Report No. 7220-CE Sri Lanka A Break with the Past: The 1987-90 Program of Economic Reforms and Adjustment (In Two Volumes) Volume 1: Executive Summary, Main Report and Statistical Appendix May 27,1968 Asia Country Department I FOR OFFICIAL USE ONLY Document of the World Bank This report has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Annual Averages) Sri Lanka Rupees per US$1.00 1978 - Ra 15.61 1979 - Rs 15.57 1980 - Rs 16.53 1981 - Rs 19.25 1982 - Ra 20.81 1983 - Rs 23.53 1984 - Rs 25.44 1985 - Rs 27.16 1986 - Rs 28.02 1987 - Rs 29.44 GLOSSARY AND PRINCIPAL ACRONYMS AMDP - Acclerated Mahaweli Development Program ARC - Administrative Reforms Committee BTT - Business Turnover Tax CCPI - Colombo Consumer Price Index CFF - Compensatory Finance Facility CTB - Ceylon Transport Board DSS - Department of Social Services EDB - Export Development Board EPF - Employees Provident Fund FIAC - Foreign Investment Advisory Committee GCEC - Greater Colombo Economic Commission JEDB - Janatha Estates Development Board LIAC - Local Investment Advisory Committee MPA - Ministry of Public Administration NFSP - National Food Stamp Program NKSP - National Kerosene Scanp Program NSB - National savings Bank PEs - Public Enterprises PIC - Public Investment Corporation PIP - Public Investment Program PTC - Presidential Tariff Commission RDA - Road Development Authority RTBs - Regional Transport Boards SAF - Structural Adjustment Facility SCC - Salaries and Cadres Committee SLCC - Sri Lanka Cement Corporation SLR - Sri Lanka Railways SLTB - Sri Lanka Transport Board SPC - State Plantations Corporation Fiscal Year January 1 to December 31 FOR OFFICIAL USE ONLY TITLE SRI LANKA - A BREAK WITH THE PAST: THE 1987-90 PROGRAM OF ECONOMIC REFORMS AND ADJUSTMENT COUNTRY : SRI LANKA REGION ASIA SECTOR COUNTRY ECONOMIC REPORT TYPE CLASSIF MM/YY LANCUACZS 7220-CE CEM Restricted 05 88 English PUBDATE 8805 ABSTRACT : The situation that Sri Lanka now faces is one of the most complex in its history, both politically and economically. The report analyzes the causes for the deteriorating economic situation: (i) the structural constraints to growth that were created over decades of controls and extensive government interventions in the economy, prior to liberalization in 1977; (ii) the unsustainably large macro-economic imbalances; and (iii) the outLteak of the ethnic conflict in 1983. The report highlights that the program of economic reforms recently announced by the Government is a bold initiative that aims at addressing the country's long standing structural constraints to growth. The report also analyzes the main components of such program: the reforms in industrial policies, in the Government administrative structure and staffing levels, and in the public expenditure programs. The report makes detailed suggestions on how the efficiency of public expenditure programs could be improved. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. SRI LANKA - A BREAK WITH THE PAST: THE 1987-90 PROGRAM OF ECONOMiC REFORMS AND ADJUSTMENT Table of Contents Page No. Country Data EXECUTIVE SUMMARY i INTRODUCTION 1 PART I: RECENT ECONOMIC PERFORMANCE AND ADJUSTMENT ISSUES . . . . . 1 I. Development Policies, Constraints to Growth and Recent Economic Performance. . . * . . . . . . . . . . . . . . . 1 A. Background . . . . . . . . . . . . . . . . . . . . . . . 1 B. Structural Constraints . . . . . . . . . . . . . . . . . 5 C. Macro-Economic Imbalances . . . . . . . . . . . . . . . 8 D. The Delay in Adjusting . . . . . . .. . . . . . .. . 15 II. The Objectives of the Adjustment Program, Supporting Policies, and External Finance Requirements . . . . . . . . 18 A. The Macro-Economic Framework. . . . . . . . . . . . . . 18 B Aid Requirements...... . . . . . . . . . . . . . 24 PART II. THE 1987-90 ADJUSTMENT PROGRAM . . . . . . . . . . . . . . 26 III. Reorienting Industrial Policies . . . . . . . . . . . . . . 26 A. The 1987-90 Program of Industrial Reforms . . . . . . . 26 B. Tariff Reform . . . . . . . . . . . . . . . . . . . . . 27 C. Export Promotion Measures . . . . . . . . . . . . . . . 31 D. Public Manufacturing Enterprises and Privatization. . . 31 IV. Adjusting Public Expenditures . . . . . . . . . . . . . . . 33 A. The Nature and Magnitude of the Problem . . . . . . . . 33 B. The Planning and Reporting of Public Expenditures . . . 37 C. The Public Expenditure Review . . . . . . . . . . . . . 40 D. Transfers to Households and Subsidies . . . . . . . . . 45 E. Transfers to Public Corporations . . . . . . . . . . . . 49 F. Sectoral Expenditure Programs . . . . . . . . . . . . . 55 -2- V. The Administrative Reform............... 67 A. Introduction . . . . . . . . . . . . . . . . . . . . . . 67 B. The ARC Proposed Reform ................ 74 VI. Tax Restructuring Priorities and Options . . . . . . . . . 78 A. The Main Problems . ... . ......... .... 78 B. Directions for Change ................. 87 VII. The Devolution of Power to the Provinces and Provincial Financing Issues . . . . . . . . . . . . . . 88 A. The Extent of Devolution ............... 88 B. The Fiscal Dependency of the Provincial Councils . . . . 91 STATISTICAL APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . 94 MAP ANNEXES (Volume II) Annex 1 An Historical Perspective on Sri Lanka's Development Policies A. Introduction B. The Expansion of the Agricultural Frontier Emphasizing Irrigated Rice Agriculture C. Industrial Policies D. The Anti-Market Bias E. Macro-Economic Imbalances F. The Liberalization of the Economy in 1977 Annex 2 Transfers to Households and Subsidies A. The National Food and Kerosene Stamp Program B. Fertilizer Subsidy Annex 3 Selected Cases GZ Treasury Support for Public Enterprises A. Air Lanka B. Sri Lank- Sugar Corporation and Pelwatte C. Sri La: . "ement Corporation D. Ceylia i ing Corporation -3- Annex 4 Public Investment in Power A. Background B. Public Investment in Power C. Policy Options and Priorities for the Next Decade Annex 5 Public Expenditures in Transport A. Introduction B. Public Expenditures in the Transport Sector Annex 6 Public Investment in Irrigation A. Introduction B. Public Investment in Irrigation C. Conclusions Annex 7 An Overview of the Accelerated Mahaweli Devrlopment Program A. Historical Background B. Early Feasibility Studies C. Estimates of the AMDP Costs in Constant (1986) Prices D. Settlement and Employment Under the AMDP Annex 8 Public Expenditures in Health and Education A. Introduction B. Population and Family Planning C. Health D. Education Annex 9 Census of Decentralized Units of Government and Corporation Sector Employment (1985) Annex 10 The Central Government Administrative Structure Recommended by the ARC Annex 11 The Design of Sri Lanka's Main Domestic Taxes Annex 12 Central-Provincial Tax and Expenditure Assignments This report is based on the findings of an economic mission which visited Sri Lanka during November/December 1987 consisting of Mr. R. Zagha (Chief of Mission), Messrs. and Mmes. Aggarwal (Devolution of Power to the Provinces); Aizenman (Macro-Economic Projections and Statistics); Bradfield (Public Expenditure Programs in Transport); Fenske (Air Lanka); Maxwell (Trade Policies); Nunberg (Administrative Reform); Shah (Taxation); Smith (Public Expenditure Programs in the Social Sectors); Webb (Public Expenditure Program in Power); Zeijlon (Fer- tilizer and Sugar Subsidies). Mr. Jayanntha of the Resident Mission contributed to the review of the Accelerated Mahaweli Development Program. Two subsequent mis- sions visited Sri Lanka during March/April to review public expenditure programs in irrigation and Mahaweli (Messrs. Gafsi and Berkoff) and in cement factories (Ms. Berthelot). -4- TEXT TABLES Page No. Table 1.1: Key Economic Variables ............................ 3 Table 1.2: Growth Rate of GDP in Selected Sectors, 1970-77 to 1978-87 ............................... 4 Table 1.3: Selected Indicators of Public jn1 Private Manufacturing Activities ......................... 8 Table 1.4: Finance of the Government Deficit ................. 9 Tabl3 1.5: Composition and Ownership of Government's Domestic Debt as of March 1987 ...o............. 10 Table 1.6: Monetary Aggregates - Selected Indicators ......... 10 Table 1.7: Debt Indicators, 1978-86 .......................... 11 Table 1.8: Vacroeconomic Balances 1978-86 12 Table 1.9: Balance of Payments Data, 1980-87 ................. 13 Table 1.10: Export of Textiles from Sri Lanka to the EEC, 1983-87 o................*.......... 14 Table 1.11: Tea Producer Margins, 1977-87 ................... 15 Table 1.12 Sri Lanka's Real Exchange Rate, 1979-87 ........... 17 Table 2.1: Government Expenditures, 1987-90 ...**............ 19 Table 2.2: Balance of Payments Pro.ections ................ 21 Table 2.3: External Financing Requirements, 1988-90 .......... 23 Table 2.4: Aid Flows, 1984-1990 0............................. 25 Table 3.1: Distribution of Tariffs ........................... 26 Table 3.2: Nominal Tariff Structure and Changes for Sri Lanka and East Asian Countries ............... 27 Table 3.3: Prevailing Non-Tariff Barriers ................... 29 Table 3.4: Summary Measures of Effective Rates of Protection . 30 Table 4.1: Level and Composition of Public Expenditures, 1958-87 ....................... .... 35 Table 4.2: Central Government Expenditures, 1978-87 .......... 36 Table 4.3: Public Expenditures Summary ....................... 39 Table 4.4: Public Investment Program (1987-91 & 1988-92) ..... 41 Table 4.5: Public Expenditure Review Summary ................. 42 Table 4.6: The Fiscal Cost of Mahaweli, 1979-85 .............. 61 Table 5.1: Employment in the Public Sector, 1960-1985 ........ 68 Table 5.2: Central Government Expenditure on Wages and Salaries in Selected Countries .................. 69 Table 5.3: Employment in the Central Government by Ministries 70 Table 5.4: Starting Monthly Salaries for Selected Classification of Government Employees ........... 71 Table 5.5: Central Government Salaries Compared to Public and Private Sector .................... ........ 73 Tabld 5.6: Distribution of Central Government Wage Bill ...... 76 -5- Table 6.1: Selected Comparative Data on the Level and Composition of Central Government Revenues ....... 79 Table 6.2: Main Features of Sri Lanka's Taxes Non-Related to Foreign Trade ................................. 81 Table 6.3: Buoyancy and Elasticity of Tax Revenue in relation to GDP .............................. 83 Table 6.4: Personal Income Tax - Selected Indicators, 1982-87 85 Tabld 6.5: 1986 Average Effective Business Turnover Tax (BTT) Rate on Output and Value-Added by Sector ......... 86 Table 7.1: Selected Demographic and Socio-Economic Indicators 89 Table 7.2: Devolution - Selected Indicators ................. 92 Page 1 of 2 SRI LANKA COUNTRY DATA AREA POPULATION a/ DENSITY 65.608 sq.ka 16.1 million (mid 1986) 246 per sq.ka (1986) Rate of Growth: 1.62 (from 1976 to 1986) 763 per sq.km of agricultural land (1979) POPULATION CHARACTERISTICS (1983) b HEALTH (1984) b/ Crude Birth Rate (per '000) : 26.2 Population per physician : 8.969 Crude Death Rate (per *000) : 6.1 Population per Hospital Bed a 350 Infant Mortality (per '000 live births) : 30.0 c/ INCOME DISTRIBUTION (197b) DISTRIBUTION OF LAND OWMERSHIP 2 of national income, highest quintile 54 X owned by top 102 of owners - lowest quintile : 4 Z owned by smallest 102 of owners 3 - ACCESS TO PIPED WATER (1981) ACCESS TO ELECTRICITY (1971) 2 of population-urban : 47 % of dwellings--total : 9 --rural : 10 --rural : 3 NUTRITION (1977) EDUCATION (1981) Calorie intake as 2 of requirements 97 Adult literacy rate : 872 Per capita protein intake (grams per day) 43 Primary schoool enrolment :98 GNP PER CAPITA IN 1986: US$400 d/ OUTPUT IN 1986 BY SECTOR ANNUAL RATE OF GROWTH (%. constant prices) Value Added US$ Million 2 1970-77 1977-86 Agriculture 1.525 26 2.3 3.9 Industry e/ 1,475 25 1.7 5.2 Services 2L879 49 3.7 6.8 Total fL 5.879 100 3.1 5.6 GROSS DOMESTIC PRODUCT IN 1987 US$ Million z GDP at Market Prices 6.772 100 Investment 1.642 24 Gross National Savings 837 12 Current Account Delicit 572 8 Exports of Goods and NFS 1.711 25 Imports of Goods and NFS 2.436 36 GOVERNMENT FINANCE Central Government (Ra Million) 2 of GDP at Market Prices 1987 1975 1984 1987 Revenues A/ 41,435 17.2 22.1 20.8 Current Expenditure h/ 40.040 18.3 17.2 20.1 Current Surplus 1.394 -1.1 4.9 0.7 Capital Expenditure 1/ 25.499 7.3 13.6 12.8 External Assistance 12,550 3.2 6.4 6.3 a/ Registrar General's Department. b/ Provisional. Z/ 1981. d/ World Bank Atlas estimate. el Manufacturing, mining and construction. l GDP at factor cost. gI/ Includes capital revenue. h/ Includes advance accounts. i/ Includes net lending. Page 2 or 2 SRI LANKA : CWUNTPY DATA MONEY. CREDIT AND PRICES 1979 1 1 1981 1982 1983 1984 1985 1986 1987 (end of period) (Re Million) Money and Quasi Money 14.957 19.?09 24.287 30.249 36.818 43.015 48.099 50.591 57.925 Bank Credit to Public Sector 2.962 9.100 12,889 17.236 17.639 14.605 20.486 22.624 27.115 Bank Credit to Private Sector 11.082 16.308 20.763 24.934 31,34', 34.979 38.201 41.344 48.371 (Percentages or Index Numbe-s) Money and Quasi Money as Z of GDP 28.6 29.6 28.6 30.5 30.3 28.0 30.0 