A Happy Transition
In the aftermath of the civil war, the Sri Lankan economy has shown impressive forward momentum.
he end of the 26-year-long civil war against Tamil rebels was indeed a decisive juncture in the history of Sri Lanka. For decades the country regressed in many spheres of economic and social life while the continued tension among different communities due to the insurgency prevented it from making any contribution to world economy. However, the Sri Lankan government surprised many by taking a strong stand against insurgency and stating its resolve to end it through military action despite the failure of similar attempts in the past.
The introduction of an ‘open economy’ in 1978 and a shift from the ‘social orientation’ the country had adopted following its independence in 1948, proved a successful experiment. Sri Lanka recorded an annual growth rate of 6 percent in the region until 1986 because of its policies that encouraged private sector investments and its export-oriented economy that helped increase foreign earnings. When the civil war started, the country’s economy recorded a significant decline with a 2.7 percent annual average during 1986-1989 and around 5 percent in the decade after
The military’s victory over the LTTE separatists brought in its wake many serious challenges – both domestic and international. It was predicted that the economy would suffer due to the after-effects of war and aid cuts – a key determinant of the country’s economic progress. However, surprisingly, the conclusion of the war did wonders for the Lankan economy, making it one of the fastest growing economies in the region. Even in 2009, growth was 3.5 percent despite the setbacks in the last stages of the war as well as the global economic crisis. The country’s GDP growth rate averaged at 6.4 percent during 2003-2013, recording an alltime high of 8.6 percent in December 2010.
In November 2009, when Sri Lanka was facing serious challenges to the survival and growth of its economy, Dr. P.B Jayasundera, the Secretary to the Ministry of Finance and Planning and Secretary to the Treasury, had declared that the country had the potential to emerge as a growing economy. “With our increased new capacity in terms of infrastructure, stability, sound policies and the likely investments in tourism, alternative energy, agriculture, manufacturing, urban development and various other sectors, Sri Lanka will have greater integration in global trade and finance. I prefer not to label whether the country will be a finance, shipping or a bunkering hub but the fact is that all these facilities being available here is bound to make Sri Lanka a unique development centre in the region. Future prospects for IT and enabling services and industries, financial services, shipping, medical services are also great,” he said.
He also promised that the government would systematically build up its policies to .create a knowledge and skill-based economy. “We have shifted from being a literate society to an educated society. From an educated society we are moving towards becoming a knowledge and skilled society. Our doctors have revamped our medical services and in our own way we have succeeded in attracting investments to this area,” he declared.
Massive economic and social infrastructure development took place in the following years and Sri Lanka made significant progress. The problem of inadequate infrastructure was tackled and many development projects were undertaken that supported the middle-income transition of Sri Lanka.
The development of seaports and airports has played an important role in fulfilling the government’s aim to make the country a leading aviation, navigation and trading hub in the region. The expansion of the Colombo South Port, development of the Hambantota Port, expansion of Bandaranaike International Airport and construction of a second International airport at Mattala (in the southern province of the country) are some of the significant projects undertaken after the end of the civil war.
Furthermore, the development of high-mobility road networks is seen as a move to address the delays in road development and transportation caused by the war. The ColomboKatunayake Expressway ( 25km) and the Southern Highway ( 126km) has been completed, while the Outer Circular Highway (28km) in the Colombo metropolitan area and the Colombo-Kandy Highway (98km) are under construction.
Three major projects were undertaken in the power and energy sector. The hydropower project in Upper Kotmale was completed and connected to the national grid in July 2011, The Norochcholai coal-power project, too, commenced in 2011, with the second phase expected to be completed this year. An agreement is being finalized between the Ceylon Electricity Board and the National Thermal Power Corporation of India to develop coal-power plants in Tricomalee. The project will commence this year and will be linked to the national grid by mid-2016.
Additionally, many small-scale infrastructure development projects such as the ‘ Maga Neguma’ rural road development program, rural electrification projects, minor irrigation projects and community-based water supply projects have continued to facilitate local development. Public investment on economic and social infrastructure development amounted to Rs.388 billion (5.1 percent of GDP) in 2012.
However, there has been harsh criticism of the sustainability of growth shown through infrastructure development and GDP rise following post-war developments.
A think tank, Verite Research, has speculated that the ‘post-war growth bump has hit the ceiling’. The group calls for serious administrative and policy reforms to increase GDP growth in a sustainable manner.
An editorial in a leading Lankan newspaper stated that in 2012, the decline in contributions by the import trade and transport was mostly compensated for by a huge increase in the recorded GDP contribution from construction. “As a post-war driver of growth, it leapt up, tripling its significance and adding an extra 1.07 percent to GDP growth in 2012. The problem is that the main driver of construction in Sri Lanka is government-financed expenditure on infrastructure. Government expenditure-led growth will also not sustain,” said the editorial.
Critics also point out that although Sri Lanka appeared to be a highly lucrative market for investment even during the time of global uncertainty, the foreign investments were predominantly portfolio investments, not foreign direct investment (FDI), which promote commodity production and facilitate transfer of technology to the economy.
Nonetheless, with Sri Lanka’s contours changing significantly as it transitions towards becoming a middle-income economy, the country has proven to the world its potential.
Unemployment and poverty rates have reduced and the country is being recognized as an early achiever of 10 out of the 21 indicators of the Millennium Development Goals, which also includes goals related to primary education and gender equality. Undeniably, the setbacks faced by Sri Lanka have not consumed its potential. Rather, they seem to have pushed it forward in many areas. The writer is a business journalist based in Sri Lanka. She focuses on issues pertaining to trade, health and fashion.