 4.6Private Loans (net) 2.1 4.8 1.3 .. 0.1 -0.8 -1.2Net Current Transfers 3.4 5.5 4.6 4.5 4.4 4 7 4.6

Memo Items:Gross Foreign Exchange

Reserves /ein US$ million 246 351 546 427 348 263 260in months of imports 1.4 2.1 3.4 2.5 2.1 1.5 1.4

/a Mainly private remittances./b With Government guarantee. Includes suppliers' credits./c Includes short-term capital, Government non-guaranteed M&LT capital, SDR

allocations, and errors and omissions./d Estimates for 1988./e As of end of year.

Sources: Central Bank of Sri Lanka; and Bank staff estismates.

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reserves fell to the equivalent of three weeks of imports, the lowest level inthis decade. Were it not for heavy short-term borrowing, the level of reserveswould have been considerably lower. Lack of comprehensive data makes itdifficult to assess whether the US$160 million loss during the first half of theyear stems from the current or capital account. Available data suggest thatwhile imports remain high in 1989. exports have declined, as have receipts fromtourism. It is too early to assess, however, whether this reflects an excessdemand for goods, or is a symptom of capital flight via the misinvoicing oftrade. The demand for imports also reflects increased imports of rice, theproduction of which suffered from adverse weather conditions. Even a 16Sincrease in 1988 was not sufficient to bring paddy production back to the levelit had reached in 1985. Imports of rice have thus increased, from about 100,000metric tons (MT) in 1987 (at a US$20 million cost) to 210,000 MT in 1988 (US$60million) and about 300,000 MT (US$80 million) anticipated for 1989, not aninsignificant drain on the country's foreign exchange reserves, and one of thereasons for the anticipated increase in the current account deficit of thebalance of payments to 10.3? of GDP in 1989.

Table 8s DEBT INDICATORS, 1978-88

1978 1980 1982 1983 1984 1985 1986 1987 1988 a/

Total External DebtAs a 2 of Exports 144 148 220 223 177 227 260 266 266As a 2 of GDP 50 48 60 59 51 60 62 67 71

Memo Items:Debt Service (US$ Hillion) 131 229 308 341 308 346 412 494 556Amortization 73 128 112 117 114 132 176 236 270Interest 25 43 104 139 139 151 143 144 168IMF Repurchases 28 45 55 47 23 36 69 90 86IMF Interest 5 13 19 38 32 28 25 24 31

Total Debt (US$ Billion) 1.4 1.9 2.9 3.0 3.1 3.5 4.1 4.8 5.CPublic and Publi:ly Guaranteed 1.0 1.3 1.9 2.2 2.4 2.8 3.4 4.1 4.2Non-Guaranteed --- - - 0.1 0.1 0.2 0.2 0.2IMP 0.2 0.3 0.4 0.3 0.3 0.3 0.3 0.2 0.3Short-term Debt 0.1 0.3 0.5 0.4 0.3 0.3 0.2 0.3 0.2

Debt Service Ratios (1)As a share of exports ofgoods and services 13.5 17.0 21.9 24.2 17.1 22.5 26.0 27.6 29.6As a share of CurrentAccount Receipts 12.9 15.7 17.7 18.2 14.7 17.9 21.7 23.1 24.9

a/Preliminary estimates.

Source: Central Bank of Sri Lanka.

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II. The Formulation of the 1989-92 Economic Program

The Gradual Approach

23. Concerned with the escalation of social conflicts, and convinced that oneof the roots of political violence was an increase in the country's level ofpoverty, the new Government hesitated at first to take the drastic actions thatwould have been necessary to arrest the deterioration of the economy. To avoidcreating addi'ional hardships, the government decided to follow a gradualapproach to stabilization. Except for the price of oil which was readjustedearly in 1989 (oil is highly taxed in Sri Lanka and the increase in its pricewas intended to improve the finances of the Ceylon Petroleum Corporation andaccommodate the cost of the 1988 wage increases irn that corporation) thegovernment postponed adjustments in the price of basic items: wheat, fertilizer,bus and railways fares. Some measures were taken, however, to tighten monetarypolicy in May 1989. Deposit rates were raised at the National Savings Bank (NSB)from 13? to 15? per annum, a move followed by most comercial banks since theNSB, because of its size and widespread network, is a price leader in Sri Lanka'ssavings industry. Shortly thereafter, the central bank increased the discountrate from 102 to 142, imposed a selective freeze of commercial bank credit (allcredit except to agriculture, exports and industry), and required from commercialbanks a 1002 cash deposit against imports letter of credit for most luxury goods.

24. The same gradual approach was followed until June regarding the exchangerate. Between 1985 and the first half of 1988 a relatively active exchange ratepolicy had been pursued, which led to a cumulative 302 real depreciation againsttrading partners. This depreciation was sufficient to offset the appreciationof the rupee in the early 1980's, but meant only a 42 depreciation against SriLanka's export competitors, even though the country has had chronic balance ofpayments problems, a relatively high debt service ratio and is in urgent needto expand its exports and penetrate new markets. The tendency not to use theexchange rate more actively continued during the first half of 1989, despitethe heavy losses in foreign exchange reserves. The exchange rate was Rs33.03/US$ at the end of December, and Rs 34.51US$ at the end of June 1989.

The July Stabilization Program

25. By July, however, it had become evident that absent stabilization measures,a balance of payments crisis was imminent and that the fiscal deficit couldexceed the budgetary target because of higher than expected cost of subsidiesand revenue shortfalls. The prospect of further fiscal deterioration at a timethe balance of payments problem was becoming acute prompted the government totake actions on several fronts. First, it accelerated the devaluation of theexchange rate and by early September the USS was at Rs 40/US$, i.e. a 212increase in the rate in relation to end-1988. Second, it took a series of fiscalactions. The main one was to make the speed of implementation of the JSPconditional on the fiscal situation (para 26). In addition, the price of wheatwas increased by 202 and further increases that will eliminate the need forsubsidy by early 1990 have been decided. Helped by a decline in internationalprices, the per unit subsidy on fertilizer was reduced by about 352 in Septemberand will be eliminated by the end of 1989. Besides this, a 102 across-the-boardcut in non-wage, non-interest current expenditures was implemented in August and

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starting in September, this cut was increased to 202. These decisions shouldnot only prevent the fiscal deficit from increasing beyond the 13.72 envisagedwhen the budget was prepared but should also help to bring it down to 12.52 ofGDP. However, the government has deferred to early 1990 a substantial cut intransportation subsidies, pending a restructuring of the Central Transport Board.As the restructuring process may take longer than what is envisaged, this maycreate more pressure on the budget.

26. The reduction in the capital budget from Rs 29 billion to Rs 20 billionis an important factor in containing the fiscal deficit to the planned 12.52 ofGDP. Three developments help explain this reduction. The first is the decisionto reduce the speed of implementation of the JSP. Rs 2.8 billion for the*investment* component of the JSP (seq the PFP for details of the program) hadbeen budgeted but will, remain unspent. The second is related to the securitysituation in the North and the East which slowed the implementation of theReconstruction and Rehabilitation Program. Based on the fi-st six months of1989, only half of the Rs 4.4 billion allocated for reconstruction andrehabilitation will be spent during the year thus saving Rs 2.2 billion to the1989 budget. The third is the decision to impose across-the-board cuts (ordelay) capital projects with no foreign financing, and to readjust allocationsfor projects the implementation of which is being delayed because of the securitysituation in the South. These two factors together should bring about Rs 3.2billion of savings to the budget. The remaining Rs 0.8 billion is the resultof taking into account, at the aggregate level, the nominal level ofunderexpenditure normally associated with the capital budget.

27. In the more medium-term, the government has also decided to continue tomake implementation of the JSP conditional on the fiscal situation and to containthe expenditures on the JSP, National Food Stamp Program (NFSP) and mid-day mealto no more than 3.52 of GDP. These decisions, together with the new tax revenuemeasures envisaged in 1989 and 1990 which are described in detail in the PFP,should allow a gradual reduction in the fiscal deficit to 10.42 of GDP in 1990,92 in 1991 and 82 in 1992. On the monetary front, the central bank has decidedto reduce its financing of the central government deficit; it has already reducedits purchases of Treasury bills and allowed interest rates to increase to 18-202 during September. More restrictive fiscal and monetary policies, togetherwith a more active exchange rate policy, should allow the current account deficitto decline to 9.32 in 1990, 7.82 in 1991 and 6.32 in 1992.

The Structural Reforms

28. The development of Sri Lanka's human resources is much more advanced thanthat of its economic base. The essence of the 1989-92 program of reforms is tobring to the latter the same level of development that has been achieved in thecase of human resources by focussing on Sri Lanka's most serious constraint tosustained growth: an excessively large public sector which absorbs a large shareof the country's resources without a commensurate contribution to growth andproductive employment. The public sector's size and inefficient use of resourceshas little to do with the development of Sri Lanka's human base. The countryhas been remarkably efficient in structuring low-cost health and educationsystems as well as income transfer programs (the National Food Stamp Program,NFSP, being the main one) which are often far superior to those found in middle-

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income countries. In 1981, for example, Sri Lanka allocated 8Z of its GDP tosocial sectors, the same as the average for middle-income countries, the per-capita income of which was then five times Sri Lanka's. Thus, at one-fifth ofthe cost, indicators of Sri Lanka's population living standards are well abovethose in middle-income countries. While some of the low cost at which theseresults have been achieved is attributable to the country's relatively low wages(the most important cost element in health and education services, which arelabor intensive by their very nature), the excellence of Sri Lanka's publicadministration and the high degree of professionalism of its civil service areprobably the most important factors.

Table 9: SRI LANKA'S LIVING STANDARDS RELATIVE TO LOW-AND HIDDLE-INCOME COUNTRIES

Life Crude Infant Population Secondary Per Capita IncomeExpectancy Death Mortality Growth School Calorie Perat birth Rates Rates Rates Enrolment Consumption Capita(Years) (Per '000) (Per '00) (Percent) (Percent) 1987 USS

Sri Lanka 69 6 32 1.6 63 2,400 400

Low-Income 51 15 112 2.7 34 2,100 290Countries

Middle-Income 60 10 68 2.1 49 2,700 1,810Countries

Source: World Bank Atlas.