27.7 29.1 General Price Index (1970=100) 110.8 139.7 164.8 182.6 208.2 142.9 246.4 265.6 286.1 Annual Percentage Changes in: General Price Index +10.8 +26.1 +18.0 +10.8 +14.0 +16.7 +1.4 +7.8 +7.7 Bank Credit to Public Sector +56.8 +297.2 +41.6 +33.7 +2.3 -17.4 -40.3 +10.4 +19.8 Bank Credit to Private Sector +25.8 +46.3 +28.1 ".0.1 +25.7 +1'.u +9.2 +8.2 +17.0 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (1987) 1985 1986 1987 US$ Million) Z (US$ Million) Tea 365 26.0 Exports of Goods. NFS 1.568 1.513 1.698 Rubber 98 7.0 Imports of Goods. NFS 2.312 2.263 2.435 Coconut Products 52 3.7 Resource Gap (deficit -) -744 -750 -737 All Other Commodities 888 63.3 Net Factor Income -117 -138 -139 Total 1,403 !00.0 Net Transfers and Remittances 267 293 308 Palance on Current Account -594 -595 -568 EXTERNAL DEBT (US$ Million) a/ Direct Foreign Investment 25 29 24 Net M< Loans 258 337 256 December December Disbursements 314 409 339 1986 1987 Amortization 56 72 83 Capital Grants 175 177 192 Total Outstanding 5.189 5.840 Other Capital (net) 23 -35 12 Total Outstanding Change in Reserves (+ = increase) -113 -87 -84 and Disbursed 3.508 4.167 Gross Reserves (end-year) 451 353 279 Net Reserves (end-year) 63 8 n.a. DEBT SERVICE RATIO 6/ () 22.5 29.9 Crude Oil and Petroleum Products Imports 421 224 284 Exports 143 84 95 IBRD/IDA LENDING, End 1987 (US$ Million) IBRD IDA RATE OF EXCHANGE Outstanding and Disbursed 59 587 End 1981 End 1984 Undisbursed 60 329 US$1.00 = Rs 20.55 US$1.00 = Rs 26.28 Rs 1.00 = US$ 0.55 Rs 1.00 = US$ 0.04 Outstanding, inclu4ing Undisbursed 119 916 End 1982 End 1985 US-1.00 = Rs 21.32 US$1.00 Rs 27.41 Rs 1.00 = US$ 0.05 Rs 1.00 = US$ 0.04 End 1983 End 1986 US$1.00 = Rs 25.00 US$1.00 = Res 28.52 Rs 1.00 = US$ 0.04 Rs 1.00 = US$ 0.04 End 1987 US$1.00 = Rs 29.44 Rs 1.00 = US$ 0.034 a/ Repayable in foreign currencies and with an original maturity over one year. including private non-guaranteed debt. Excludes obligations to the IMF. b/ Ratio of debt service to exports of goods and services. Debt service includes service on M< debt. including IMF charges and repurchases. and interest payments on short-term debt. EXECUTIVE SUMMARY i. The situation that Sri Lanka now faces is one of the most complex in its history, both politically and economically. Against this background, the program of economic reforms recently announced by the Government is a bold initiative. On the political front, in spite of the Peace Accord signed between the Governments of Sri Lanka and India in July 1987, establishing a viable peace in the Northern and Eastern regions, and starting up the Recon- struction Program, have taken longer than expected. The recent resurgence of terrorism in the south has created new complications. In addition, Presiden- tial, Provincial and Parliamentary elections are to be held in the next twelve months. In such a political climate, pressures to postpone the program of economic reforms have been strong. A postponement would be dangerous, however. Gains in consumption and employment brought about by delaying econumic reforms would be small, short-term in nature and unsustainable over the longer run. In addition, this would leave Sri Lanka's economic problems unresolved. ii. The country's economic problems are serious. The economy has continued to deteriorate in 1987 with growth at less than 2%, and unemployment at over 18% of the labor force. In addition, Che country's level of spending has continued to be well beyond its available resources. The current account deficit in the balance of payments is at 8% of GDP, net official reserves have fallen to their lowest level in a decade and, at close to 30% of exports of goods and services, the debt service ratio is at a record high. Chronically high fiscal deficits have pushed interest payments on the Government debt to 5% of GDP. iii. There are three principal causes for the country's economic problems. The first is related to structural constraints to growth that were created over several dec.'des of controls and extensive government intervention in the economy, priur to liberalization in 1977. While that liberalization had a strong positive effect on efficiency, it failed to (i) reduce the size of the overextended public sector which still employs one-fifth of the country's labor force and accounts for close to half of GDP; (ii) increase the efficiency of public expenditure programs; and (iii) reorient the industrial sector suffi- ciently towards export markets which have the largest potential for growth. iv. Second, the structural constraints to growth have been aggravated by L level of spending which, in spite of the large volume of aid made available to Sri Lanka, has been beyond the country's available resources. After liberalization in 1977, with strong donor support, the Government undertook a massive public investment program (concentrating on irrigation, power and housirg) that peaked at 15% of GDP in 1980-82 and then declined gradually to 12-13% of GDP in 1983-87. In spite of a relatively high tax-GDP ratio of 20%, the fiscal deficit rose to 18% of GDP in 1980-82, before gradually falling to 11-12% in 1983-87. This expansion in aggregate demand contributed sig- nificantly to increased inflation and, because of an insufficiently flexible exchange rate, led in turn to a aradual appreciation of the real exchange rate in the first half of the 1980's. Thii appreciation has impeded a more igorous -ii- development and diversification of the export sector and, together with the deterioration in the country's terms of trade, contributed to a current account deficit which averaged 16% of GDP in 1980-82 - with a gradual decline to around 10% of GDP thereafter. This deficit was partially financed through commercial borrowing up until 1984; this has been one of the main reasons for the rapid increase in the debt service ratios. Thus, the good growth perfor- mance after liberalization can be explained by a once-for-all gain in efficiency that followed the removal of regulations and market distortions prevailing before 1977, complemented by an expansionary fiscal policy. The basis for such fiscal policy was an investment program which grew rapidly because of the need to rehabilitate an infrastructure run down by an extended period of insufficient investment and inadequate maintenance. In addition, there was a need to improve the housing stock that had deteriorated during decades of rent controls and, in the 1970's, by limits on the number of houses an individual could own. Gradually, Sri Lanka's housin, program became one of the most innovative and efficient of the developing world. It is now well targetted to the poor, it emphasizes low cost indigenous construction methods, and it is based on self help. Such projects were, however, the exception rather than the rule in the Government Public Investment Program and a large share of the country's resources was absorbed in public investment projects with low rates of return; thus, the growth experienced after 1977 could not be sustained. v. Finally, the third cause for the country's problems has been the out- break of the ethnic conflict in 1983 and, in the last two years, severe droughts. The ethnic conflict required fiscal resources which reached 5% of GDP in 1987, and imports of US$100 million, i.e. 5% of the country's total import bill. In addition to the burden it has put on the budget and on the balance of payments, the ethnic conflict has also weakened the Government's capacity to respond vigorously to a deteriorating economic environment. Throughout the 1980's, the annual budget speeches have reiterated the need to stabilize the economy; a first attempt at stabilization was made in the early 1980's when an Extended Fund Facility was negotiated with the IMF. The out- break of the ethnic conflict in mid-1983, however, has complicated decision making, and the Government has found it increasingly difficult to translate its views into policy actions. In the Sri Lankan political system where power is distributed among 40 Cabinet level ministries held by 28 ministers, and where most important decisions are taken on a consensus basis, the views ot the Ministry of Finance do not always have a strong influence on the decisions ultimately taken. Furthermore, from 1978 to 1985 GDP growth was above 5% per year. Until shortly after the outbreak of the ethnic conflict, Sri Lanka could borrow on commercial terms in the international market, and, from 1983 to 1985, the price of tea was at a record high. The adjustment could thus be postponed. vi. By 1986, however, it became evident that the country's spending levels could not be sustained any longer. The tea boom was over and, in spite of the decline in oil prices, the external current account deficit reached 9% of GDP for the second year in a row. The growth rate of CDP slowed to under 4%, unemployment rose to about 17%, and gross official reserves declined to less -iii- than 2 months of imports. In November 1986, the Government announced a three year stabilization program consisting, essentially, of a reduction in public expenditures from 33% of GDP in 1986 to about 29% by 1989, the maintenance of fiscal revenues at 20% of GDP and the adoption of a more realistic exchange rate policy. vii. Next, during the course of 1987, the Cabinet has approved the reports and recommendations of three high level committees--the Administrative Reform Committee (ARC), the Presidential Tariff Committee (PTC), both appointed by the President in 1986; and the Industrial Policy Committee (IPC), appointed by the Cabinet in 1984. Finally, a SAF agreement has been reached with the IMF and a Policy Framework Paper outlining an agenda for future policy changes was issued in early 1988. With such decisions, the measures that the Government had announced iii late 1986 to stabilize the economy have evolved into a comprehen- sive adjustment program focusing on long-standing constraints to the country's economic development. The 1987-90 Adjustment Program consists of three impor- tant structural reforms, all of which are justified on microeconomic efficiency grounds but which, taken together, would address long standing and serious macroeconomic problems: the unsustainably large deficits in the balance of payments and fiscal accounts, and the politically intolerable high unemploy- ment. viii. The Administrative Reform. The first structural reform is related to the reorganization of the Central Government with a view to rationalizing its administrative structure and reducing overstaffing. Compared to other countries of its size and level of development, Sri Lanka's public administra- tion is exceptionally large. Organizational units with uncoordinated and overlapping functions have proliferated. The three main clusters of Sri Lanka's public sector are: (i) the Central Government, consisting of 40 Cabinet Ministries, 4 non-Cabinet Ministries and 25 District Ministries with 430,000 civil servants; (ii) 86 statutory bodies, i.e. decentralized units of Govern- ment which include the rountry's eight universities and other agencies with diverse functions, such as the Ceylon Tourist Board and the Mahaweli Develop- ment Authority, which employ 155,000 people; and (iii) some 130 public sector enterprises (PEs), financial and non-financial, employing 180,000. Including the workers in the publicly owned tree crops plantations and temporary and casual workers, the public sector employs about 1.1 million people, close to one-half of all formal employment in the country, at a heavy cost to the budget (6%-7% of GDP in recent years). In spite of the high aggregate wage bill, public sector employees are largely underpaid. Adjustments in wages have, historically, not kept up with inflation, particularly at the senior levels. In real terms, the salary of a civil servant in the higher echelons is now less than half of what it was in the 1950's, and is less than half of private sector salaries. This situation has brought about a growing discontent among civil servants and severe morale problems. ix. The thrust of the ARC proposals is to address the twin problems of overstaffing and inadequate pay through a strategy aimed at redefining the existing Central Government's administrative structure, reducing the number of -iv- Ministries to 16 and the number of civil servants by at least 25%. A part of the savings from reducing staff would be used to make the salary scale more competitive with the private sector. The Government has already implemented the first phase of ARC's recommendation on wages, i.e., beginning January 1988, civil servant's salaries were increased by 50% of the proposed ARC increase. This meant up to a 40% increase, in real terms, for the higher levels, and a 10 to 20% increase for the lower level staff. By the end of 1988, a plan of action to implement the ARC's recommendation related to tte reduction in the number of ministries and staff is expected to be completed before Ihe second phase of the wage increase. x. The administrative reform proposed by the ARC deserves strong support. Its implementation should not only increase the Central Government's efficiency and reduce the cost of civil administration, but