Sri Lanka is a lower-middle income developing nation. In 1978, Sri Lanka shifted away from a socialist orientation and opened its economy to foreign investment. But the pace of reform has been uneven. Sri Lanka’s development policies are being reoriented with an aim at acceleration of economic growth with special consideration given to pro-poor growth strategies. The development strategy consolidates positive elements of the policies followed over the past two decades and revisits the weaknesses, limitations and lapses in past policies in order to ensure equitable development in the country.
The sectoral composition of the economy has changed from that of an agriculture based economy to one dominated by the services sector. The services sector has been the highest contributor to Gross Domestic Product (GDP) at 60 per cent, followed by the industrial sector at 28 per cent and the agricultural sector at 12 per cent in 2008.
Liberalization, private sector participation and increased competition have contributed to the expansion of the services sector, with buoyant performance in transportation, communications, financial services, trade and tourism.
The manufacturing base is dominated by the apparel industry, although the production of food and beverages, as well as chemical and rubber based goods, is also important. Industrial exports are dominated by textiles and apparel, which contribute approximately 65 per cent of industrial exports. The phasing out of the Multi Fiber Agreement is a major challenge for most of the manufacturers competing in non quota markets and catering to niche markets. The structure of exports has changed over the years from a few traditional plantation crops to several industrial exports. The share of agricultural exports declined to about 20 per cent, while industrial exports now accounts for 78 per cent.
Sri Lanka’s economy is predominantly a small and medium enterprise economy where over 50 per cent of GDP is produced by this sector. The Government gives significant emphasis for the development of Small and Medium Enterprises (SMEs). The SMEs are constrained by limited access to finance and pay significantly higher interest rates than the established corporate private sector. A high cost of reliability of the supply of electricity, and poor state of roads and transport services pose major obstacles for enterprise development.
Inadequate infrastructure facilities remain one of the biggest impediments to Sri Lanka’s progress. Reliable infrastructure is a paramount need for further economic development, especially for export oriented activities such as manufacturing and tourism. The buildup of security expenditure and rising debt services during the past two decades crowded-out public investment in economic infrastructure, and human resource and skills development.
The serious cut backs in investments in these vital areas has weakened the country’s competitiveness and created growth impediments. In order to fast track reduction in poverty and rural development, it is important to improve rural infrastructure. The need for a reliable power supply, road network, transport systems, telecommunication capacity, urban infrastructure and port and aviation facilities is strong.