29. In spite of the country's significant achievements in improving the livingstandards of a large part of the population there is still a pressing need toimprove the lot of the least privileged groups, particularly in terms of theirnutritional status. Nutrition and health surveys carried out in the early1980's, and a more recent one carried out in 1987, identified a malnutritionproblem of unexpected proportions. In 1987, over 252 of pre-school children werefound to be stunted (low height for their age) from malnutrition. Over 1O werefound to be acutely malnourished (low weight for their height)--which issurprising in view of Sri Lanka's low infant and child death rates. While thesenutrition results are not significantly worse than those found in surveys carriedout in the mid-1970's, the aovernment is of the view that further restructuringof the economy will not be socially acceptable unless it is accompanied with someimprovement in the living standards of least privileged groups. Critical toachieving this goal will be the generation of productive employmentopportunities. Thus, the gist of the 1989-92 program of economic reformsoutlined in the second-year PFP is to bring about further improvement to thecountry's human resource base pari-pasu uith the implementation of policies whichwould strengthen the economy's growth performance.

30. The liberalization of the economy in 1977 began a process which provedextremely effective in improving the functioning of markets and microeconomicincentives in general. The 1977 liberalization failed, however, in improving

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macro-economic performance; on the contrary and as indicated earlier, post-1977macroeconomic policies tended to overvalue the currency and led to extremelyhigh fiscal deficits. These policies resulted in severe imbalances and increasedthe cost of capital to the private sector. In addition, the 1977 liberalizationfailed to increase the efficiency of public spending; a number of expensiveprojects with negative rates of return were financed out of the budget, theFertilizer Corporation, closed in 1985, and Air Lanka being the most giarin3examples. Finally, the efficiency of the PEs continues to be a serious problem.

31. The first-year PFP recognized the need to extend to the public sector theprinciples of the 1977 liberalization of the economy. At the heart of thestructural adjustment outlined in that paper were reforms focussing on the publicsector, its efficiency, its size, the claims it puts on resources and its useof such resources. This "break with the past' did not take place in last year'senvironment but the second-year PFP outlines agair., an ambitious program ofstructural reforms focussing on the public sector. While no substantial progressin implementing policies has been made during the first-year PFP period, a numberof studies were completed and policies formulated. The result is that the newprogram is much more focussed than the previous one. There is a question,evidently, as to whether the implementation cf policies in the second-year PFPwill be delayed because of the uncertain poiitical situation, as was the casewith the policies envisaged in the first-year PFP. All indications are that inaddressing structural issues, the government will show the firmness demonstratedafter July in stabilizing the economy. The content and phasing of thegovernment's economic program are described in detail in the second-year PFP,but some of the main components of the program and economic dimensions arediscussed below.

32. The program specifies five main areas of reforms. The first is the reformof the civil service with a view to creating a smaller and better paid civilservice. Sri Lanka's central gover'nment has grown in an uncoordinated fashionin the last decades, some times because of genuine needs but more often becausethe public sector has been considered the employer of last resort. Rationalizingthe government's administrative structure, reducing overstaffing, and increasingthe levels of pay when necessary, are thus essential measures if the country isto maintain the excellence of its public administration at a cost which can beaccommodated in the budget.

33. Restructuring the civil service will lead to large reductions in publicsector employment; as much as 100,000-120,0001 staff, if not more, may beretrenched, out of about 770,000 staff in the public sector (according to thelast Public Sector Employment Census carried out in 1985, excluding employmentin the tree crops state plantations). While this may seem small in relation tothe total labor force, (about 6 million in 1986), it represents a very largeshare of formal employment, probably 5-6Z. Based on a 2? attrition rate, onlyabout one-half of the planned retrenchment would result from normal retirement.The government is aware of the obvious political difficulties associated withthe reductions in public sector employment; based on retrenchment experiences

1 refers to staff in both the central government and public enterpriseswhile the PFP refers to central government only.

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which have taken place in the past (e.g. in the Central Transport Board and theFertilizer Corporation in the mid-1980's) it feels confident, however, that thesepersonnel cuts could be implemented over a three to four-year period ifcompensation packages were sufficiently attractive. In carrying out the program,it will be essdntial to maintain an effective freeze on public sector employmentand to establish mechanisms to monitor such a freeze.

34. The second is the rationalization of public expenditures with a view toeliminating wasteful programs and increasing the efficiency of spending inremaining programs. The last World Bank Country Economic Memorandum on SriLanka made a detailed analysis of Sri Lanka's public spending. The progtamoutlined in the second-year PFP addresses most of the concerns expressed in thatreport; it should be recognized, however, that the task of increasing theefficiency of public expenditure programs has become much more complex thanbefore as a number of new public expenditure programs have been created in 1988or early 1989. The JSP is obviously the most important one. As originallystructured, the JSP was not an effective anti-poverty program because: ti) theselection criteria were too loosely defined; (ii) it provided to familiesbenefits which were large compared to income levels prevailing in the country,thus creating strong disincentives to work and conversely, strong wage pressuresin the labor market; (iii) its benefits were unrelated to the beneficiaries'income thus introducing strong inequities; (iv) it was limited to two years whilepoverty is a long-term problem with complex roots which cannot be resolved overa short period of time; and (v) it failed to provide a safety net; i.e., familiesfalling into poverty after the selection process was completed would not benefitfrom the JSP. In addition, the government's original intention was to eliminatethe NFSP--a program that suffers from serious mistargetting problems, blt whichhas a proven strong positive impact on the living standards of the poor--andreplace it by the JSP.

35. The government's decision to restructure the JSP has avoided the numerousbudgetary and economic pressures, as well as the social tensions, that the largescale implementation of the JSP would have inevitably brought about. It alsohad the indirect effect of ensuring the continuation of the NFSP. For thefuture, it would be essential to formulate a comprehensive anti-poverty policyand specific related programs. In this new anti-poverty approach it would beprobably desirable not to discontinue the NFSP, but to improve its targetting.

36. The mid-day meal and the subsidy for bus transportation are two otherlarge expenditure programs that need to be restructured. The mid-day meal's mostserious problem is that, in addition to its lack of targetting and cost (almost12 of GDP), it fails to reach the population which is most nutritionally at risk,i.e. pre-school children. The subsidy for bus fares has the undesirable effectof weakening the private bus industry finances. As fares in the public sector(both buses and railways) have not increased since 1982, private buses have foundit difficult to raise their fares and remain competitive even though their fareshave been deregulated since the early 1980's. The weakening of their financialposition and their inability to repay their loans is believed to be an importantreason for the insolvency problems that many finance companies experienced in1988 and which made it necessary for the central bank to irLtervene to avoid amajor crisis in the financial sector. While there may be a case for subsidizingpublic transportation, it is important that the system as a whole be viable;

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thus the alternative between restructuring the industry before raising fares orincreasing bus fares ahead of improvement in services needs to be considered.

37. Improving PEs' efficiency is the third major area of reform, for whichthe program addpts a three-pronged approach consisting of privatizing when thiscan be done immediately ; restructuring and commercializing when immediateprivatization is not possible, and liquidating when a public enterprise is notinherently viable. While the approach is clear and simple, its implementationwill be complex. In some cases, e.g. manufacturing, the technical studiesnecessary for the process to be implemented have already been completed, whilein others, e.g. tree-crops, they are just starting. The process may take sometime to be implemented, but its effects on growth should be noticeable in arelatively short period of time.

38. As discussed earlier in this note for tree-crops and manufacturing, therelatively poor performance of PEs has slowed overall growth considerably. PEsare present in virtually all sectors of the economy--manufactuting, banking,insurance, hotels, air transport, shipping, etc.--and it is widely recognizedin Sri Lanka that, with few exceptions, their standards of efficiency are low.This is not necessarily because PEs managers are not well qualified, but ratherbecause the level of political influence and the contradictory objectives thatPEs are forced to pursue (provide employment; be a source of revenue to thecentral government, supply consumer goods at low prices, etc.) render efficientmanagement virtually impossible. Thus, while management skills in the privatesector are not inherently superior to those in the public sector, particularlyin Sri Lanka, experience has shown again and again that these skills were oflittle use given the public sector vulnerability to political interference. Theprogram outlined in the PFP should thus allow considerable gains in efficiency.It will be also important, however, that the government exerts judiciously itsshareholder role in the case of enterprises that are to remain in the publicsector. Frequent changes in management should be avoided, particularly when amanagement team is proving successful at reducing the need for budgetary supportand increasing the enterprises's efficiency.

39. Reducing impediments to private sector activity is the fourth importantarea of reform. There have been numerous and recurrent complaints from theprivate sector against excessive regulation or bureaucratic barriers, most ofthem put in place before 1977 when the economy was highly regulated and whichare now creating unnecessary costs and delays. In addition to deregulatingforeign investment, the program also intends to institutionalize channels wherebythe private sector can demand and propose changes in the regulatory frameworkand bureaucratic procedures. Last but not least, trade reforms are the fifthimportant area of reforms envisaged in the PFP. It should be highlighted thatSri Lanka's trade regime is already one of the most liberal in Asia in the sensethat it is virtually free of quantitative restrictions and non-tariff barriers,but the level of effective protection is still too high and the range of rates,excessive. The gist of the reforms envisaged in the second-year PFP is to reducelevels of effective protection and to reduce their dispersion, an objective thatshould increase the country's export orientation.

40. The second-year PFP outlines other important reforms in several areas butthere is little to add to what is already in the paper on financial sector,

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agriculture, energy and other sectors' reforms. On the whole, the 1989-92economic program is well articulated and addresses the country's most fundamentalconstraints to growth. It is the result of several years of studies, policypapers, and the work of high !t'vel government committees which in severalinstances have been supported by na.ltilateral or bilateral institutions. Itholds the promise of a more balanced, dynamic and equitable growth process inthe medium term while, in the short run, it should ease some of the costs ofstructural inefficiencies in the public sector. Needless to say, its successor failure will hinge on whether or not stabilization issues are addressed asthey emerge, on the maintenance of a realistic exchange rate policy, and on atimely implementation of the 1989-92 policy agenda.

I1I. Medium Term Projections and Aid Requirements for 1989-92

Balance of Payments Projections

41. The balance of payments projections in Table 10 have been prepared by theCentral Bank in consultation with the staffs of the IMF and the World Bank.Underlying the projections are three assumptions. The first is that a returnto normalcy remains highly uncertain, and thus foreign exchange receipts fromtourism and foreign investments continue at relatively low levels, at least until1990, but begin to grow at modest rates in 1991. In the case of tourism, forexample, foreign exchange earnings in 1989 and 1990 are assumed to be about onlyUS$50 million (Table 11), well below the US$70 million reached in 1987 and belowUS$60 million in 1988.