it should also change the philosophy and mentality that has so far shaped the Central Government's modus-operandi and interventions in the economy. However, the ARC has mainly focused on the Central Government, and its reports do not question the need for a large number of decentralized units in the public sector most of which are performing essentially Central Government functions. Available information suggests that the decentralized units also suffer from problems of overstaffing and inadequate pay. This report recownends that the ARC also focus on integrating to the extent possible the decentralized units of Government into the main core of the Central Government administration. It may also be appropriate for the ARC to reconsider the current pension benefits which allow civil servants to draw a pension at 85% of the last salary at age 55, after ten or more years of service. This costly benefit may be no longer necessary with more realistic salary levels. xi. Regarding the third cluster of Government, consisting of over 130 PEs, the Cabinet has already endorsed a program of privatization which is underway. However, full privatization can only be achieved over the long term, if at all, and the ARC has recommended measures to increase PEs efficiency in the mean- time. This will encourage PEs to contribute to growth and reduce their cost to the Treasury. The PEs are to be consolidated under a holding company, the Public Investment Corporation (PIC). ARC's approach has considerable merit. It would allow the PEs to be isolated from politically-motivated interventions. However, no system is immune to the quality of its management and in the absence of a firm Government commitment to efficient management for PEs and rigorous selection of strong entrepreneurial managers for the PIC and the PEs, the creation of a PIC may just create another layer of bureaucratic controls. xii. Restructuring Public Expenditures. Restructuring public expenditures to eliminate wasteful programs and increasing the efficiency of spending in remaining programs is the second important structural reform of the 1987-90 Adjustment Program. Public expenditures are to be reduced from about 33% of GDP in 1987 to 29% by 1990 (18% of GDP for current expenditures and 11% for capital), a level that can be financed from expected tax revenues (20% of GDP); foreign sources (6-7% of GDP), and other domestic financing sources for the remaining 2-3% of GDP. With the 4-5% growth anticipated during the Program -V- period, the 29% of GDP target can be achieved by maintaining existing expendi- tures constant in real terms. Thus, from a narrow stabilization point of view, the Government's objective does not call for any drastic austerity measures. From a development point of view, however, it is imperative to increase economic returns on public expenditures, improve their cost effectiveness, and phase out all those that generate little or no returns. This is made all the more urgent by a large number of pressing expenditure needs, e.g., the Recon- struction Program and the large backlog of investments in the Transport Sector, that need to be accommodated within the overall fiscal limits. In view of already high tax levels, reducing public expenditures with questionable economic returns is the best way to accommodate expenditure programs which are essential to the country's development. xiii. The recognition that increasing the contribution of public expenditure programs to growth is urgent and that the resolution of this problem is essen- tial for the country's continued development, is perhaps the most important feature of the 1987-90 Adjustment Program. This problem has built up gradually since the early 1950's as a direct consequence of the Government's approach to development which devoted substantial resources to (i) expanding the agricultural frontier to provide employment to the growing numbers of entrants in the labour force and increase food production; (ii) creating an industrial base; and (iii) expanding the Government's entrepreneurial role in all sectors of the economy, all of which generated disappointing returns. As this three-pronged approach to development proved unsuccessful in generating employ- ment, additional pressures were put on the budget to (iv) increase transfers to households to maintain living standards; and (v) expand public sector employ- ment. xiv. After liberalization, the Government reduced gradually, but substan- tially, its budgetary support to Public Manufacturing Enterprises (PMEs), as well as transfers to households. The across-the-board consumption subsidy for rice for the whole population was replaced by a National Food Stamp Program later complemented by a National Kerosene Stamp Program limited to the poorest segments of the population. While these public expenditures have declined since liberalization, others have increased. The Accelerated Mahaweli Develop- ment Program (AMDP), aimed at expanding the agriculture frontier through large irrigration/settlement projects, has increased public expenditures on irriga- tion to record levels; at their peak in 1982 they absorbed 7% of GDP. It appears that decentralized units of government have been used to create employ- ment, as evidenced by the 7% per year increase in the number of employees in the sector. The exact cost of the Government's entrepreneurial role is dif- ficult to identify in the budget because it is included in an overall expendi- ture category which contains subsidies as well as the operating budgets of decentralized units of Government. Based on partial information, this cost appears to have been high. In 1986, for example, the Treasury's support to Air Lanka alone amounted to 1.3% of GDP. xv. Public expenditures with low returns to the economy have taken place in spite of a well designed planning and budgetary system which has allowed Sri -vi- Lanka to avoid some of the problems that are frequently found in other develop- ing countries, such as lack of adequate funding for ongoing projects or resour- ces spread across too many projects. The appraisal system is also well struc- tured. Except for health, comprehensive strategy papers outlining development priorities have been recently prepared for most sectors in the economy: agriculture (1984); transport (1987); power (annually and periodic Master Plans); industry (1987); and education (1981). All proposed projects are to be reviewed in light of these sectoral strategies by sector specialists in the National Planning Division in the Ministry of Finance and Planning before they are presented for review to the Development Secretaries (DS), a working group that meets every week, consisting of the Secretaries to the Ministries in charge of economic-related matters. Only after the DS's review is a project sent to Cabinet for its approval and inclusion in the Public Investment Program (PIP). This procedure, however, has not prevented projects with questionable economic benefits bypassing the DS, being presented directly to the Cabinet and included in the PIP, especially when foreign financing was available and a politically powerful Ministry was sponsoring the project. xvi. To discourage public expenditures with questionable returns from being included in future PIPs, the already established principle of prior DS review and approval should be strictly adhered to and extended to Government guaran- tees as well as to any new program that requires additional current expendi- tures. This report also recommends that the medium-term approach for the planning of capital expenditures be extended to current expenditures as well. This would allow for better planning of maintenance programs and translation of sectoral strategies into expenditure programs. Finally, the reporting of public expenditures needs to reflect better their economic significance to be more useful for decision making and analysis. xvii. With a view to increasing the contribution of public expenditures to growth, this report reviews some of the major Central Government expenditure programs: (i) transfers to households, mainly the National Food Stamp Program and the National Kerosene Stamp Program, subsidies to the railways, the Sri Lanka Transport Board and fertilizer for farmers; (ii) support to some public corporations: Air Lanka, Ceylon Shipping Lines, Sri Lanka Cement Corporation, Sri Lanka Sugar Corporation and Petwatte (including the subsidy on sugar); (iii) public expenditures on power, transport, health and education, Mahaveli and other irrigation schemes. The expenditure items reviewed account for close to 60% of the 1988 budget, excluding public expenditures on interest, defense, and reconstruction. Capital expenditures on health and education, transport, power and irrigation, account for 50% (60% excluding defense) of the 1987-91 PIP. The 1988-92 PIP is not yet finalized, but preliminary information sug- gests that capital expenditures on the above categories will be, again, at least 50% of PIP. xviii. The analysis suggests two types of actions to increase the efficiency of public expenditures. Virst, a substantial share of the investment projects in the program have low rates of return and should be gradually eliminated from the PIP. A number of subsidies, which are not justifiable on economic and -vii- social grounds should also be phased out. Second, institutional reforms to ensure more efficient implementation of expenditure programs should be carried out. For example, most projects in health, education, power and transport are well justified on economic terms, provided institutional changes necessary for successful project implementation and efficient management of the new and existing assets are made. For example, improvements are urgently needed in health programs where inadequate management and chronic budget underruns may now be contributing to the deterioration of once outstanding health indicators. A well articulated strategy for the development of health services is also needed. The Government's decision to prepare a Health Strategy and Family Planning Study to provide a framework for an investment program in the sector and its recent initiative to strengthen the management of the health system are critical first steps. In the transport sector, unless the Sri Lanka Rail- ways is transformed into an efficient and commercially oriented, efficiently staffed, autonomous entity, investments in railways inciuded in the PIP will fail to generate the anticipated high returns. Unless the Road Development Authority is provided with resources sufficient to enable it to change its maintenance methods, the large investment on highways will fail to provide potentially very high rates of return. xix. Projects with low rates of return are a serious problem in the AMDP and in two public corporations: the Sri Lankan Cement Corporation and the Sri Lankan Sugar Corporation. Economic returns on investment in the AMDP have suffered both from high costs and lower than expected benefits. Indicative of the extent of such decline, recent estimates suggest that the ex-post rate of return of an ANDP project completed in 1985 (Mahaweli II in System H) is -1% va 21% at appraisal. Investments on Mahaweli amount to 13% of the 1987-91 PIP. They are expected to bring into cultivation 45,000 ha at about US$15,000 per ha, and settle about 35,900 families at the cost of US$18,000 per family. The ex-ante rate of return estimated in 1986 for one project in the so-called system B (right bank) is 3% excluding all sunk costs associated with the head- works. Since the ANDP was launched shortly after the current Government took office in 1977, it was known that, at 9-11%, rates of return on the AMDP were not very high. However, both donors and the Government provided a strong support to the AMDP as both believed that the benefits of the project went far beyond what could be captured by conventional economic analysis. However, given the macroeconomic developments of the recent past, the burden that the ethnic conflict has put on the economy, the current resource constraint and significantly lower prices of rice and oil than anticipated at the beginning of the AMDP, a careful reassessment is needed of the costs and benefits of future Mahaweli related investments and. at a more general level, of the emphasis given to irrigation projects in the country's development plans. This report recommends that the share of irrigation/resettlement in future PIPs be reduced substantially and that future investmentr concentrate on high return projects in rehabilitation and upgrading of existing irrigation schemes. Investment in new projects should proceed only after a new irrigation strategy, less capital-intensive and yielding higher returns, is articulated. It is clear that the strategy of coping with population pressures in an island with limited land resources through high cost and capital intensive irrigation projects -viii- based on low value crops such as paddy, should be critically assessed against viable alternative strategies. A major reorientation of the existing programs and, particularly, reconsideration of plans to complete the fifth dam under the AMDP (Moragahakanda) may