42. The second is that exports volume will grow by an annual average slightlyover 52 annually over the medium term, a rate significantly higher than thatachieved in the last few years. Exports of tea and rubber in 1989 are expectedto decline both as a result of adverse weather conditions and the effect ofdisruptions, and are projected to grow at modest rates from 1990 onwards. Inthe case of tea, for example, production in 1989 is expected to decline to183,000 tons from 220,000 tons in 1988 and 201,000 in 1987; the exportprojections assume, conservatively, 200,000 tons only by 1992. Nontraditionalmanufacturing and agriculture exports are projected to expand rapidly, however.Implicit in this assumption is the expectation that the Government will pursuethe aggressive exchange rate policy that it has began implementing in July andwill adjust the exchange rate as needed. Details on how specific export itemsare expected to perform over the medium-term and how it compares with pastperformance are in Table 11.

43. The third is that the growth of import volume will be considerably belowthat of exports, and slightly below that of GDP. The annual average rate o.import growth for 1989-91 is taken as 2.1Z while that of GDP is at 2.6Z, implyingthat the elasticity of imports to GDP is at 0.8. While this is low, it is inline with the experience of the last three years. In addition, two developmentsshould help contain the elasticity of imports in relation to GDP in the mediumterm. The first is the reduction in imports of rice as more normal weatherconditions are expected to prevail. The second is a slowdown in imports of otherconsumer goods as relative price are realigned.

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Table 10: MEDIUM TERM BALANCE OF PAYMENTS, 1988-92(US$ Million)

Actual --------Projections------1988 1989 1990 1991 1992

Trade Balance -768 -797 -700 -642 -597Exports 1,472 1,473 1.637 1.844 2,066Imports 2,241 2,269 2,337 2,485 2,663

Services -161 -191 -193 -191 -172

Goods and Services, net -930 -987 -893 -833 -769

Private Transfers, net 319 282 278 281 284

Current Account -610 -705 -615 -55w -485

Official Transfers 207 183 186 204 211Director Investments 43 20 29 37 46Private Long-term, net -52 -37 -32 -42 -38Government Long-term, net 255 229 320 369 335Short-term, net 14 95 13 20 15Errors & Omissions 50 - - - -

Change in Net Reserves -93 -215 -99 36 84

Use of Gross Official Rese.ves 13 65 -58 -19 -55Use of Fund Credit 120 26 16 -83 -71

Purchases 206 85 57 - -CFF 146 - - - -SAF 60 85 57 - -Repurchases 86 58 41 '13 71

Central Bank Short-term Borrowings -52 162 -64 -65 -37Rest of Banking System 12 -38 38 - -

Financing Gap - - 167 130 79

Sources: Central Bank of Sri Lanka, IMF and Bank Staff estimates.

44. Under the above assumptions, it should be possible tc finance the currentaccount deficit and a modest build-up of reserves by maintaining aid flows inreal terms at the levels they have reached in the recent past (excluding the one-time exceptional increase associated with the Reconstruction Program), butincreasing the proportion of quick disbursing assistance. This should besuff4.ient to generate the disbursement flows assumed in Table 10, even takinginto account the slowdown in project implementation brought about by the increasein the level of disruptions in a number of project areas.

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Table 11: EXPORT PERFORMANCE INDICATORS, 1979-92

----Actual------ -------------Projected------------- Memo ItemsShare in 1988

1979-83 1984-88 1989-92 1989 1990 1991 1992 Exports (2)---------------------Annual Growth c/----------_____

Tea .-4.7 9.5 -1.9 -16.7 4.1 2.1 3.0 24.7

Rubber -1.8 -4.5 -1.7 -7.4 1.1 -0.2 -0.5 7.5

Coconuts 9.3 -11.5 42.8 123.1 30.3 10.3 7.7 3.1

Other Agric.Products 15.1 -6.5 4.8 0.1 3.8 8.2 7.2 5.2

Garments 42.1 19.7 9.7 5.4 8.8 13.7 10.8 28.7

Total ExportsVolume 3.9 3.3a/ 5.3 2.6 6.9 5.7 5.8 100.0

Memo Items

Tourism (USSM)b/ 103.0 80.0 67.0 48.0 53.0 70.0 96.0

Imports Volume n.a. 2.2al 1.9 2.4 -0.7 2.7 3.2

GDP Growth 5.6 2.8a/ 3.0 2.0 3.0 3.0 4.0

a/ Based on 1986-88 after Central Bank's index was revised and the weightsof non-traditional exports increased.

b/ In nominal terms.c/ In volume terms.

Sources: Central Bank of Sri Lanka and Bank Staff estimates.

The Role of Aid

45. Throughout the 1980's, aid flows played an important role in financing SriLanka's balance of payments. on the one hand because donor wished to support andencourage the country's liberaaization efforts that started in 1977 and. on theother, because the country demonstrated its ability to plan, formulate andimplement development projects on a relatively large scale. Thus, while for low-income countries aid inflows generally amount to 72 of GDP, they reached 82 ofGDP for Sri Lanka during the 1980's. Disbursements peaked at 92 of GDP in 1983,but then started a slow decline toward 72 in 1981. This decline was due in partto the outbreak of civil unrest in the country in 1983 and resulting slow-downin project implementation, and in part reflected* the completion of large

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hydropower projects. It also reflected, however, a temporary slow down in aidcommitments in 1983 and 1984 as rhe government and donors had to reassessinvestment plans and priorities in light of the eruption of the ethnic conflict.In recent years., aid commitments have fluctuated between 8 and 102 of GDP, exceptfor 1988 when they reached 162 of GDP because of the exceptional financingassoriated with the Reconstruction Program.

Table 12: ROLE OF AID FLOWS IN FINANCING THE CURRENT ACCOUNT(Annual averages as a Z of GDP)

Aid Aid Current AccountDisbursements Commitments Deficits

1975-78 4.7 7.0 1.71979-83 8.4 13.9 14.51984-87 8.3 8.8 7.91988 8.2 16.2 8.7

Source: External Resource Department, Ministry of Finance and Planning.

46. Agriculture (including irrigation) and public utilities absorbed half ofaid disbursements since 1980 reflecting first, the fact that two-thirds of SriLanka's population live and work in rural areas, and second, the impact of theMahaweli Accelerated Development Program. Irrigation projects received 7-82 oftotal disbursements, but annual figures fluctuated widely between 22 and 182depending on the level of activities in the Mahaweli Program. Manufacturing,and transport and communication have received relatively steady shares ofdisbursements: 4-5Z and 6-7Z respectively.

Proiect Implementation and Disbursements Profiles

47. Despite the substantial security problems, the government has made everypossible effort to continue implementation of development projects. Somedeterioration in project disbursements, however, appears to have taken place.According to the World Bank Debt Reporting System, Sri Lanka's projectdisbursement ratio (disbursements during a year as a share of the undisbursedpipeline at the beginning of the same year) declined from around 202 (1984-1986)to 172 in 1987-1988 for multilateral loans, and from 412 to 272 for bilateralloans during the same period. In addition, IDA's disbursements during the firstseven months of 1989 are proceeding at an annualized rate of only 102 as opposedto 201 in the past. According to field staff of the executing agencies,constraints imposed by the security situation probably account for most of thereduction in the disbursement rate for 1989, but the following factors haveplayed a role as well (i) the general elections of 1988-89; (ii) the delay ofthe budget to March 1989; (iii) the devolution of responsibilities to ProvincialCouncils; (iv; restructuring and relocation of Ministries; and (v) work on theJSP at all levels of the government, which have slowed administrative processescrucial for project implementation.

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Table 133 SECTORAL COMPOSITION OF AID DISBURSEMENTS(2 of total)

1980-84 1985-88

Agriculture,Forestry, & Fishery 21 27Irrigation 7 8Manufacturing 4 5Construction 1 8Public Utilities 25 18Transport &Communication 7 6Services & others 22 16Food aid a/ 11 9Technical Assistance 2 5

a/ Excludes commodity aid and other forms of balances of payments support.

Source: External Resource Department, Ministry of Finance and Planning.

48. According to donors, one of the most difficult problems slowingimplementation was the lack of access to project sites located particularly inthe areas most affected by the strife, mainly in the Northern and EasternProvinces, and the areas of high JVP activity in the South. Althoughpreparatory work such as planning, preparation of designs and cost estimatesand some preliminary procurement work could still be done, there was a noticeableslowdown. This has seriously affected the Reconstruction Program, as well asprojects related to the Mahaweli Accelerated Development Program. Other problemsfaced by the government and donors in project implementation include theinability of the staff to remain in some of the rural areas for a long periodof time and to carry out sustained construction activities. It has aiso beenat times difficult to have routine decisions taken in the midst of working hoursthat have been disrupted by the generally unsettled conditions created by the"hartals' or JVP-imposed curfews. Construction activities have been stymied onnumerous occasions by the disorders.

49. Yet, in the midst of all the uncertainties brought about by the civilstrife, project implementation is continuing, albeit at a slow pace. Donors arestill able to send operational missions, although their geographical coveragehas become increasingly curtailed. Work in Colombo, however, is proceeding atan acceptable rate and Government is still able to provide responses to officialinquiries on project issues. Projects related to the industrial sector orlocated in Colombo appear to be facing the least amount of delays. Projectsinvolving large construction programs and located in problematic rural areas seemto be faced with the most serious delays, if not outright stoppage. In a numberof projects where the project sites cover areas throughout the country, as muchas 20-50? of the sites may be inaccessible and activities may have stoppedtotally; however, staff at the remaining sites in a number of cases still appearto be implementing the projects, albeit at a reduced rate.

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Table 14: SRI LANKA - EXTERNAL FINANCING REQUIREMENTS, 1988-92CUSS Million)

1968 1989 1990 1991 1992.Actual --------- Projections ------------

Current Account Deficitexcluding official transfers 610 706 615 551 485

Amortization 270 220 195 214 263Change in Reserves (Decline -) -13 -66 58 18 55IMF Repurchases 86 58 41 83 71less: Direct Investment 43 20 29 36 46

Total Finance Requirement 910 898 879 830 827

1. Private Capital Flows a/ 118 120 44 58 64

2. Disbursements from Donors 574 497 485 569 583

A. From Existing Commitments 574 442 i33 376 302

Grants 207 156 76 70 53Official Loans 367 286 257 306 249Bilateral 241 179 186 213 159Multilateral 128 108 72 93 91of which: World Bank 65 48 45 52 43

ADB 52 44 26 39 39

B. From Expected NewCommitments -- 54 152 193 281

Grants -- 27 110 134 159Official Loans -- 28 42 60 122Bilateral -- 25 14 19 75Multilateral b/ -- 3 28 40 47of which World Bank -- -- 15 21 21

ADB -- -- 10 17 22

3. Disbursements from non-concessional sources 51 72 152c/ 136 139

4. IMF: SAF 60 85 58 -- --

CFF 146 -- -- -- --

5. Other Monetary Movements(including Central Bankshort-term positions) 40 124 -26 -65 -37

6. Financing Gap -- -- 167 130 78

a/ Including public enterprises and net short-term flows.b/ Excludes adjustment lending.cI/ The large increase in 1990 onwards reflects increases in both mixed project

lending and financing of wheat imports guaranteed by an export-import bank.

* a: Atta t ' r of the second-year PFP.

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Aid Requirements

50. External assistance requirements in Attachment III of the PFP (Table 14)have been projected taking into account: (i) the US$85 million that will beprovided by the IMF in 1989 in the context of the SAF expected to be approvedin the first half of October; (ii) the reduction in the current account deficitof the balance of payments from 10.32 of GDP in 1989. to 9.3? in 1990, 7.82 in1991 and 6.32 in 1992. in the context of the 1989-92 Economic Program; and (iii)the slow down in project implementation (Table 16). About US$2.4 billion indisbursements will be necessary over 1990-92 to finance the current accountdeficit, repay the central bank short term debt contracted during 1989. amortizethe foreign debt, and restore reserves to a modest 1.4 month of imports by theend of the adjustment period. About US$1 billion is expected from disbursementsout of already existing commitments from donors on concessional terms, and US$430million on non-concessional terms. Over two-thirds of the latter are expectedto consist of official bilateral guaranteed credit to finance purchases of wheat.Besides this, the IMF is expected to disburse US$60 million in 1990. Theremaining US$1 billion will have to be financed out of new commitments.

51. Based on historical disbursement patterns, US$2.5 billion of commitmentsduring 1990-92 would have been more than sufficient to ensure this level ofdisbursements and would have allowed a more rapid build-up of reserves. But,with the project implementation problems that have emerged in the last few years,this would not be enough unless there is a change in the historical mix betweenproject and program type assistance. About US$800 million of the US$2.5 billionshould thus be in the form of quick disbursing adjustment loans if Sri Lanka isto avoid balance of payments problems in the next few years. The US$2.5 billionof overall commitments that are necessary in the next three years (US$780 millionin 1990; US$841 million in 1991; and US$912 million in 1992) are in line withthe levels of aid provided to Sri Lanka in the recent past after excluding theexceptional financing that was obtained in 1988 for the Reconstruction Program.US$2.5 billion over 1990-92 are equivalent to about US$540 million per year,valued in 1980 US$. This is the average for 1985-87 and represents no increasein real terms. Therefore, what is necessary at this stage in Sri Lanka is notso much an increase in the level of aid, but a change in its composition. Theproject pipeline has increased substantially from US$1.3-1.4 billion throughoutthe early and mid-1980's to about US$2.2 billion after 1988; a furthersubstantial build up would not be consistent with the overall macro-economicframework and fiscal constraints. 'While aid in support of the balance ofpayments has normally accounted for about 162 of commitments, it now needs tobe increased to 402 in 1990, and to about 30Z in 1991-92 to assist thegovernment's efforts to effectively implement the adjustment program outlinedin the PFP. Thui, increased support in the form of commodity aid or generalimport financing will be essential in the next few years. There is ample scopeto increase commodity aid. Sri Lanka imports relatively large quantities ofwheat, fertilizer, sugar and milk. In addition, there is a need to rebuildstocks of rice which have been depleted in the last few years and are now at amere one-month level of domestic consumption. While sources of financing forimports of wheat have already been identified, this is not the case for othercommodities.

-29-

Table 15: COMPOSITION OF AID COMMITMENTS (US$ Million)

Total Proiect Commoditv/BOP Memo ItemCommitments Total Loans Grants Total Loans Grants

Year Nominal Real a/ B. M. B. M. B. M. B. M. MUV b/Actual1982 541 546 409 152 199 47 18 132 57 0 66 9 991983 365 375 263 62 119 69 13 102 36 0 50 16 971984 462 487 310 124 57 105 24 151 53 0 83 15 951985 547 571 487 62 241 168 15 61 43 0 3 15 961986 653 580 584 264 174 124 22 68 35 0 26 7 1131987 575 466 427 168 97 117 45 148 68 0 62 18 1231988 1,133c/ 850 1,017 307 426 279 5 116 60 0 45 11 133

Projected1989 848 618 653 214 182 257 0 194 63 80 46 5 .071990 780 510 481 43 230 181 27 299 149 100 45 5 1531991 841 543 578 52 305 192 29 263 151 60 47 5 1551992 912 573 674 62 365 217 30 238 132 50 50 6 159

B-Bilaterals M=Multilaterals

a/ Ir 1980 US$.b/ Unit Value Index in US$ terms of manufactures exported from the

G-5 countries to developing countries; 1980-100.c/ Of which US$322 million for the Reconstruction Program.

Sourcess Department of External Resources, Ministry of Finance and Bank Staffestimates

52. Were there to be delays in the implementation of the policies envisagedin the adjustment program, increased balance of payments assistance would becounterproductive, however. On the other hand, were events to evolve differentlythan the assumptions in this report. i.e. were the civil conflict to escalatebeyond current levels or were international terms of trade to move against SriLanka, the country's financing needs would be substantially greater than whatis indicated in this report. Given Sri Lanka's extremely low level of foreignexchange reserves, even a mild shock may have highly disruptive consequences onthe trade regime and the economy. This situation calls for a willingness on thepart of donors to provide increased support should the need arise so that theimplementation of the program of reforms outlined in the PFP not be put injeopardy. This recommendation assumes the continuation of an extremely carefuland consistent economic management on the part of the government and thatstabilization issues will be addressed as required to protect the country'salready low level of foreign exchange levels. The country cannot afford anyfur.her loss of foreign exchange reserves after the heavy losses experienced in1988 and the first half of 1989. The government's willingness to actively pursueappropriate fiscal, monetary and more particularly, exchange rate policies, willbe essential in that respect.

Table 16: SRI LANOU - SUWMARY OF AID COMMITMENTS AND DISBURSEMENTS, 1982-1992

(US$ Millions)

Undisbursed Balances a/ New Commitments bl Disbursements bl

Disbursement

Year Total(Proiect) Loans Grants Total(Proiect) Loans Grants Total(proiect) Loans Grants Ratio cl

Actual1982 1,566 (1,334) 1,354 212 541 (409) 409 133 408 (311) 256 152 22

1983 1,471 (1.253) 1,284 167 365 (263) 217 148 463 (331) 284 178 25

1984 1,388 (1,379) 1,183 205 462 (310) 234 227 536 (396) 335 200 32

1985 1,411 (1,307) 1,179 232 547 (486) 346 200 502 (404) 324 177 29

1986 1,503 (1,402) 1,268 235 653 (584) 473 179 547 (444) 364 182 34

1987 1,576 (1,431) 1,280 296 575 (427) 333 242 489 (402) 309 180 29

1988 2.135 (1,969) 1,703 432 1,133 (1,017) 793 340 575 (446) 368 207 31

Projected1989 2,414 (2,165) 1,855 558 848 (653) 539 308 569 (457) 386 182 23

1990 2,390 (2,133) 1,760 630 780 (481) 522 258 804d/ (513) 618 186 24

1991 2,395 (2,144) 1,696 699 841 (578) 568 273 836d/ (567) 632 204 26

1992 2,506 (2,238) 1,715 792 912 (674) 609 303 801d/ (580; 590 211 26

Note: Figures in parentheses are project aid totals.

a/ Net of adjustments and cancellations.bl Commitments and disbursements for 1990, 1991 and 1992 include balance of payments support

to fill financing gaps.cl Project disbursements as a share of undisbursed project aid pipeline at the beginning

of the year.

di Correspond to the total of lines 2, 3, and 6 in Table 14.

Sources: Department of External Resources, Ministry of Finance and Bank Staff estimates.

-31-

STATISTICAL APPENDIX

Table No.

1.1 Gross Domestic Product: Composition and SectoralDtflators, 1982-88

1.2 GDP. Its Components and Growth Rates, 1982-881.3 National Product and Expenditures, 1982-88

2.1 Balance of Payments, 1975-882.2 Aid Commitments, 1971-882.3 Aid Disbursements, 1971-882.4 Overall Aid Pi'eline, 1987-89

3.1 Summary of Central Government Revenue, 1984-893.2 Economic Classification of Expenditure, I084-893.3 Functional Classification of Current Expenditure and

Net Lending, 1984-893.4 Functional Classification of Capital Expenditure and

Net Lending, 1984-893.5 Central Government Domestic Debt, 1984-883.6 Current and Capital Transfers to Public Corporations, 1984-893.7 Transfers and Subsidy Payments to Households, 1984-89

Tabl 1.1: GOOSS DOOESTIC PRIOUCTt COMPOSITIOI AND SECTORA,. OEFLATORS, 1982-88(Current Factor Prices)

1982 1983 194 193 1966 1987 !/ V /

Re X,t R X ot Re 1 o R S of Rs X of Re S of Rs X OfMR GOP ln GDP Mn GDP Mn GOP Mn GDP Min GDP Mn GOP

Productito

riculture 249064 20.4 32160 26.8 40136 28.7 41069 27.6 44855 27.1 4728 27.0 36N00 26.8Mslting 22a 2.4 2700 2.6 8163 2.3 8828 2.2 4166 2.6 4927 2.8 6607 2.7Mmauectering 1801 14.4 16968 14.0 20690 14.9 21649 14.7 24669 15.2 28470 16.0 81298 15.4Contruction 7969 0.4 9607 6.0 11160 8.0 11640 7.6 12272 7.5 18020 7.8 14943 7.3Servics 45017 46.4 U134 46.8 64678 40.1 70435 62.6 70062 47.7 63891 40.9 96106 48.2

Utilities 1066 1.1 1426 1.2 1033 1.2 2042 1.4 2262 1.4 2846 1.3 2492 1.2Traesport/Commicatio 10666 11.3 12654 11.0 15499 11.0 16554 11.1 17911 10.9 1666 10.5 21966 10.6Co mencll Service. 19694 20.6 21795 19.1 27192 19.4 29261 19.7 81606 19.4 34620 19.4 40676 19.9Flmaclil Services 3ns 3.9 4163 8.7 4731 3.4 6093 8.6 6640 4.2 7466 4.2 9002 4.4mooning Service 3260 3.4 8696 b.2 3968 2.6 4162 2.6 4678 2.6 4904 2.8 6260 2.6Public Administration 2696 3.0 4100 8.J 6322 8.6 6876 4.4 7045 2.9 6501 4.6 11060 6.4Oer Sevice 464 4.9 6414 4.0 648 4.5 6347 4.8 6726 4.1 7002 8.9 7740 3.6

Oro. 1osesic Product 9679 100.0 113876 100.0 140039 100.0 145821 100.0 16718 100.0 177781 100.0 203516 100.0

Prrices (Iplicit Setltor.)