be needed. xx. Low economic returns on investment are also a problem in the sugar sector. According to the 1987-91 PIP, the Government's objective is to increase Sri Lanka's sugar production from 10% to 60% of the country's annual consumption. Several investment projects have been approved by the Cabinet, some of which are already in the 1987-91 PIP and others are expected to be included in future PIPs. In addition, to attract private investment into sugar production, the Government has guaranteed a minimum rate of return on such investments. Unfortunately major investment and policy measures have already been decided before undertaking research to establish whether there are condi- tions and/or technologies which could make sugar economically attractive and there is now no evidence that Sri Lanka has a comparative advantage in sugar production. The domestic production cost is about US$650 per ton, while the c.i.f. price is at about US$190 per ton. Consumers pay a tax amounting to about US$285 per ton consumed in the country, and the remaining US$175 per ton is paid by the Treasury to producers. Because of the high tax, the poorest 25% of the population pay, by way of taxes on sugar, 80% of the income supplement they get through the food and kerosene stamp programs. The Treasury's con- tribution in the 1988 budget is Rs 275 million, i.e., US$770 for each existing job in the sugar industry, direct and indirect. Given the magnitude of these costs, it is essential that the Government review its current policy in the sugar sector and postpone any new investments for new factories or for rehabilitation as well as new guarantees to the private sector until such a review is completed. The report also recommends that the Government assess the variable production costs in the existing four sugar factories comparing their marginal production costs with c.i.f. prices. To the extent marginal costs exceed the c.i.f. import price, it is less costly to the economy to close these factories and provide severance packages to those now working in the sugar industry. A situation similar to that of sugar is encountered for cement. Again in this case, it is recommended that expansion decisions not be under- taken before a careful assessment of the potential role of the private sector, of alternatives and their associated costs, be completed. In particular, the expansion and rehabilitation of two cement plants (Puttalam and Ruhunu) for which the Cabinet has recently approved US$20 million should be postponed until such an assessment is completed. xxi. In contrast with the subsidies for sugar and, to a lesser degree, fertilizer, which are difficult to justify on economic or equity grounds, the subsidies for the railways and bus transportation, could, in principle, be justified on equity grounds. However, at present, the level of operational efficiency in the railways is such that, in spite of the subsidy, consumers do not benefit from cheaper transport services. Part of the operational inef- ficiency in the Sri Lanka Railways (SLR) is due to overstaffing and part is due to management practices. As suggested in the National Transport Study, the Government should reorganize the SLR into a more commercially oriented entity, -ix- with freedom to take operational decisiors on hiring and firing, fare deter- mination, route structure and level of service. Subsidies for certain routes could be included in the budget provided the cost and benefits of providing such subsidies are periodically reviewed and the routes being subsidized are clearly specified. This would require 3LR to develop a cost accounting system that allows the regular determination of costs and revenues at the individual route level. This is also essential to allow tariffs to be set in accordance with economic cost of supply and to support marketing decisions. Although problems of efficiency and overstaffing in public bus transportation are not as serious as in the SLR, similar institutional changes to improve the cost accounting system and target subsidies are necessary. xxii. Substantial leakages away from the intended beneficiaries are also occurring in the case of Stamp Programs for food and kerosene. In spite of their high cost (US$70 million in the 1988 budget), they have failed to prevent recent increases in malnutrition and are not efficient as an income-supplement scheme. The two stamp programs need to be consolidated with other ongoing nutrition and income-supplement programs, which cost close to US$20 million, and then be replaced by one program specifically targetted to reduce malnutri- tion and one program designed to increase incomes of the poorest segments of the population. Data have been collected by the Central Bank for the new 1986-87 Consumer Finance Survey, which will be completed in the second half of 1988. They could be used to identify the geographical and socio-economic distribution of malnutrition and poverty and design assistance programs on that basis. Much better results in terms of addressing poverty and nutrition issues could then be achieved at a much lower cost to the country. xxiii. Industrial Reforms. The third structural reform of the adjustment program consists of changes in the country's industrial policies aimed at accelerating industrial growth and increasing the export orientation of the manufacturing sector. As indicated in the IPC and PTC reports, Sri Lanka's industrial sector has played a modest role in generating growth and employment. First, in spite of a decade of more liberal policies, the level of protection afforded by the trade regime to import-substitution activities in the manufac- turing sector continues to be high and Sri Lanka's industries thus continue to concentrate on the limited domestic market. Second, the PMEs' output has been essentially stagnant in the last decade. Since they account for close to half of manufacturing output, they have been a major factor in slow industrial growth. Third, private investors have been relatively cautious, not only because of the negative effect of the ethnic conflict on the investment climate but also becav e of the lack of a strong Government commitment to the develop- ment of an i'Aependent private sector. Convincing measures to reduce the role of PMEs and make room for private initiatives have not been taken. For example, little tangible progress has been achieved in privatizing PMEs. An insufficiently well defined policy regarding foreign investment adds to the uncertainty. To attract foreign investors the Government has, on a case by case basis, granted costly privileges such as guaranteed rates of return on capital, loan guarantees, and tariff exemptions on imports of raw materials, i.e. an ad-hoc approach which suggests that it may be time to undertake a -x- comprehensive review of the foreign investment incentive system. Finally, the fear of nationalization is still alive. Even though, in contrast with the previous Government, no nationalization has taken place in the last 10 years, the Government Acquisition Act of 1971 which entitles the Government to take over any private business if judged by the Government to be in the country's interest, is still in force. xxiv. To create a more internationally competitive and less inward-looking industrial sector, the IPC and PTC have recommended that the Government reduce the average current rate of effective protection from about 100% to around 50%, while reducing the dispersion of effective protection. As a first step, the 1988 budget brought the maximum nominal tariff, of 100%, down to 60%, increased the minimum tariff from 0 to 5%, and eliminated all import licensing require- ments that could not be justified on health or security grounds. The second phase of the reform is planned for the end of 1989 and would bring the maximum nominal tariff to 50%. In addition, to increase the PMEs efficiency, the Government has prepared a program of PMEs reform consisting of two components. First 16 PMEs (out of a total of about 40) will be converted into public liability companies, the share of which will be divided between the Ministry of Finance and the Itne miaistries. The companies will be managed according to private sector rults; they will determine their employment levels as well as the structure of their pay scales, and will not be subject to government tender and investment approval procedures. The second component of the program will be the privatization of enterprises that can be partially or totally divested beginning in 1988. Three PMEs are ready for total privatization, i.e., they are profitable, they are financially viable, and their equity could easily be absorbed by local investors. A fourth one (a textile mill) will have its equity shared between foreign investors, the Government and state banks. xxV. The program of industrial reform is comprehensive and should have a strong and positive impact on the sector's performance. However, very little has been done to improve the investment climate and the costs of doing busi- ness. The Government will need to review its foreign investment approval procedures and establish clear and transparent criteria for their approval. As a general principle, conditions for approval should be minimal, and steps should be taken to encourage foreign investors. Of particular help to foreign investors would be for the Foreign Investment Advisory Committee (FIAC) to focus on helping them in the post approval stages where bureaucratic procedures are particularly cumbersome. Private investment would also be encouraged by restricting the expansion of PMEs that are not justified on economic grounds, such as in the case of the Sri Lanka Cement Corporation discussed earlier. Reducing the costs of doing business is another initiative that would improve the investment climate. With the administrative reform underway, it may be the time to create a Committee with power to simplify government procedures affect- ing business along the lines of what was done in 1979 and 1985. xxvi. Taxation. As a share of GDP, Sri Lanka's tax collections are larger than in many other developing countries, partly because of the high priority placed on public provision of social services. Early on, large exports -xi - provided a convenient and administratively simple tax base. However, the system relies heavily on indirect taxes which are responsible for over 80% of tax collections, with taxes on trade accounting for about half of that amount and domestic indirect taxes for the other half. Heavy taxation of basic con- sumption items (rice, sugar, wheat) is very regressive and largely offsets the effect of the National Food and Kerosene Stamp Programs. As part of the 1987-90 Adjustment Program, the last two budgets have introduced a series of tax changes aimed at increasing the elasticity of tax revenues and reducing tax evasion. While bringing about significant improvements, these tax reforms have lacked the comprehensive and detailed medium-term approach that has guided the Government in other policy areas. In addition to the low elasticity, high evasion, and negative effects on income distribution, the current tax system also suffers from unclear objectives. Future tax reforms would gain from being part of a thorough and systematic reform program. The successful approach taken by the PTC could be used as a model for designing future tax reforms. An essential part of this plan should be to provide more resources to the Commis- sioner of Inland Revenue so he can improve his tax policy forfulation and audit capabilities. xxvii. The Exchange Rate Policy. As indicated in the last two budget speeches and in the IPC report, a more flexible exchange rate policy is essential to correct the external account imbalances and to support the development of the manufacturing and the export sector in general. Until now, the management of the exchange rate in Sri Lanka has not focussed sufficiently on current account performance. In the early 1980's, for example, with the large inflow of for- eign capital, the Central Bank let the exchange rate appreciate in real terms to curtail inflationary pressures. Exports suffered as a result; e.g., exports of garments stagnated in 1984-85, in sharp contrast with the high growth rates (well over 10% in real terms) which were experienced after a more flexible exchange rate policy was adopted in 1985. With the planned reduction in tariffs, which is substantial, there will be a need for a more aggressive use of the exchange rate. Experiences in other countries have shown that trade liberalization unaccompanied by an appropriate exchange rate policy can have deleterious effects on manufacturing. It is thus extremely important, spe- cially in the short run, that the adjustment of the manufacturing sector to a more competitive environment be facilitated by a continuation of the policy of constantly reviewing the adequacy of the exchange rate. xxviii. Aid Requirements. External assistance requirements have been projected taking into account: (i) the US$340 million that will be provided by the IMF over 1988-90 in the context of the recently approved SAF and CFF; (ii) the US$500 million pledged by donors