Agriculture 100.0 119.0 13.61 144.8 162.5 174.8 191.6Womlan 100.0 115.7 126.7 133.9 168.9 156.8 167.1lsautecerlng 100.0 110.4 136.7 1U4.9 141.6 161.9 169.6Coetrctlon 100.0 122.0 189.2 144.2 149.9 166.2 176.6Servicos 100.0 106.5 124.1 129.8 187.4 148.0 164.6

Utillties 100.0 122.3 132.0 156.6 160.1 162.0 166.2Traesporet/Cemnlcatioes 100.0 111.2 124.6 127.8 18.9 137.9 161.6Comerclil Service 100.0 104.9 128.6 127.6 188.6 140.9 161.3Financial Serviceo 100.0 101.2 104.6 114.6 182.2 136.6 164.7

ausong Services 100.0 116.6 121.3 125.4 185.4 166.1 146.7Public Admisnitration 100.0 106.3 127.8 143.9 160.9 160.4 202.8Other ServIcIs 100.0 116.0 18.0. 144.2 159.2 160.7 176.2

Gross DBostic Product 100.0 114.6 134.0 186.2 142.6 158.8 171.0

a/ PrevliocelInclew foretry and fishing

Source: Central Book of Sri Lanka

-33-

Tabl- 1.2: GOP, ITS COMPONENTS AND GROWTH RATES, 19M2-68(Re Mllion at Constant 1982 Factor Prices)

1982 I96 19648 i98 1986 19987! 19663/

Agriculture k/ 24964 20212 26118 26866 29106 27409 27984Mining 2238 241B 2449 2438 2616 3112 8392Manufacturing 13601 18710 15890 10198 17556 18748 19622Construction 7959 8039 80B0 6070 819L 8O83 8468Services 45917 49001 62418 54455 56791 68315 59689Utilities 1089 1161 1289 1818 1406 1446 149"Trensport/Com_unicatione 10666 11281 12437 12959 1887? 18586 13619Commercial Urvice0s 19694 20788 22029 22925 23621 24496 25164Fineancol U rvices 8716 4180 4626 4976 6174 5490 5819Housing Services 8250 316 5 u81 8482 8497 8550 860sPublic Ad&1nistration 2699 aTM 4164 4482 5274 6486 5462Other Services 4604 4590 4636 4419 4242 4B85 4428

Oross Domstic Product 94679 99875 104895 109570 114261 116922 119050

Annual Growth Rate (3)

Agriculture 2.6 5.0 -0.4 6.6 2.6 -6.8 2.1Mining 4.1 7.8 1.5 1.5 5.2 19.0 9.0Manufacturing 4.8 0.8 12.8 5.2 6.4 6.8 4.7Construction -2.0 1.0 -0.1 0.5 1.6 1.8 1.6Services 7.0 6.7 7.0 8.9 4.8 2.7 2.2

Uttlities 9.6 6.6 6.7 6.0 7.1 8.0 8.6Transport/Cosunic.tions 6.2 5.6 10.2 4.2 8.2 1.2 0.6Co ms reial Services 6.0 5.8 6.2 4.1 8.9 2.8 2.7FinancTal Serviceo 11.9 11.2 9.6 9.9 4.0 6.1 6.0Housing Services 6.6 2.0 2.0 1.5 1.9 1.5 1.5Public Administration 10.5 80.6 10.0 6.4 19.0 8.1 0.5Other Services 7.0 -0.8 1.0 -4.7 -4.0 2.7 1.5

Gross Domestic Product 5.; 5.0 5.1 5.0 4.8 1.6 2.7

*/ Provisional, Includes forestry and fishing

Source: Central Bank of Sri Lanka

-34-

Tabl 1.8: NATIOI.L PRODUCT AND EXPEDI1WE, 1982-S8(RU. Mll o Ton at Current Prle")

iut lIon 1154 1i8S 1983 1987 !f 1988 2/

PRODUCT

CDP at Factor Cost 94679 11367 140089 148821 168718 177781 203516Indirect Taxes Ise Subsidies 75U 10815 12719 16778 18872 22488 21733COP at Market Prices 102217 124198 162760 165094 162565 200219 225249Nat Factor Incom from Abroad -1959 -3214 -3401 -8400 -s86l -436 -6499CNP at Market Pries 100260 12087 149057 161694 176742 195883 219750

EXPENDITURE

Consumption 87468 104884 128170 148102 167850 171487 194488Public 6242 989 11935 16599 18480 19688 21653Private 79226 94945 111285 12650 189370 151949 172965

Cross Fixed Capital Formation 80279 U842 39568 6U7 42826 45752 50860Covernment and Public Enterprise 4846 5968 7076 7767 9U64 11216 1704Pubitc Corporations J ) ) ) 1 ) ) )Private )2U418 )2979 )32468 80097 )82692 84636 )3716

Change In Stocks 248 -210 15O 225 187 148 601Exports of Goods A NFS 27148 82016 44285 42287 42566 49559 57108Imports of Goods A NFS 45900 50881 58417 61646 68407 70223 80047

Memorandum Itms:

Gross National Savings I -11844 20204 84056 2231 26787 80S60 82044External Current Account Blance 15223 -1519 -6502 -15597 -16449 -15400 -19417

(Perent of GDP In current arket uric.o)

CDP (at Market Prices) 100.0 100.0 100.0 100.0 100.0 100.0 100.0External Resources (net Imports of OMS) j 18.4 14.8 6.0 11.8 11.5 10.8 10.2Tota; Resource Avellable (atotal use) 118.4 114.8 106.0 111.8 111.5 110.8 110.2

Consumption 85.6 0 4.4 80.6 88.7 66.4 85.6 66.8Public 6.1 8.0 7.8 10.1 10.1 9.8 9.6Private 77.5 76.4 72.6 76.6 76.8 ?6.9 76.8

Gross Fixed Capitol Fernation 29.6 28.5 25.9 28.8 28.2 22.9 22.6Covornmnt a Pubile Enterpri / 4.6 4.6 4.6 4.7 5.8 5.6 6.1Public Corporations g| 10.7 ) ) )Private 14.2 )23.7 )21.8 )18.6 0179 )17.2 )16.l

Change in Stocks 0.2 -0.2 0.1 0.1 0.1 0:1 0.3

Mmorandum Itms:

Cross National Savings */ 14.2 16.4 22.2 1S8. 14.1 15.2 14.2External Current Accountnblonce -16.8 -12.2 -8.6 -906 -9.1 -7.? -8.6

xX Provisional

/ Include Railways, Ports, Harbour, Warehous, Poets and Teleceounications. Since 1979, the Ports,Harbor, and Warehouse have becme Public Coporations and are no longer Included under Public Enterprire.

j/ Autonomouc state-owned enterprises.1 Equale Gros Flxed Capital Formatlon plus Change In Stocks plus Extrnal Current Account Balance

Net lmport of goods and non-factor servics.

Source: Central Bank of Sri Lanks

-35-

Ta a 2. 1: (LAC R PAl S 19t8QJSt Hit tII ion)

1975 1976 1977 1976 1979 19M0 1981 1982 198W 1454 198 1986 1987 198

CURREr ACCOUiNr

MKrchandie Export.. f.o.b. 6S5 56 747 68 982 1065 1O8 1014 1064 1472 1815 1210 1394 1472Port, Tranaprtation. 4 Insurance 29 26 27 20 29 44 60 59 69 72 70 9o 115 123Por..gn Travlt 18 28 33 48 68 99 117 19 102 102 82 83 71 62Covornownt Exponditure 6 6 6 7 8 8 10 is 1s 12 11 14 20 22Other Servico. 20 17 26 29 48 81 108 90 109 98 7r 118 122 126Inveetwent 'ncew 7 4 U2 20 40 47 33 44 45 58 83 88 69 68Private Res 'tancea 9 13 18 39 60 152 230 289 294 302 292 317 50 357

Payments Du2 r9t n z 2aa =Z 2Sm4 2m m 25m 2a 2m M2

Herehandilo Export. f.o.b. 757 640 716 999 1.450 2.051 1877 1990 1920 1912 204 1978 2074 2241Part, Transportation, * Insurance 12 11 12 2i 26 34 8as 47 60 57 80 101 112 116Foreign Travel 2 3 3 J9 29 84 88 40 39 48 48 54 63 66Covern_ne Exp.nditure 4 4 6 5 a 7 8 14 12 12 17 16 19 21Other Services 24 1. 20 28 30 79 98 110 11O 93 109 U2 180 119hon-HMn*tory Cold 1 - - 4Investment Incoa 25 24 27 is is 73 130 l'd 181 190 210 206 229 241Private Rmitt ances 6 6 8 17 12 18 27 26 20 25 26 32 37 38

Not. Cur,ent Account, -L z8 ±ZI z9a 1l ZM * -tlO2 -52

APEITAL JNt

Nonn-onotary Capital (net4 m am An m m m iii m m A 6 U z

Mediuo and LAna Toro Capital

R;ciic M 2 _2 1 AU i20 E2 M M ZO M Q2 M

Wirect Private Inveatment 1 1 1 2 49 48 52 68 39 37 28 29 58 4aOrent. 77 58 s0 88 144 188 162 12 171 153 178 "a2 180 207Supplier.' Credit. 52 42 17 - 89 SO (899 (57 (4 (42 482 9 444 4473

Roa ;nen126 J1 26 12 = 26 I M (L 4912 2S7

Direct Private nvestment 1 - 2 - 2 S 3 3 2 1 1 1 0 0LIan, 39 28 47 43 44 ( t 178 (Suppliere' Cedit. 60 S4 84 25 (124 (80 121 120 (18 (15 6 (2s (27

Short Term (not) -16 *2 -29 -3 - *1S7 41 .7 .83 -28 -4 -21 39 14

SOR Allocation, - - - - .16 *1( *13 - - - - 0 0

Capital, n.a.i. j/ -10 -10 S3 -7 .48 *21 -4 .16 .22 .40 -41 *24 -42 so

overllt Blnance 11/ - to 7 *9 *48 = -- Zl. : 1 :2 1 - l l --8 -D

Mn"etary MFvents in =Z I2 5 *fa in z -= ±OS i7n IO 99

ISN Tran-ectiono I/ 28 .10 .47 *20 .67 -4 *165 -8 -11 *9 -38 -9 -90 2Orseing 62 S2 70 48 106 39 229 4S S8 32 - 87 0 206Repurche.o- 24 22 2t 28 Se 43 64 49 49 23 S6 68 90 88

/ Includes errora end ammisanes.Eque64 change in net intrnatieol reerve.

J DW TreSt Fund borrolng :re shwen under lon, in nen-m_etary capital; thaw sunted to 681 milliOn i97S,on8 m*Ilion in 1979, ;,S *illion in 1980 nd i0.4 million in 1981.

Not'. Thi table is prepared by the Central Sank using unadjusted Custom date for mrehandie Import and export *.titeo.the trade numbor In thi. table, as wel 11 t*hea in table. 8.02.8.0, end 3.04 thu. diftfr frm tmee used elsewhere by the Centrol Sank

Sourco Central Bank ef Sri Lanka.

Table 2.2: AID COkMITMENTS, 1971-89(USS1 million)

AD GROW 1971 1972 1973 1974 1976 1976 1977 1978 1979 1980 1981 1982 1983 144 1985 1986 1987 1988

Australia 2.1 2.1 0.4 1.8 6.1 2.0 1.6 7.8 8.7 2.1 8.6 8.1 4.4 4.6 - 1.0 - 0.9

Seiglus - - - - - - - - - 1.6 0.7 0.8 - - - -

cons" 0.7 4.6 9.7 5.2 19.2 12.4 16.6 2a. 10.4 71.8 80.6 12.6 20.7 68.9 8.2 0.1 47.2 69.9

Denmark - 2.8 - - 8.7 - 0.5 I " - 2.8 0.4 6.1 - - 6.7 2.8 9.2

EEC - - 1.4 7.4 6.5 5.4 6.9 6.7 9.6 10.2 27.6 6.7 - 26.0 6.5 4.0 86.0 -

fiFlaud - - - - - - - - - 1.0 0.6 '.6 7.8 0.2 7.7 7.2 11.8 13.0France 6.6 0.7 6.4 7.2 8.2 7.7 6.8 1.0 26.4 17.6 25.6 19.0 - 19.0 11.6 10.2 24.9 1.2

Ibmany 659 1.6 18.1 18.8 29.7 8.4 8.8 28.0 80.8 17.0 166.6 6.0 10.1 8.6 .3.8 102.9 11.2 22.6

Indil 7.2 - 7.9 0.6 11.0 7.6 6.0 12.4 12.4 - 12.7 - - - - - 19.2 -

Italy 1.8 - - 1.4 - - 0.7 - - - - 1.1 - - - - 8.0 -

_Bp.. 6.8 11.4 14.0 14.7 16.6 16.7 25.6 66.6 66.1 100.6 96.7 97.1 80.0 70.6 115.5 160.6 170.0 484.4

Nbrlads - - - - 9.6 11.5 16.0 85.7 18.4 41.8 16.4 11.9 14.8 9.8 11.7 16.8 21.2 36.7womy - - - - - - 2.8 6.2 9.1 9.1 6.7 10.2 9.4 10.1 10.8 11.5 8.8 10.4

Soo" 1.6 - 2.6 10.8 12.6 18.6 16.6 19.1 20.6 24.1 22.7 25.6 26.7 88.2 84.0 28.9 26.0 19.7

Seitsrlaad 0.2 0.2 0.1 - - - 0.6 - 16.1 0.9 - - 0.9 - 6.4 - 1.6 -

United Kitlm 16.0 0.1 4.6 6.8 7.4 6.7 28.9 41.1 209.lJ/ 7.1 - - - 21.5 29.1 46.8 0.2 6.a

United State. 17.2 14.7 7.0 8.2 87.4 67.4 14.0 78.9 51.4 66.6 70.8 s8.2#/ 98.6 107.0 87.4 46.6 68.6 67.2

of which CARE (1.8) (1.5) (1.1) (8.2) (4.9) (6.5) (5.0) (6.6) (6.4) (7.8) (.1) (6.9) (6.4) (7.0) (6.6) (8.8) (6.2) (4.7)

Asia. DO.l.pem t Book 7.8 9.8 2.8 2.6 80.0 - 22.6 20.2 a8.9 56.0 60.6 46.4 47.6 14.6 98.9 26.9 77.2 210.7

UN Group 4.6 0.9 6.6 2.6 22.8 19.6 16.1 6.4 10.1 18.4 14.2 10.7 16.7 11.6 24.1 21.7 27.1 17.

ot which: -. (1.7) (0.6) (0.4) (1.6) (12.4) (16.4) (6.9) (0.6) (2.7) (1.6) (1.5) (2.6) (4.0) (2.5) (8.7) (6.9) (12.0) (10.7)

FAO (-) (-) (-) (-) (-) (0.8) (2.2) (0.8) (1.4) - (-) (-) (-) (-) (1.1) (1.0) (0.8) (1.5)

World Slek Group - - 6.0 24.0 29.6 - 40.0 25.6 oe.o 161.6 161.0 126.9 56.7 42.4 141.9 148.4 19.6 216.6 O'

Sub-tobel Aid Group 37.4 4S.5 37.5 112.5 249.7 176.1 227.1 a77.6 567.6 56.6 7s7.a 471.4 840.6 487.6 54.6 623.7 575.3 1181.5

NMG-AID W

Centrally PlannedEcoemes 88.2 54.0 - 37.2 60.2 8.6 4.1 10.4 - 82.7 - - - - - 16.6 -

IFAD - - - - - - 12.0 - - 14.5 18.6 14.1 - - 6.8 -

K..tt Fund - - - 26.6 0.8 - - - 2.1 - 46.0 - - - - -

Ira. - - - - a2.0 - - -

OPEC Fed - - - - - 6.1 8.2 - - 6.0 14.0 11.0 - - - - - -

SaudiFed - - - - 6.7 - - - 1.0/ - 60.0 - - 24.2 24.2 - - -

UhA - - - 12.0 - 6.2 - - - - - - - - - - - -

Liby - - - - - - 15.0 - 0.1 - - - - - - - - -

OWwr - - - 0.1 2.7 8.0 0.1 - 0.1 6.62/ - - - - - - - -

Sub-total N.i-Aid Group 80.2 84.6 - 49.8 127.1 20. 1 22.4 22.5 1.1 47.4 76.5 69.6 14.1 24.2 24.2 28.6 - -

TOTAL COLITI0S 125.6 182.9 67.5 161.8 876.6 198.2 249.6 400.1 574.9 657.0 815.8 641.0 364.6 y 462.0 670.8 662.5 6765. 1133.6

Amvl consi n ef F 4 1. I. 45. 50. e0. 45 and 6. rIlion rer tiily Iuioring 1960 thromh 196?tc.mbCONS== ofL.2.I.. 40. 46. 80. W8. 70. 75. 66. 89.6ad0 ilo reecb.el ri.r. 1077 th.rw~ 14967. An. adititon I comi,tment of Iik.. 45 allt (I in ?.0 aillIion)

a.... tis S;2ense 49611.. ;4...l Oeveloeeant Projecr. 6~aatote Oiet,rict. aid t anaaltaIIocat.on ri, 12 octiin (1n 9), i2i. 12w, ilLo (1963) and P6- 15 millio e er!.

19r64 l;wtiadig h carryforuard beleamc. of Mi.. 24 oil ISi from yre.ioq.m vase's emtmeta.e Elutine; tJ, e_ale @larate eS L61a 7 *iiion.,#Wl iiWledio,reetvl.

mA CDIn Ereli;"e t*_iw r _ t tf La" of*mand itmtt2 *;Iion reepec;atly~/ Ealmmilo th follmjae oiniaemmt: Im rocrm'micg Loon of u588 mi IlIion i n 1979. Er-c.rrancr Loon af U5875 millIion i n 19S1; Euro-currancy Loan of '.5810 mill Iion to 1962;

SW.4IUI. Imort t Crdieti fr N.tinl. Project. lb... 250.2 mon In 19160. bmnufectuwr.r l.noter Tret Compn LO"n for Victwi a Project. L 20 o,ll,on in 1960.

.Japna lam _i mmine to Y en 3.0tO mIllton in 19(thacl.ltinne iraq oll _-.idy to_ eO# 56. Sd ion.

dI ;ne ..mrgcy e isf ain_i-e-. t612.0 *illtion.

Noteo Tb. 1962 ommitaent figure for JaPa has been raweied to includ the coit_nt of 114.4 million for Colombo Intornational Airport Da..1cmer.t Proraaee.

iSc Dopertnt of Estormal tReaour,cep ";I;try of F; ieance and Pl nn,ns.