in a Special Aid Group focussing on Recon- struction last December which is expected to largely exceed the import content of the program; and (iii) the reduction in the current account deficit of the balance of payments from slightly over 8% of GDP in 1987 to 6% in 1990, in the context of the 1987-90 Adjustment Program. About US$2.8 billion will be neces- sary over 1988-90 to finance the current account deficit, amortize the foreign debt, and restore foreign reserves to a modest 3 months of imports by the end of the adjustment period. About US$1.5 billion is expected from disbursements -xii- on already existing commitments; US$400 million from the Reconstruction Program; and US$340 million from the SAF and CFF. The remaining US$600 million will have to be financed out of new commitments. Based on historical disburse- ment patterns, about US$1.6 billion will need to be committed over the next three years in addition to the US$500 million already committed for the Recon- struction Program (US$550 million in 1988, US$530 million in 1989, US$520 million in 1990). These amounts are in line with aid provided to Sri Lanka in the recent past and are vital to the Government efforts to adopt and effec- tively implement the 1987-90 Adjustment Program. Were the Reconstruction Program to proceed more slowly than expected because of the difficulty in bringing about peace to the Northern and Eastern parts of the country, a financing gap may emerge. The Reconstruction Program has an important role in financing the balance of payments, since its foreign financing is expected to largely exceed the import content of the program. A report on the Reconstruc- tion Program outlining progress achieved so far is being prepared by the Government and should be ready by June 1988. xxix. Primary areas of donors' assistance would be in manufacturing to sup- port the development of the private sector; in transport, to strengthen institutions and policies in the sector and finance projects with potentially very high rates of return. Providing support to the implementation of the recommendations of the ARC and the devolution of power to the Provinces are other two important areas for aid. Strengthening the management of the health sector and rehabilitating the infrastructure in both the health and the educa- tion sectors is also important. Investments in agriculture should concentrate on supporting the Government's objective of diversifying the cropping pattern and encouraging farmers to shift from paddy to higher value crops. A restruc- turing of the agricultural credit system - basically non-existent at present, is probably an essential pre-condition for this objective to be achieved. Investments in new irrigation schemes should be postponed until the potential for high return non-paddy based systems is established. This may provide, notably in the case of Mahaweli, a viable basis for future development. INTRODUCTION 1. Sri Lanka is a striking case of an economy which was well ahead of other developing countries in the 1950's, but which did not maintain its position over time. In the 1950's, Sri Lanka's per capita income was about half of Japan's or Malaysia's and much higher than Korea's or Thailand's. The living sLandards of its population in terms of life expectancy at birth, school enrollment ratio, literacy, and infant mortality rates, were among the highest in the developing world. Four decades later, the country's per capita income is less than 5% that of Japan, less than a fifth that of Malaysia, and well below those of Korea and Thailand. In addition, the country is now confronted with slow growth, large fiscal deficits, a dif- ficult balance of payments and serious political disturbances that the Government sees as resulting mostly from chronically high unemployment. 2. The 1987-90 Adjustment Program is a major step towards the resolution of Sri Lanka's chronic unemployment problem and macro-economic imbalances. It also represents a resumption of efforts initiated in the late 1970's to tackle the factors which account for Sri Lanka's relative decline over the past several decades. The Program addresses long standing development con- straints which are at the root of the country's problems: (i) inward looking industrial policies that have emphasized excessive state involvement and discouraged private investment, both foreign and private; (ii) major public expenditure programs which have absorbed a large volume of resources and, more importantly, have often yielded low returns; and (iii) a public administration which is overstaffed, split between over 40 ministries and close to 100 decentralized units of Government, and which has created pres- sures to expand the Government's role in the economy, and discouraged private sector initiatives. 3. This report consists of two parts. Part I highlights how Sri Lanka's structural constraints to growth evolved over time, and analyzes the Govern- ment's response to the recent deterioration of the economic situation. It concludes with a review of the thrust of the 1987-90 Adjustment Program and the main supporting macro-economic policies. 4. Part II analyzes the three main structural reforms envisaged under the Program: the reorientation of industrial policies, the restructuring of public expenditure, and the comprehensive reorganization of the Central Government administration and devolution of power to the new Provinces, expected to begin during the course of 1988. Finally, it indicates that a reform of the tax system is also an issue that the Government will soon need to address. PART It RECENT ECONOMIC PERFORMANCE AND ADJUSTMENT ISSUES I. Development Policies, Constraints to Growth and Recent Economic Performance A. Background 1.1 High unemployment and macroeconomic imbalances have been chronic problems in Sri Lanka. Pressures on the labor market began with the expansion of health programs in the early 1900's and accelerated after malaria was eradicated in the mid-1940's, when the population growth rate tripled. While Sri Lanka had once needed immigrant workers to develop its plantations, unemployment rates gradualiy began to increase until they reached a record high of 24% in the 1970's. After the economic liberalization in 1977, some improvement was made, nonetheless unemployment remains a volatile and intractable problem today; conservative estimates indicate that 18% of the labor force is now unemployed, and only 70% of the 180,000 new entrants to the labor force have found employment in the recent past. Unemployment has often been cited as one of the causes of periodic social unrest in Sri Lanka, including the 1971 insurgency which cost 10,000 lives, the recent resurgence of political violence in the South, and even the disturbances in the North and East of the country. While there has been no lack of awareness of the seriousness of the problem, none of the numerous reports on the subject have identified the causes of the puzzling long term inability oi Lhe Sri Lankan economy to generate adequate employment growth. At close to 2% a year, labor force growth is not excessive in relation to GDP growth, which has consistently exceeded that rate. Sri Lenka has a well educated and adaptable labor force which has flourished overseas. Excessive rural-urban migration has not forced up unemployment rates; the share of the labor force employed in agriculture has been remarkably stable for the last five decades. The root of the problem lies else- where, and this report argues that the size of the public sector, the approach it has taken to development, the share of resources it has absorbed, and the efficiency with which it has managed such resources, have created the secular unemployment problem in Sri Lanka. 1.2 Since Independence, albeit with a short-lived liberalization experiment in the 1960's and some important modifications after 1977, the thrust of develop- ment policy, has been (i) to make large and capital intensive investments to expand the agricultural frontier to support food production to the neglect of plantation based export crops; (ii) to promote industrial growth by establishing public enterprises and protecting the domestic market against foreign competi- tion; and (iii) to increase the role of Government in the economy by creating public enterprises, and making extensive use of price controls, private invest- ment licensing and restrictions on trade, both external and domestic. This approach to development was not unique to Sri Lanka and has been followed by a number of countries in the developing world. In Sri Lanka's case, however, it was carried further than in most, and, because of the smallness of the economy, its costs were relatively higher. Indicative of the degree of Government inter- vention iv the economy, prior to 1977, rice could not be traded freely in the country between producing areas and consumer centers. In the mid-1970's, the -2- Government introduced limits on individual incomes in the form of a compulsory savings ncheme. Up to 1977, private initiatives in general were mistrusted and often penalized. The result has been that, while maintaining its impressive social achievements, Sri Lanka has not made the transition to an urban based industrialized and export oriented economy which can provide ample employment opportunities while maintaining internal and external balance as well. This development approach failed in generating growth and employment commensurate with the large fiscal resources that it required. This created additional pressures on the budget to fulfill the expectations of a population accustomed to rapid increases in living standards. As a result, public expenditure programs to increase household consumption levels reached unsustainably high levels. At their peak in the late 1970's, food subsidies reached 5-6% .f GDP. Furthermore, to diffuse popular discontent of a well educated labor force with high employment expectations, the Government was pressured to increase public sector employment rapidly. The public sector became the largest employer in the economy, thus creating additional pressures on the budget. Since the early 1960's, public sector deficits have never been below 6-8% of GDP. Liberalization in 1977 1.3 The liberalization of the economy in 1977 brought about major gains in efficiency by eliminating market distortions. Quotas were replaced by tariffs, the foreign exchange regime was liberalized, most price controls were eliminated, and restrictions on domestic trade were lifted. The supply response to these measures was remarkable. Before 1977, for example, not only the price of rice was controlled but, as indicated before, it could also not be freely exported from one district of the island to the other. (Sri Lanka is divided into 25 districts). Rice production grew at a rate well over 10% in the first few years after liberalization (1977-80). The once repressed financial sector and private manufacturing were liberalized and grew at record rates, in sharp contrast with near-stagnant output in public manufacturing. With an improved incentive framework, the long term growth rates rose substantially in most sectors of the economy (Table 1.2). The trend of declining output in the tree crop sector was reversed, except for rubber, where lower export taxes and a more competitive exchange rate could not overcome the long-term deterioration of the sector. 1.4 Liberalization has also led to a diversification of Sri Lanka's foreign exchange earnings. Encouraged by generous tax incentives, tourism boomed. Tourist arrivals increased from 150,000 in 1977 to 400,000 in 1982; a 20% annual growth rate. However, due to the ethnic disturbaices that began in 1983, arrivals have gradually declined since then; they were less than 200,000 in 1987. A second new source of foreign exchange has been exports of garments which increased from a negligible amount prior to 1977 to some US$440 million in 1987, out of total exports of US$1.3 billion, while creating some 50,000 jobs in the process. Workers' remittances, at some US$20 million in 1977, have grown to about US$350 million in 1987 in response to the increased number of Sri Lankans working abroad and the more attractive exchange and domestic interest rates. -3- Table 1.1: KEY ECONOMIC VARIABLES, 1978-87 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Incentive Indicators 1. Real Interest Rate (2) 1.1 Savings Deposits -1.0 -7.3 -6.7 7.3 1.0 -5.1 -7.8 9.8 3.4 0.9 1.2 Commercial Lending Rates 4.2 -1.4 -2.4 -2.0 8.0 3.3 0.2 19.4 12.3 9.6a/ 1.3 12 Months' Deposit Rates 5.7 -0.8 -0.0 0.2 6.7 0.7 -3.9 12.9 5.2 2.6 2. Index of Minimum Real Wages (January 1978=100) 2.1 Private Sector 100 113 111 97 101 95 99 106 103 102 2.2 Public Sector 105 111 97 93 103 109 107 121 117 114. 