Tablo 2.3: AID DISBURSEIENTS. 1971-88(USS eil l ion)

AID iW 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980- -- 19 92 19 1964 1984 5s 1986 1# s7 1988

AustrI i a 1.0 1.1 2.2 4.2 8.3 2.0 1.7 1.7 2.9 4.2 6.6 9.3 4.5 7.8 0.7 0.8 - 0.7Belgium - - - - - - - - - - - - 0.2 0.9 0.9 0.1 - 1.0Canada 6.5 5.8 8.7 6.1 11.5 11.5 14.7 14.0 16.6 27.8 28.9 28.7 34.6 31.2 22.8 19.8 18.0 24.6Degmark 0.4 0.2 2.1 0.7 0.2 0.6 0.3 0.9 0.5 3.6 2.6 2.9 1.1 0.2 0.4 0.8 3.8 6.4EEC - - 1.4 2.2 18.1 0.6 6.2 3.0 4.4 0.3 16.0 11.4 11.3 14.4 12.1 5.6 8.6 -

Flslad - - - - - - - - - 0.6 2.4 4.4 6.5 5.3 5.9 13.4 16.4 14.7

France 2.9 6.0 6.8 3.2 7.1 11.2 3.4 4.5 7.1 5.3 18.5 10.7 13.9 8.6a/ 12.4 9.4 16.3 17.5GConay 2.3 4.8 9.8 17.7 12.3 8.7 11.6 28.2 24.2 13.4 6.8 18.6 49.0 44.0- 47.3 63.5 30.3 27.1Irdle 2.0 2.4 2.3 8.9 2.4 4.7 6.2 13.0 9.5 9.1 1.5 3.1 6.6 0.4 0.1 0.2 1.4 3.3Italy 0.9 1.8 0.3 0.8 1.3 - 0.7 - - - - - 1.1 - - - 3.0 -

Japan 7.0 5.6 9.2 9.2 18.1 11.3 17.2 36.1 37.9 37.7 49.9 60.1 54.2 61.9 86.2 118.7 101.2 192.6NetIIIl and - - - - 8.3 4.3 9.6 28.3 19.8 11.3 42.4 15.5 13.9 23.9 15.7 10.8 14.6 17.7Norway - - - - - - 1.1 6.6 8.3 12.8 16.7 11.8 4.7 11.2 8.7 10.3 12.6 14.6S _d m 1.6 - 2.4 8.6 8.6 6.8 9.4 7.4 34.4 22.8 22.1 21.1 26.4 81.2 84.2 23.8 18.5 4.4Switerland - - - - - - - - - 0.1 0.6 - 6.9 4.2 4.6 6.2 0.1 3.8Utnited King" m/ 16.1 7.4 4.0 8.0 4.7 7.4 2.7 8.9 19.1 63.0 48.0 52.6 a8.6 28.7 6.3 15.5 8.6 16.8United St.t. 10.9 26.6 6.6 0.4 26.6 82.7 40.6 39.0 46.2 61.2 87.8 61.7d/ 66."_J 81.2 96.7 61.7 44.8 57.6

of wbh CARE (1.0) (1.6) (1.1) (8.2) (4.9) (5.6) (6.0) (6.6) (6.4) (7.8) (6.1) (6.9) (5.4) (7.0) (6.6) (8.8) (8.8) (9.2)

Asian Dwelopmsnt Sank 2.0 4.0 8.6 3.0 6.0 8.2 7.7 26.2 10.3 5.3 10.2 18.0 18.8 37.1 30.9 41.9 48.5 64.6

WI Group 2.3 0.9 0.6 2.6 19.1 16.6 15.1 6.4 12.0 13.4 12.2 12.8 16.7 11.8 24.1 21.8 27.1 24t6et which: iFP (1.7) (0.6) (0.4) (1.6) (6.9) (138.) (8.9) (0.8) (2.7) (1.6) (1.6) (2.6) (4.0) (2.5) (6.7) (6.9) (12.0) (10.6)

FAO (-) (-) (-) (-) (-) (1.9) (2.2) (0.0) (3.3) (-) (-) (-) (-) O- (1.1) (1.0) (o.a) (1.S)

World Bank Group 7.6 6.6 10.6 16.6 18.7 0.4 13.0 12.8 12.2 20.2 20.0 59.9 74.7 107.3 78.8 68.9 87.6 62.7

Sub-total Aid Orop 64.7 70.2 6.2 62.6 160.8 158.0 162.0 240.0 265.4 311.5 335.7 s92.5 447.1 515.4 482.3 513.1 465.5 554.4

NIII-AID MI00

Cetrally Pl_aneEcom_ium 36.0 18.2 1.2 29.1 3.9 14.9 12.3 6.4 0.8 0.1 16.8 5.4 1.0 1.8 1.7 - 9.8 6.2

IFAD - - - - - - - - - 2.7 8.4 2.0 1.6 8.2 6.1 6.6 4.5 8.4KI itFd - 9.0 5. .9 1.7 4.7 3.1 1.2 - - 1.2 10.1 8.6 10.1OPEC fn - - - - - - 6.0 1.0 - 1.4 9.0 5.5 8.0 4.0 3.1 2.1 3.0Sudi ful - - - - 6.7 - - - - - - - 8.0 7.7 7.9 16.5 2.0 1.3Ot - - - - 34.5f/ 12.6hJ 16.1/ 0.1 0.2 6.6j/ 1.1 1.6 0.7 0.8 0.2 0.3 1.6 0.2

Sub-total Nn-Aid Grwop 85.0 18.2 1.2 29.1 45.1 37.1 41.7 10.4 2.7 14.4 34.0 15.7 9.5 18.0 19.2 35.9 25.3 20.2

MOTAL DOSlBUINEMETS 99.7 63.4 67.4 111.7 206.4 170.1 208.7 261.2 268.1 826.9 369.7 400.2 456.4 686.4 501.5 646.9 488.6 574.6

EB-CUU4S 5561.3 miSSion dietome smeda Indasa bb md 3.P.C.A. (Fracs 1 Loa for NegSoab Wete uspi,* Project.Esclus 1U1.1. 1.C 1*1.2 ib ldor *dres nd d Oct_ Cr * for _tl Project. *ec .tl. in 1am and 1464.IcludesW _ 1541.1 L 0en . 8. allio I 1064 diabreWd n"ar baectursr-o o_er Trus Cemap,ny 05 LonEacimies 1564."40. *lile 4dburs under Bamn io s Incorporation (& lose for Sow cast He.ins Ptromme.En Eacudee 156. 15 all I Is dialmureadl under SScean brolmer. Zgr~oraton to" ea for Om coat "husa0m Progrm.M Eo ctime folle Seams: I.-. -renu Loan of 56 US00ll dieboreed in 1910

bror Oec toa f 1875 ailli dibros in 1911Surornc a of U558c0 SIlIlen of gimlc U10. 25 and 35 *illo ilo m- dieburse.

Mianeas Yen bind. sasunting to Ven 3,600 IS ion (62.14 *lIlion) diebwreed in Ceceab,r 1962.

%Incl Iran loa" of dUUtS.;0 aiS iam.Inclwd Libyasn Sa of UU815.0 tIllionP Rprenta tie ro loa fto oil oubeiv.

Sces,: Department of datenal Raeourca. Ninistrp of dFtinnc. and PMannino.

-38-

Table 2.4s OVERALL AID PPELINE 1997-89(US4 Million)

Non-ahawo II (Accelerated) of whichProject Project Comodity Food Total Non-Mahawall

1987

.- ndisbur,.1 Balance 12/81/U 1117.6 2U4.0 91.4 10.0 1608.0 1219.0Now Colitmata 1937 372.9 70.6 64.6 47.0 675.8 604.7total Disburmants 198? 82a.0 76.1 89.7 47.6 488.9 410.9

1966

Undlieburvd Balance 12/8/67 1154.2 270.6 186.5 9.6 1676.? 1800.2Nw Comitmants 647.6 185.7 110.8 89.1 113.4 997.7Disbureemnft from Poat

Comitmente 292.6 51.7 69.9 27.6 441.7 390.0Diebursemnte trm NMw

Commitmets 99.4 11.9 10.6 21.1 182.9 121.0Total Disbursements 1989 82.0 63.6 60.4 48.6 674.6 611.0

1969

Undisburee Balance 12/81/U8 1620.0 348.6 166.9 - 2136.5 1786.9

a The following amounte have bea cancelled during 1967 under non-Mahaweli Projects:

IDA Kuruneapl 2.67IDA Construction Induatry 1.00IDA Tea Rehab. and Divereificatioa 7.04IDA Rural Credit Projet 1.82

12.78

SegMg: Department of External Reeour.e, Ministry of Finance and Planning.

-39-

Table 8.1: SUMMARY OF CENTRAL GOVERNMENT RVEvEN, 19 4-09(In millions of Sri Lanka Rupe_.)

1084 198S 1966 1t? 1088 1989Dud" Actul Budget

Tax Revenue 29.389 80.442 81.272 5.110 9 80.738 86.946 49.932

Income tax 5.460 56 86 4 787 4N909 4.86e 4.647 65977Personal --- P.424 1,Fl8 1,440 F. W14 6476Corporate 8,720 4,162 8,274 8,820 8,425 3,183 4,210

Tax on property 489 499 648 1.568 1.C68 1.777 4.070 */

Taxes on goods and services 10 800 18i860 14 767 15 667 1s 605 17.020 22.070Ceneral sales and turnover tax -8TI4 T0TEU 10,08 3O,1T !!;U5 12,821 14,560of which: Turnover tax

on imports 3,170 8,881 4,408 4,510 5,780 6,825 6,419Excise 2,561 2,982 4,414 4,716 6,700 4,419 7,130Liquor 1,018 1,104 1,465 1,644 1,980 1,764 2,328Tobacco 1,687 1,67? 2,927 8,071 8,720 2,665 4,802License feex 104 168 205 840 805 280 380

Taxes on International trade 18 082 10 998 11 060 12 075 14 716 12 601 16 915Imports 0,070 -U 9,t414 W1.1;5 1 Wh1Exports 6,412 2,905 1,686 1,924 2,215 1,830 2,016Tea 6,004 2,214 996 1,162 1,805 672 470of which: Ad valorem 8,2386 1,032 62 202 700 264 200

Rubber 1,009 28 a07 680 726 642 1,250Coconut 297 842 282 148 110 67 126.Other 102 96 101 94 76 49 170

Other unclassified cb 1,300

Non-tax revenue 4,122 5 607 5 966 7 02 6 486 5 6803 8.765Property Income 8,884 o1 4,680 4Of which: Central Bank

profits 1,650 1,600 1,779 1,728 1,650 1,660 2,000Foes and charg 265 864 847 384 506 412 697Other nontax revenue 628 1,286 888 2,151 1,424 1,811 3,368 SI

Total revenue 84,061 86,249 87,286 42,144 46,223 41,746 68,117

a/ Includes tax on central bank holding of treasury bills.S/ Collection of tax arrears._/ Includes revenue from sale of food stocks, estioted at SLRS 2 billion.

Source: IMF.