3. Tree Crop Taxation (%) b/ 3.1 Tea 52 48 33 31 25 27 32 19 11 11 3.2 Rubber 49 50 53 50 32 30 31 10 12 18 3.3 Coconuts 42 56 41 30 19 13 14 11 10 6 4. Ratio of Domestic Producer Prices to International Prices (%) 4.1 Coffee 69 76 76 67 73 70 67 81 78 90 4.2 Rice 87 70 83 82 111 114 120 123 128 113 4.3 Sugar 173 161 132 137 186 200 239 251 263 244 External Trade Indicators 5. Volume Index of Major Exports (1977=100) 5.1 Tea 104 101 100 98 97 85 110 107 112 108 5.2 Rubber 102 94 89 98 98 92 93 88 81 78 5.3 Coconuts 182 187 90 144 302 208 118 329 388 189 Memo Item: Sri Lanka's Share in World Exports of: 1961 1965 1969/71 1979/81 1984 1985 c/ 1986 c/ Tea 32.5 33.8 33.3 24.1 24.1 21.9 23.1 Rubber 5.6 5.6 5.0 3.9 3.5 3.4 3.6 Coconuts n.a. n.a. 5.6 3.0 2.; 2.8 2.7 a/ Average of first and second quarters. c/ Estimated. b/ Taxes as share of exports, including the ad-valorem in the case of tea. Sources: Central Bank of Sri Lanka and Bank staff estimates -4- Table 1.2: GROWTH RATES OF GDP IN SELECTED SECTORS, 1970-77 TO 1978-87 1970-77 a/ 1978-87 a/ Agricultur,. 2.3 3.1 Paddy 2.1 3.0 Tea -0.1 1.2 Rubber -0.7 -2.3 Coconut -2.4 7.0 Manufacturing 1.7 5.8 Public 3ecto% n.a. 1.0 Construction -0.3 6.4 Services 3.6 6.0 GDP 3.1 5.3 a/ Annual Averages. Source: Central Bank of Sri Lanka and Bank staff estimates. 1.5 In addition to the development of tourism and non-traditional exports, aggregate demand was also stimulated by the massive public investment program concentrating on irrigation, power and housing that the Government undertook with strong donor support. Construction growth reached 7-8% per year during 1978-81, before declining gradually as major projects were completed. Higher growth and overseas employment of Sri Lankans led to a sharp reduction in the rate of unemployment. From the high of 22% prevailing before liberalization, th: unemployment rate 1/ declined to 12% in the early 1980's. 1/ The most comprehensive estimates of unemployment are done by the Consumer Finance Survey of the Central Bank. The last one was carried out in 1981/82. Unemployed are defined in the survey as all those who are above 14 years and had no employment during the week of the survey but were actively seeking work. Employed are those who worked at least one day with a minimum of three hours during that week. There can be, therefore, a substantial amount of underemployment that is not reflected in the unemployment rate. -5- B. Structural Constraints 1.6 In contrast with unprecedented economic growth after 1977, outpt growth has recently slowed, from over 5% during 1978-85, to 4% in 1986 and less than 2% in 1987, while unemployment has risen to 18% of the labor force. Mac- roeconomic imbalar.ces are unsustainably large. Chronically high fiscal deficits have pushed up interest payments on the Government debt to 5% of GDP. The current account deficit on the balance of payments amounts to 82 of CDP. Net reserves have fallen close to zero and gross reserves have fallen from over 4 months in 1985 to less than two months of imports. At about 302 of exports, the debt service ratio reached an all time high in 1987. Inflation has esca- lated from less than 2% in 1985 to 8-10% in 1986-87. There are several reasons for the recent deterioration in economic performance. 1.7 While liberalization of the economy had a profound and positive effect on factor productivity and efficiency in general, it failed to (i) reduce the size of the public sector; (ii) rationalize public expenditure programs; (iii) reorient the industrial sector towards export markets and increase its role in the economy. Essentially, the liberalization of the economy induced increases in efficiency but left the same basic economic structure unaltered. Size of the Public Sector 1.8 The liberalization process did not reduce the size of the public sector which still employs close to one-fifth of the country's labor force and accounts for close to half of GDP. According to a public sector census carried out in 1985,1/ employment in the public sector grew rapidly (8% per year) outside the Central Government. While the pace at which new public sector enterprises were created slowed significantly after 1977, the Government con- tinued to manage over 130 enterprises that were inherited from the previous regime in all sectors of the economy. They account for 15-20% of CDP. In general, this management has been inefficient and not guided by economic or financial considerations. In addition, the expansion of public expenditure programs after liberalization actually increased the importance of the public sector in the economy and crowded out private sector activity. Construction costs increased at more than twice the increase in the consumer price index until the mid-1980's. Real interest rates reached record highs in the mid-1980's. 1/ Department of Census and Statistics, Causes of Public Sector and Corpoation Sector Employment, 1985; Colombo, November 1986. -6- Efficiency of the Public Sector and of Public Expenditure Programs 1.9 A serious constraint to the country's sustained economic growth was and still is the low efficiency with which the public sector has managed the large resources under its control. Most public enterprises have not been managed efficiently and a number of public investment projects generated low returns to the economy. In agriculture, since the 1950's, capital-intensive large-scale irrigation/settlement schemes have been very costly and yielded low or even negative returns. In industry, the Government invested substantial resources in inefficient import-substituting projects. After liberalization, there have been some isolated cases of success. The Sri Lanka Port Authority (SLPA), once overstaffed and inefficiently run, was transformed into a dynamic commercially oriented organization which was instrumental in the growing tran- shipment business at Colombo Port. However, for the bulk of the public sector, there is substantial room for improvement. Industrial Policies 1.10 Sri Lanka's industrial sector has played a disappointingly modest role in generating growth and employment. The share of Sri Lanka's manufacturing sector in the country's GDP is only 14%, as opposed to 20% in Pakistan, 18% in Indonesia, and 28% in Thailand. Only one-third of the manufacturing sector gross output (and a much smaller share of its value added) is exported. In addition, domestic value added in manufacturing exports is extremely low.1/ In spite of a decade of more liberal policies, Sri Lanka's industries continue to concentrate on the limited domestic market because of the high level of protection provided by the trade regime. Since quotas were replaced by tariffs in 1977, and bans on imports were gradually eliminated (the last ban on imports, that on textiles, was eliminated in 1985), the tariff system underwent several reforms aimed at reducing both the level and dispersion of effective protection rates. However, until before the November 1987 Tariff Reform, the overall level of effective protection was at close to 100%, a level which has encouraged concentration on the limited domestic market. This is illustrated by the case of the garments industry. One of the features of this industry is its reliance on foreign sources of supply for textiles, thread, and other physical inputs with the result that domestic value added is only 30% of exports of garments. 1.11 This has had two drawbacks. First, local garments manufacturers are at a disadvantage compared with their overseas competitors, since significant additional time (often 2-3 months) is required to allow for receipt ov shipment of cloth and other inputs from abroad before an export order can be produced. Second, the rest of the economy has benefitted less than it would have, had the 1/ Athukorala, P., The Impact of the 1977 Policy Reform on Domestic Industry. Upanathi, Vol. 1, No.1, January 1986. -7- industry's linkages been more developed. This situation has been induced by the high degree of protection granted to domestic textile producers. Until November 1985, there was a ban on the import of textiles, and after that, a tariff of 100% which was reduced to 60% in the November 1987 tariff reform. Local textiles manufacturers have therefore found it more advantageous to focus on the domestic market where they can earn large unit profits because of the high tariffs, rather than developing the capability to supply materials needed by the export-oriented garments industry where profits would be based on large volumes with high quality but relatively low unit profits. 1.12 Another cause of low industrial growth has been the poor performance of the Public Manufacturing Enterprises (PMEs) over the last decade which accounts for close to half of manufacturing output. There are about 40 PMEs at present. Their output has grown at an average annual rate of only 1% and employment increased only marginally. The disappointing perfcrmance of most PMEs can be attributed to the inconsistent functions they are expected to undertake: to provide employment, to promote regional development in depressed and isolated areas of the country, and to substitute for imports. In compensation, until the last tariff reform, PME's have been protected against foreign competition with higher than average tariffs and provided with budgetary support. As a result, PME managers have no autonomy and require approval of supervising ministries for almost all aspects of their operations; any capital expenditure undertaken by a PME has to be approved by a series of Government bodies. Procurement of materials has to be approved by a tender board appointed by the Cabinet for purchases over the equivalent of US$170,000, and by the Ministry for purchases over the equivalent of US$70,000, price changes even for consumer goods such as textiles, have to be approved by Cabinet, and, finally, PMEs have no autonomy to fire or to fix salary scales without approval of their parent Ministry, and are often requested to hire staff in excess of their needs. 1.13 Convincing measures to reduce the role of PMEs and make room for private initiatives have also not been taken. For example, the Government has recently decided to increase investments in the Sri Lanka Cement Corporation (see para. 4.40) rather than exploring the interests of private groups to expand cement productioni a similar approach has been taken in the case of pharmaceuticals for which the State Pharmaceuticals Corporation is now complet- ing a new plant. Little tangible progress has been achieved in privatizing PMEs. An insufficiently well defined policy regarding foreign investment increases the uncertainty of an already difficult investment climate. To attract foreign investors, the Government has granted on a case-by-case basis costly privileges such as guaranteed rates of return on capital, loan guaran- tees, and tariff exemptions on imports of raw materials. This ad-hoc approach suggests that it may be time for a comprehensive review of the foreign invest- ment regime. -8- Table 1.3: SELECTED INDICATORS OF PUBLIC AND PRIVATE MANUFACTURING ACTIVITIES Growth Rate Value of Output Ownership 1978-86 in 1985 (%) Employment % PMEs 1% 41 54,600 26 Formal Private Sector a/ 10-12% 59 157,600 74 100 212,400 100 a/ It excludes establishment with less than five workers which, according to the 1983 Industrial Census, amounted to 100,000 units, employed about 600,000 people in 1982, and produced less than 10% of the sector's output. 1.14 Finally, the fear of nationalization is still alive. Even though, in contrast with the previous Government, no nationalization has taken place in the last 10 years, the Government Business Acquisition Act of 1971 which entit- les the Government to take over any private business if judged by the Govern- ment to be in the country's interest, is still in force. C. Macro-Economic Imbalances Fiscal Imbalances and their Financing 1.15 The structural constraints to growth discussed above have been aggravated by macro-economic imbalances. After liberalization, with strong donor support, the Government undertook a massive public investment program (concentrating on irrigation, power, and housing) that peaked at 15% of GDP in 1980-82 and then declined gradually to 12-13% of GDP in 1983-87. In spite of a relatively high tax-GDP ratio of 20%, the fiscal deficit rose to 18% of GDP in 1980-82, before gradually falling to 11-12% in 1983-87. About half of the Government's deficit was financed from foreign sources, of which a third was through grants and two-thirds through borrowing (Table 1.4). About US$3 billion was disbursed out of Government and Government-guaranteed loans during 1978-85, of this some US$900 million was contracted on commercial terms. The domestic financing of the public sector deficit has relied primarily on the Central Bank and institutional investors such as the state-owned National Savings Bank (NSB) and the Employees Provident Fund (EPF) which own most of the Government's debt (Table 1.3). The NSB has a widespread network of branches all over the country that captures a large share of the country's financial -9- savings; close to 90% of NSB's assets are in long-term Government securities which earn market determined interest rates. Depositing in NSB is made attrac- tive to investors by tax exemptions and a Government subsidy which permits NSB to pay slightly above market interest rates. The subsidy has been reduced from about 0.3% of GDP in 1985 to about 0.1% of CDP in 1987. The EPF is a fund managed by the Central Bank and financed by contributions from employers (14% of their wage bill) and employees (8% of their wage earnings). EPF's assets are held entirely in government papers. The NSB and the EPF have financed about two-thirds of the Government's domestic borrowing requirements (Table 1.5) implying that about one fourth of the country's financial savings has been allocated to the financing of public sector deficits. Table 1.4: FINANCING OF THE GOVERNMENT DEFICIT, 1978-87 (As % of GDP) Central Government Deficit 14.2 Less Foreign Grants 2.6 Deficit after Grants 11.6 Foreign Borrowing 5.0 of which: Grant equivalent at 2.3 Commercial equivalent 2.7 Domestic Borrowing 6.6 of which: Bank 2.6 a/ Based on 1981-87. Defined as the grants implicit in concessional lending. Source: Central Bank of Sri Lanka. 