-4n-

Table 3.2: ECONOMIC CLASSIFICATION OF EXPENDITURE, 1984-89(In millions of Sri Lanka Rupees)

1984 1985 1986 1987 1988 1989Budget Actual Budget

Current Expenditure a/ ZL24 32.644 33.968 39.560 40549 46,132 5661Expenditure on goodsand services 9,196 16,287 15,156 18,466 19,130 20,654 24,329Salaries and wages 5,554 6,878 8,028 8,006 10,001 10,016 12,437Other goods and services 3,642 9,409 7,128 10,460 9,129 10,638 11,892Interest payments 6,738 7,428 8,762 10,157 11,962 12,590 13,388Foreign 1,623 1.970 2,209 2,564 3,199 2,896 3,265Domestic 5,115 5,458 6,553 7,593 8,763 9,694 10,123Subsidies and currenttransfers 8,696 8,929 10,050 10,937 10,497 12,888 20,385To public corporations 1,762 882 2,350 1,722 1,736 1,515 2,532TO other levels of govt. 443 501 600 609 833 9i8 939To households 6,491 7,546 7,100 8,606 7,928 10,456 16,914Food Stamps 1,495 1,439 1 493 1,561 1,780 1,895 5,180Pensions 2.180 2,728 2,984 3,242 3,477 4,128 4,181Other 2,816 3,379 2,623 3,803 2,671 4,433 7,553

Less: provision for under-expenditure - - - - -1,040 - -1,484

Capital expenditure a/ 19.915 21.530 2 2 7 22878Acquisition of capifalassets 5,849 7,375 7,788 10,970 15,532 11.431 16,497Capital transfers 14,066 14,155 15,447 11,846 11,489 10,872 11.311To public corporations 13,681 13,441 14,874 11,198 10,729 9,684 9,429To other levels of govt. 198 481 472 571 672 1,123 1,689Other 187 233 101 77 88 641 193Less: provision for under-expenditure - - - - -4 - -1,914

Net Lending 3.292 1.059 1.991 1.518 4.969 7.521 7009of which: Advance accounts Z,916 -31 -i1i -T-_ -Th-IM Z-3 --4D

Net on-lending 375 745 2,161 2,698 4,869 4,789 6,609

Total expenditure 48,837 55,233 59,194 63,894 72,535 76,531 89,521

a/ Some revision has been made from data presented in earlier reports, arising from the- reclassification of taxes paid on behalf of Mahaweli contractors as capital expenditures

(transfers). Previously these had been classified as current expenditure (transfers).

Source: IMF

-41-

Table 3.3: FUNCTIONAL CLASSIFICATION OF CURRENT EXPENDITUREAND NET LENDING, 1984-89

(In millions of Sri Lanka Rupees)

1984 1985 1986 1987 1988 1989Budget Actual Budget

Current Expenditure 24,630 32,644 33,967 39,560 40,549 46,132 56,618

General pulic services 4.257 8.768 8.680 1Lj1 10861 1.96 1.Z

Civil administration 2,288 3,095 2,884 2,943 4,540 5,217 4,541Defense 1,275 4,614 4,351 6,001 4,478 4,732 3,066Public order and safety 694 1,059 1,445 2,169 1,843 2,547 4,626

Social Services 8.897 1LO=2 11.004 12.7 13.099 15.253 2L

Education 2,672 3,523 3,775 4,066 4,313 5,036 7,620Health 1,580 1,773 1,841 2,401 2,509 2,420 3,380Welfare 4,518 4,889 5,254 6,098 6,108 7,609 12,438Housing 12 13 13 13 15 1S 21community services lS 125 121 136 154 173 160

Economic services 3.457 2.544 3.960 2,905 2 994 4.050 4.181

Agriculture, irrioation 1,511 1,313 1,336 1,086 1,337 1,401 1,556of which: Mahaweli project 1,489 1,849 700 477 - - -Fisheries 24 31 38 40 47 40 75Mining, manufacturingenergy and water supply 207 262 493 214 378 277 900Transport and communications 1,342 592 1,668 1,200 615 1,613 1,104Trade and commerce 87 94 152 190 313 415 207Other 286 252 273 175 304 304 339

Unallocable 8.019 11.009 10.323 1828 13 594 14 333 16 585of which: interest 67T.M T,762 1Il57

Source: IMF

-42-

Table 3.4: FUNCTIONAL CLASSIFICATION OF CAPITAL EXPENDITUREAND NET LENDING, 1984-89

(In millions of Sri Lanka Rupees)

1984 1985 1986 1987 1988 1989Budget Actual Budget

Capital expenditureand net lending 23,207 22,589 25,226 24,334 31,878 30,400 35,704

General public services 901 1.039 1 217 1 676 1 684 2 772 2 938Civil administration 7859 I64 1,93 z.uPublic order and safety 151 180 353 806 591 639 628

Social services 1 422 1 826 2 567 2 817 3 263 2 883 4 839Education -JIM 1"7M I lm ' m rLimHealth 216 318 405 979 1,436 1,498 2,005Housing 571 459 575 505 590 429 884Community services 79 108 320 493 102 88 152

Economic services 17.608 17 235 19.941 19 110 19.559 21 957 23.512Agriculture, irrigation 9400 06870 1,17 8.484 8,Z0 6,1Z 6of which: Mahaweli project 7,057 7,233 5,952 5, 01 5,050 3,430 2,995Fisheries 166 108 122 2b4 264 140 445Mining, g9anufacturing,energy, water supply 3,410 2,606 3,269 4,388 5,624 5,781 6.908Transport and communications 4,229 4,805 7,648 5,133 4,932 5,264 7,957Trade and commerce 124 156 445 309 77 103 75Other economic services 279 190 240 502 458 827 1,563

Unallocable 3276 2.489 .01 731 7,372 2 788 4 415of which: Reconstruction - - - WTU 1OU

Source: IMf

-43-

Table 3.5: CENTRAL GOVERNMENT DOMESTIC DEBT, 1984-88(In millions of Sri Lanka rupees, end of period)

1984 1986 1988 1987 1997

Total domestic debt 65,652 62,612 69,498 78,999 98,695

Rupee loans 33,227 36,670 39,130 44,958 49,960Treasury bills 16,860 22,280 26,173 29,850 43,700Others 3,565 3,762 4,195 4,191 4,936

BanksCentral Bank 18,823 24,299 26,190 26,324 38,228Rupee loans 45 45 36 38 32Treasury bills 15,320 20,621 22,114 22,208 33,270Advances 3,468 3,633 4,040 4,000 4,926

Commercial banksBy debt instrument 949 8u 1,003 4,181 4,227Rupee loans 944 U65 852 845 594Treasury bills 4 - 1SO 3,336 3,632Other 1 1 1 1 1

By institution 948 56e 1,003 4,181 4,227Bank of Ceylon 376 296 294 788 1,030People's Bank 557 557 708 2,871 1,894Other 15 3 3 522 1,303

'inking Fund 9,149 6,871 4,808 4,476 2,832Rupee loans 9,149 6,871 4,808 4,475 2,832Treasury bills - - - - -Others _ _ _ _ _

Nonbank sectorBy debt instr6ment 24,731 30,688 37,497 44,019 63,308Rupee loans 23,089 28,799 33,434 39,602 46,502Treasury bills 1,536 1,659 3,909 4,227 6,798Other 100 128 154 190 8

By institution 24,731 30,688 37,497 44,019 53,308National Savings Bank 11,214 12,949 14,026 16,113 17,962Other savings institutions 1,028 2,613 1,628 2,568 5,974Employees' Provident Fund 10,868 13,618 17,285 21,190 26,186Insurance companies 1,243 1,102 4,120 3,874 3,289Other 378 406 441 284 277Departmental and offic;al fund 282 287 294 103 114Foreign administrative borrowing 96 119 147 181 163

Source: IMF.

-44-

Table 3.6: CURRENT AND CAPITAL TRANSFERS TO PUBLIC CORPORATIONS, 1984-89(In millions of Sri Lanka Rupees)

1984 1986 1989 1987 1988 1989Budget Actual Budget

Total 16,433 14,323 17,224 12,907 12,465 11,198 11,961

Current 1,762 882 2,360 1,722 1,736 1,616 2,632Capital 13,681 13,441 14,874 11,186 10,729 9,883 9,429

Of which:

Air Lanka 935 800 2,404 892 944 809 408Shipping Corporation 200 274 274 64 200 320 64Mahaweli Authority 7,067 7,233 5,962 6,102 6,060 3,429 2,995JED3 161 258 311 64 4 193 4Airport and Aviation 336 956 2,047 1,066 966 1,817 345Electricity Board 1,041 156 109 116 239 778 485Transport Board 362 163 215 312 152 741 381Housing Development 480 359 466 374 380 380 324Water Supply 874 968 994 1,233 1,068 926 1,093Port Authority 213 307 897 230 - - -

Road DevelopmentAuthority 601 710 1,038 1,031 1,165 876 3,460Cement Corporation - 3 - - - - -

State PlantationCorporation 436 97 72 2 4 - -Railways 629 72 408 348 188 411 460

Source: IMF

-45-

Table 3.7: TRANSFERS AND SUBSIDY PAYMENTS TO HOUSEHOLDS, 1984-89(In millions of Sri Lanka Rupee,)

1984 1985 1966 1987 1988 1989Budget Actual Budget

Total 6,491 7,546 7,100 8,606 7,928 9,621 18,914

Of which: Excluding p.nhe'n 4,311 4,818 4,116 5,364 4,451 5,488 12,733

Food subsidy and foodstamps 1,496 1,439 1,498 1,601 1,780 1,684 2,980

Infant milk 90 100 96 84 100 97 100Food stamps 1,405 1,889 1,96 1,477 1,660 1,687 2,880

Pension and other 4,996 6,107 5,607 7,045 6,148 7,937 13,934Pensions 2,180 2,728 2,984 8,242 3,477 4,128 4,181Kerosene stamps 398 389 401 423 425 482 425NSB subsidy p/ 498 495 199 174 175 77 110Fertilizer subsidies 1,005 768 614 S1l 6oo 6oo 8ooFertiliz r Manufacturing

Corporation 587 43 173 611 - - -

Fertilizer Corporation 807 460 318 - - - -

Other institutions 1l1 285 128 - - - -

Department of Welfarepayments 282 138 179 617 18S 186 672Free textbooks 62 154 102 106 110 314 135Mid-day meal 38 81 26 61 1S0 147 2,150Other 636 1,389 1,108 2,009 1,026 2,003 6,761of which: Drought relief - - - 1,446 5f - 1,181 -

s/ National Savings Banki/ Includes SLRs 600 million in direct expenditure, plus SLRe S46 million

equivalent of food distributed by the Food Commiseion.

Source: IMF.