1.16 The existence of large institutional investors keeping their assets in government papers has given the Government flexibility in financing its large fiscal deficits, reduced the need for inflationary finance, and in turn, helped to keep inflation under control. Progressively during the 1980's, monetary growth rates have been reduced from over 30% to 10-12% (Table 1.6). -10- Table 1.5: COMPOSITION AND OWNERSHIP OF GOVERNMENT'S DOMESTIC DEBT AS OF MARCH 1987 (% of Total) Long Term Treasury Rupee Securities Bills Others Total Total 53 41 6 100 Bank Sector 1 33 6 40 Central Bank - 29 6 35 Commercial Banks 1 4 - 5 Non-Bank Sector 52 8 - 60 National Savings Banks 21 - - 21 Employees Provident Fund 28 - - 28 State Corporations 1 5 - 6 Others a/ 2 3 - 5 a/ Mostly Trust Provident Funds and Insurance and Finance Companies. Source: Central Bank of Sri Lanka. Table 1.6: MONETARY AGGREGATES - SELECTED INDICATORS (1958-87) 1958-62 1963-67 1968-72 1973-77 1978-82 1982-87 -------------- As Z of GDP a/------------------- Money & Quasi Money (M2) 23.5 28.4 24.8 20.8 30.6 29.9 Money (Ml) 5.0 8.1 9.0 7.5 17.4 18.3 Quasi-Money 18.5 20.3 15.8 13.3 13.2 11.6 -----------Annual Growth Rate (%)------------- 1978 1980 1982 1983 1984 1985 1986 1987 Money & Quasi Money (M2) 25 32 25 22 17 12 6 12 Money (Ml) 11 22 17 25 14 12 13 13 Quasi-Money 49 42 30 20 19 12 1 12 Inflation (Z) b/ 12.1 26.1 10.8 14.0 16.7 1.4 8.0 7.7 a/ Annual Averages b/ As measured by the CPI Source: Central Bank of Sri Lanka. -11- External Imbalances 1.17 The expansion in aggregate demand fueled by large fiscal expenditures led to an increase in inflation in the early 1980's and, because of an insuffi- ciently flexible exchange rate, led in turn to an appreciation of the teal exchange rate. This appreciation has severely constrained the development and diversification of the export sector and contributed to a current account deficit which averaged 16% of GDP in 1980-82 - with a gradual decline to 10% of GDP thereafter. An important share of this deficit was financed through com- mercial borrowing in the international capital market, in which Sri Lanka borrowed heavily until 1984. Commercial borrowing has been one of the main reason for the rapid increase in the debt service ratios (Table 1.7). Table 1.7: DEBT INDICATORS, 1978-87 1978 1980 1982 1983 1984 1985 1986 1987 a/ Total External Debt As a % of Exports 144 148 220 223 177 227 260 266 As a % of GDP 50 48 60 59 51 60 62 67 Memo Items: Debt Service (US$ million) 131 229 300 341 317 368 422 504 Amortization 73 128 122 117 114 133 182 245 Interest 25 43 104 139 148 171 146 152 IMF Repurchases 28 45 55 47 23 36 69 85 IMF Interest 5 13 19 38 22 28 25 22 Total Debt (US$ Billion) 1.4 1.9 2.9 3.0 3.1 3.5 4.1 4.8 Public and Publicly Guaranteed 1.0 1.3 1.9 2.2 2.4 2.8 3.6 4.1 Private Non-Guaranteed - - - - 0.1 0.1 0.1 0.2 Use of IMF Credit 0.2 0.3 0.4 0.3 0.3 0.3 0.3 0.2 Short-term Debt 0.1 0.3 0.5 0.4 0.3 0.3 0.2 0.3 Debt Service Ratio (%) 13.5 17.0 21.9 24.2 17.6 22.5 26.7 29.9 a/ Preliminary estimates. Source: Central Bank of Sri Lanka and Bank staff estimates 1.18 The extent to which the appreciation of the rupee has limited export growth is a subject of controversy. There is a view in Sri Lanka that because the country's export base is not sufficiently diversified and import -12- competing industries are not sufficiently developed, a depreciation of the exchange rate does not increase resources to these sectors. This elasticity pessimism is based on the narrowness of Sri Lanka's export base which con- sists of (i) traditional exports of tea, rubber, and coconuts; (ii) minor agricultural crops (spices, coffee, fruits, and vegetables); (iii) petroleum products; (iv) garments; and (v) other industrial exports. Traditional exports (402 of exports in 1986-87) have stagnated in the last decade. The impact of enhanced price incentives on production can occur only with a lag. Investments in plantations, on the other hand, are not thought to respond to exchange rate changes, particularly in t'. case of the state plantations. Exports of minor agricultural crops (spices, coffee, tropical fruits, vegetables) are thought to have a large potential but they accounted for less than 4% of exports in 1986-87. Exports of petroleum products are re-exports of surplus products of the domestic refinery. They cannot grow faster than crude oil imports. The only items among Sri Lanka's merchandise exports, which could respond positively to exchange rate incentives, therefore, are garments and a wide variety of "other" goods that range from frozen shrimps to ice-skating boots, leather, wood, and ceramic products. However, increases in exports of garments are restricted by quotas in developed countries while other industrial products accounted for only 62 of merchpa- dise exports in 1986-87. Table 1.8: MACRCECONOMIC BALANCES, 1978-87 (% of GDP) 1978 1979 1980 1981 1982 1983 1984 1985 1986b/ 1987b/ Foreign Savings 4.5 11.2 19.8 13.7 15.3 12.4 4.8 9.9 9.3 8.3 (Current Account Deficit) Private Sector (Incl. public corporations) Investment a/ 8.7 12.0 16.5 14.5 15.2 16.3 14.5 11.7 11.1 12.7 Savings 12.7 12.0 12.9 13.9 18.0 15.8 16.5 12.8 12.9 14.7 Investment minus Savings -4.0 0.0 3.6 0.6 -2.8 0.5 -2.0 -1.1 -1.8 -2.0 Central Government Current kevenues 25.9 22.8 19.6 17.4 16.1 19.2 22.2 22.3 20.8 20.8 Current Expenditures 23.1 20.1 18.5 17.2 18.7 18.3 17.0 21.2 19.3 20.0 Savings 2.8 2.7 1.1 0.2 -2.6 0.9 5.2 1.1 1.5 0.8 Capital Expenditures 11.3 13.9 17.3 13.3 15.5 12.8 12.0 12.1 12.6 11.2 Investment minus Savings 8.5 11.2 16.2 13.1 18.1 11.9 6.8 11.0 11.1 10.4 a/ Includes variations in stocks. 6/ Preliminary estimates. Source: Central Bank of Sri Lanka and Bank staff estimates. -13- Table 1.9: BALANCE OF PAYMENTS DATA, 1980-87 (US$ million) 1980 1982 1984 1985 1986 1987 d Exports (G+NFS) 1,297 1,305 1,743 1,568 1,513 1,698 (Merchandise fob) (1,065) (1,014) (1,464) (1,321) (1,204) (1,402) Imports (C+NFS) 2,205 2,205 2,142 2,312 2,263 2,435 (Merchandise cif) (2,051) (1,990) (1,928) (2,047) (1,957) (2,096) Net Factor Income -26 -94 -133 -117 -138 -139 (M< Interest Payments) (-33) (-69) (-103) (-110) (-113) (-104) Net Current Transfers a/ 136 264 277 267 293 308 CURRENT ACCOUNT -798 -730 -255 -594 -595 -568 Net Direct Investment 46 66 37 25 29 24 Official Grants 138 162 203 175 177 192 Bilateral and Multi- lateral Loans (net) 151 170 260 258 337 256 Disbursements (190) (204) (309) (314) (409) (339) Amortization (39) (34) (49) (56) (72) (83) Private Loans (net) b/ 84 222 51 -12 -28 -89 Disbursements (96) (263) (101) (45) (56) (47) Amortization (12) (39) (50) (57) (84) (136) Other Capital c/ 159 89 -4 35 -7 101 Change in Net Reserves (- indicates increase) 220 21 -292 113 87 84 ---------------------% of GDP--------------------- Current Account -19.8 -15.3 -4.8 -9.9 -9.3 -8.3 Official Grants 3.4 3.4 2.6 2.9 2.8 2.8 Bilateral & Multilateral Loans (net) 3.8 3.5 4.3 4.3 5.3 3.7 Private Loans (net) 2.1 4.8 0.8 -0.2 0.4 -1.3 Net Current Transfers 3.4 5.5 4.7 4.5 4.6 4.5 Memo Items: Export Price Index (1978=100) 120.3 97.0 144.0 108.0 82.0 86.7 Import Price Index (1978=100) 158.5 144.6 134.4 132.0 120.9 124.1 Terms of Trade (1978=100) 75.9 67.1 107.5 82.4 67.8 69.9 a/ Mainly private remittances. b/ With Government guarantee. Includes suppliers' credits. c/ Includes short-term capital, Government non-guaranteed M< capital, SDR allocations, and errors and omissions. d/ Estimates for 1987. Sources: Central Bank of Sri Lanka; and Bank staff estimates. -14- 1.19 Published data do not permit *1 ;e%60 1.6 1.3 1.0 8.2 0.5 n.a. n.a. 31.0 5.3 12.5 4.6 Average Nominal Tariff (Unweighted) 20.2 25.0 21.9 28.0 23.0 11.6 13.6 43.0 29.0 31.0 34.0 1/ After the 1987 Tariff Reform. Source: World Bank (1987) Trade and Industrial Policies in the Developing Countries of East Asia. September 24, 1987, and PTC for Sri Lanka. -28- 3.3 The flat tariff may be a goal that can only be achieved in the longer term, however. Meanwhile the Government announced in November 1987, in the 1988 budget, its intention to adopt a four-banded tariff system with a minimum tariff rate of 5%, with two intermediate bands of 15% and 30%. As a first step towards this, the maximum duty rate was reduced from the previous highs of 75-100% to 60% (except for some agricultural products, a few excisable items, and for 26 1/ out of the 2,600 entries in the tariff system). The second step of the reform, i.e., the reduction of the maximum nominal tariff to 50% and the adoption of the four bands, should take place in late 1988. The commitment to adopt a four-banded tariff system will result in one of the least distor- tionary systems of protection in the region. Tables 3.2 and 3.3 indicate how Sri Lanka's nominal tariffs and non-tariff barriers compare with other East Asian countries before the 1987 Tariff Reform and how they will compare after the reform is completed. Comparisons of effective protection rates among countries are difficult because they depend on the methodologies and assump- tions used in their calculations. They are, however, useful in indicating orders of magnitude. Table 3.4 indicates that Sri Lanka's tariff system provided before the 1987 Tariff Reform, the highest level of protection to manufacturing, but the lowest dispersion within manufacturing. The PTC estimates that after completion of the Tariff Reform in 1988, the effective protection for manufacturing will be reduced by half, and the d:spersion con- siderably reduced. The 1987 tariff reforms also reduced the number of items requiring import licenses from 281 to about 150. The only items now requiring import licenses are those pertaining to national security and the food industry. All the licensing restrictions that afforded special treatment to PMEs have been removed. 1/ These are continuous computer stationery (1 item); carpets and tapestries (12 items); mirrors and chandeliers (3 items), jewelry (4 items); and electrical household appliances (6 items). -29- Table 3.3: PREVAILING NONTARIFF TRADE BARRIERS Banned Import Import Local Content Products Quotas Licensing Programs Indonesia 27 products Yes--linked to Yes--covers 17% Yes--vehicles banned--vehicles licensing sys- import items generators, TVs, tires, tem but fewer machine tools, matches, etc. (300 items) tractors. Korea Few Yes--quotas 12% of import Localization for aimed uni- items require infant industries laterally import approval Malaysia Few Yes--32 16 items in Yes. Mainly products as 1984 motor vehicles 1982 Philippines On some agricul- Few formal Import approval Mainly vehicles tural products quotas on protective and electronics grounds required for 10% of import items Thailand 23 banned pro- No 22 products Yes. Vehicles, ducts--vehicles, licensed: gold, diesel engines, sugar, ceramic tea, silk, used milk products, etc. vehicles, etc. Sri Lanka None None About 150 items None Source: World Bank, op.cit. and PTC. -30- Table 3.4: SUMMARY MEASURES OF EFFECTIVE RATES OF PROTECTION A. Sectoral Distribution of Protection (%) Import- Export Competing All Sectors Manufacturing Sectors Sectors Indonesia (1984) u.a. n.a. -19 - +23 57 - 4,800 Korea (1982) 49 28 n.a. n.a. Malaysia (1982) n.a. 23 5 27 Philippines (1984) 8 20 -10 29 Thailand (1985) 30 52 n.a. n.a. Sri Lanka (1987) Before the 1987 Reform n.a. 107 23 126 After the completion of the Reform 1/ n.a. 50 5 58 B. Protection in Manufacturing (%) Sri Lanka Indonesia Korea Malaysia Philippines Thailand 1987 Reform (1984) (1982) (1982) (1984) (1985) Before After I/ Textiles 109 65 65-500 n.a. 54 106 118 Intermediaries 22-327 13-130 25-425 40-62 17 15-125 45-60 Machinery 30-110 50 10-20 31 37 116-201 18-37 Transport Equipment 75 75 125-4,800 124 74 118 60-90 Manufacturing 107 50 n.a. 28 23 20 52 1/ After the four-banded system is implemented and the maximum rate is reduced to 50%. Source: PTC and World Bank, op.cit. -31- C Export Promotion Measures 3,4 Since liberalization, Sri Lanka has developed a wide range of export incentives aimed at providing exporters with access to tradable inputs at international prices and fiscal incentives, including direct cash payments. Fiscal incentives were designed to compensate Sri Lankan exporters vis-a-vis protected import-competing industries. The IPC recognizes the need for export incentive schemes and propn9es their expansion in two directions. First, it recommends that the access to tradable inputs at international prices provided by schemes such as the tax rebate on imported inputs be extended to indirect exporters, a recommendation which is now being implemented, and second, it proposes an increase in fiscal incentives to exporters. While extending access to tradable inputs for indirect exporters is clearly desirable, the case of increasing fiscal incentives is questionable. First, the existipq fiscal incentives have a differentiated impact on exports for reasons that bear little relationship to economic efficiency considerations. Second, the total cost of these measures to the Treasury has not been determined. Finally, they are potentially subject to countervailing duties under GATT and are administra- tively costly and difficult to implement and monitor. Because the new fiscal incentivea would share some of these features, consideration should be given to phasing out existing fiscal incentives rather than introducing new ones. D. Public Manufacturing Enterprises and Privatization 3.5 The IPC proposes, as a general principle, that PMEs be sold to the private sector unless they should remain public for special reasons; also, that enterprises may have to close down because they cannot be salvaged when exposed to a more competitive environment. However, since a privatization program will obviously require time, the IPC proposes, in the interim, changes that would allow PMEs to operate with less government intervention and subject to greater competition. 3.6 In line with the IPC recommendations, the Government has prepared a program of PMEs reform consisting of two components--first, in 1988, transfor- mation of 16 selected PMEs, the assets of which would be about half of the total value of PMEs' assets (excluding petroleum and cement) into public liability companies to prepare them for possible privatization. The shares of the converted companies will initially be divided between the Ministry of Finance and the line Ministries. These companies will be free to Aetermine their employment levels as well as the structure of their pay scales, and will not be subject to government tender and investment approval procedur'es. At the same time, with the 1988 budget, most remaining special privileges of PMEs have been removed. 3.7 The second component of the program will be the privatization of enterprises that can be partially or totally divested. There are three com- panies that are ready for total privatization, i.e., they are profitable, they -32- are financially viable, and their size is such that their equity can be absorbed by local investors: State Distilleries, United Motors, and Ceylon Oxygen. The sale of shares of the first two of these companies will commence in mid-1988 and the third later in the year; all three are expected to be completed by the end of 1989. A fourth textile PME will be sold to foreign investors, probably before the end of the year; the value of its assets is being determined. 3.8 The program of industrial reform is comprehensive and should have a strong and positive impact on the sector's performance. However, it is also important to highlight that very little has been done to improve the investment climate and the costs of doing business. This report recommends that the Government review its foreign investment approval procedures and establish clear and transparent criteria for their approval. As a general principle, this report recommends that conditions for approval be minimal, and all steps be taken to encourage foreign investors. Of particular help to foreign inves- tors would be for FIAC to help them in the post approval stages where bureaucratic procedures are particular cumbersome. Private investment would also be encouraged by restricting the expansion of PMEs that are not justified on economic grounds, such as the Sri Lanka Cement Corporation discussed ear- lier. Reducing the costs of doing business is another initiative that would improve the investment climate. With the administrative reforms underway, it may be the time to create a Committee with power to simplify Government proce- dures affecting business. -33- IV. ADJUSTING PUBLIC EXPENDITURES A. The Nature and Magnitude of the Problem Introduction 4.1 An important objective of the 1987-90 Adjustment Program is to reduce public expenditures from about 33% of GDP in 1987 to 29% by 1990. With the 4-5% GDP growth rate anticipated during the program, this targiZ can be achieved by maintaining existing expenditures constant in real terms. Thus, from a narrow stabilization point of view, the Government's objective does not call for any drastic initiative. From a development point of view, however, it is imperative to increase economic return on public expenditures, improve their cost effectiveness, and curtail those with low returns. This is made all the more urgent by a large number of pressing expenditure needs, e.g. the Reconstruction Program, and the large backlog of investments in the transport sector, that need to be accommodated within the overall fiscal limits. 4.2 The recognition that a large share of public expenditures has con- tributed little to growth, and that resolving this problem is essential for the country's sustained development, is perhaps the most novel feature of the 1987-90 Adjustment Program. Wasteful public expenditure is not a problem unique to Sri Lanka; it is a problem common to both developed and developing economies. In Sri Lanka's case, however, the volume of such expenditures has been excessive relative to the growth imperatives facing the economy. This problem built up gradually since the early 1950's until liberalization in 1977, as successive Governments raised increasing fiscal resources to (i) expand the agricultural fron*-i:z; (ii) create an industrial base; and (iii) create new Public Enterprises and expand existing ones. As this three-pronged approach to development proved to be unsuccessful in terms of employment generation, addi- tional pressures were put on the budget to (iv) increase transfers to households to maintain their living standards, and (v) expand public sector employment. 4.3 The liberalization of the economy affected in different ways each one of the above expenditure categories: (i) Irrigation. The emphasis on irrigated agriculture was accentuated by new projects and, particularly, by the Accelerated Mahaweli Development Project (ANDP). Irrigation expenditures thus absorbed close to one-third of public capital expenditures in 1978-85 and amounted to about 4% of GDP in the last decade. As in previous periods, the returns on such investments continued to be disappointing. According to the 1985 completion report for one of the World Bank's early Mahaweli projects (Mahaveli II), for instance, the ex-post economic rate of return is -1% even excluding the sunk costs associated with the headworks. -34- (ii) Manufacturing. Public expenditures in manufacturing as a share of GDP doubled after liberalization because subsidies to PMEs implicit in quotas, barriers to entry, and foreign exchange allocations at the grossly overvalued official exchange rate, were replaced by explicit budgetary sub- sidies. After 1982, public expenditures on manufacturing declined substan- tially, partly due to a reduction in investments. Except for sugar (para 4.33)), no new industrial projects were launched by the current Govern- ment. Another factor has been the Treasury's decision to gradually discontinue its financial support to PMEs. As a consequence, a large number of PMEs are decapitalized and heavily indebted. The PTC has recently launched a study to analyze this problem and assess how the program of tariff reductions will affect the PMEs finances and economic viability; (iii) Public Enterprises. The current Government has continued to play an important, albeit more limited, role as an entrepreneur. New enterprises have been created and/or participation taken, e.g. in Air Lanka (100% state-owned) established in 1979, and Pelwatte Sugar Corporation (49% state-owned) which began operating in 1985. But, more importantly, the Govern- ment has continued to manage the over 130 non-financial public enterprises (PEs) inherited from previous governments in all sectors of the economy which, have often required budgetary support. As discussed in para 4.4, the reporting of public expenditures does not allow a precise estimate of such support. Partial information suggests that it has been large over the last decade, but it is not possible to assess how this compares with previous periods. (iv) Welfare Services, Subsidies and Transfers to Households. Public expenditures on welfare services and transfers to households stood, on the average, at 5-6% of GDP (excluding pensions) since the 1960's and reached 8% of GDP in 1978. They were gradually reduced to 2-2.5% of CDP (Table 4.1), after the rice subsidy was replaced by the National Food Stamp Program (NFSP). (v) Public Sector Employment. Employment in the Central Government increased at only 2% per year after 1977 (see Table 5.1). However, employment in the decentralized units of Government -- e.g., agencies such as the Ceylon Tourist Board and Mahaweli Development Authority -- increased by close to 8% per year between 1980 and 1985. It is difficult to trace the impact of this increase in employment on total wage costs because, while the budget indicates total allocations to decentralized units of Government, it does not show how much of such allocations are for wages. All indications are, however, that while wages in the Central Government declined as a share of GDP in the last 10 years (Table 4.2) mainly because of erosion in real wages, the wage bill in the decentralized units of Government has increased substantially on account of a substantial increase in employment (see para 5.3). -35- Table 4.1: LEVEL AND COMPOSITION OF PUBLIC EXPENDITURES, 1958-87 (% of CDP) 1958-62 1963-67 1968-72 1973-77 1978-82 1983-87 Total Expenditure 25.5 27.7 28.4 24.3 35.1 32.2 Administration 3.9 3.5 3.9 3.5 3.5 5.5 of which Defense, public order and safety 1.0 0.9 1.0 0.7 1.2 2.7 Social Services 7.1 6.8 6.6 4.6 5.5 4.9 Education 4.4 4.4 4.1 2.8 2.6 2.4 Health 2.3 2.1 2.2 1.5 1.6 1.4 Housing 0.4 0.3 0.3 0.3 1.3 1.1 Welfare services, subsidies & transfers to households 4.5 7.7 7.2 6.2 6.1 3.5 of which Pensions 1.6 1.6 1.7 1.3 1.1 1.4 Economic Services 7.4 7.1 6.9 6.6 13.6 12.3 Agriculture 1.7 1.0 0.9 1.5 1.5 1.1 Irrigation 1.7 1.0 1.1 1.4 4.9 a/ 4.5 a/ Fisheries 0.1 0.0 0.1 0.2 0.3 0.2 Plantation 0.0 0.0 0.0 0.0 0.3 0.3 Power 0.0 0.5 0.1 0.2 0.7 0.8 Manufacturing & Mining 0.9 0.5 0.3 1.0 2.0 0.9 Trade 0.2 0.2 0.3 0.2 0.3 0.5 Transportation 0.9 1.7 1.7 1.8 3.1 3.2 b/ Other & Unallocable 1.9 c/ 2.2 b/ 2.4 c/ 0.3 0.5 0.8 Interest on Public Debt 1.0 1.5 2.4 2.7 3.9 5.1 Other Transfers & Payments 0.6 1.1 1.4 0.7 0.9 0.9 to Local Authorities n.a. 0.6 0.7 0.4 0.4 0.4 Others n.a. 0.5 0.7 0.3 0.5 0.5 Memo Items Current Expenditures 18.2 20.4 21.3 17.6 19.9 18.6 Capital Expenditures 7.3 7.3 7.1 6.7 15.2 13.6 a/ Includes investment in multipurpose power-irrigation projects. Investments in power amounted to about 30% of investment in irrigation, i.e. 1.7% of GDP in 1978-82. No estimates are available for 1983-87 but since most large multipurpose projects were completed in 1983-84, this proportion is hound to be small in 1983-87. b/ For 1983-87, public expenditure on Air Lanka alone averaged 0.8% of GDP. c/ For 1958-72, refers mostly to transfers to Public Enterprises (PEs). The list of PEs to which these transfers were made is not published. However, available information suggests that they were mostly in the industrial sector. Source: Central Bank of Sri Lanka and Bank staff estimates. Estimates differed slightly from those in Table 4.2 which follows the IMF format, e.g., interest payments on intra-Government debt are included in this Table but excluded in Table 4.2. -36- Table 4.2: CENTRAL GOVERNMENT EXPENDITURES - 1978-87 (As % of GDP) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Current Expenditures 23.1 20.1 18.5 17.2 18.7 18.3 16.0 20.1 18.9 19.9 Operating Expenditures 7.9 8.0 7.2 6.5 6.8 6.5 6.0 10.0 8.4 10.0 Wages and Salaries 5.4 5.6 5.0 4.2 4.4 4.0 3.6 4.2 4.5 4.1 O;her Goods and Services 2.4 2.5 2.2 2.3 2.5 2.5 2.4 5.8 4.0 5.9 Interest Payments 3.2 3.2 3.4 4.4 5.1 5.4 4.4 4.6 4.9 5.1 Domestic 2.5 2.5 2.7 3.6 4.2 4.4 3.4 3.4 3.7 3.9 Foreign 0.7 0.7 0.6 0.8 0.9 1.0 1.1 1.2 1.3 1.2 Subsidies and Current Transfers 12.0 9.5 8.0 6.3 6.7 6.4 5.6 5.3 6.0 5.8 To Public Enterprises 2.7 2.0 2.6 1.7 2.0 1.7 1.8 0.9 1.6 1.5 To Other Levels of Govt. 0.3 0.3 0.2 0.2 0.3 0.3 0.3 0.3 0.4 0.3 To Households 9.0 7.1 5.1 4.4 4.4 4.4 3.5 4.3 3.4 4.0 Food & Other Subsidies a/ 7.9 6.0 4.1 3.3 2.9 3.0 2.1 2.6 1.7 2.3 Pensions 1.1 1.1 1.1 1.1 1.4 1.5 1.4 1.7 1.7 1.7 Capital Expenditures 11.3 13.9 17.3 13.3 15.5 12.8 13.0 13.3 12.9 11.7 Net Lendin 5.6 2.8 5.9 2.5 -0.3 1.5 2.1 0.7 1.1 1.5 TOTAL 40.0 37.4 41.8 33.0 34.0 32.6 31.1 34.0 33.0 33.0 Memo Item Public Order, Safety and Defence Expenditures (% of GDP) 1.3 1.5 1.5 1.2 1.1 1.3 1.4 2.8 3.4 5.0 a/ Includes the Food Stamps, Kerosene Stamps, the subsidy to the National Savings Bank, the fertilizer subsidy, and other welfare payments Source: Central Bank of Sri Lanka and Ministry of Finance and Planning. -37- B. The Planning and Reporting of Public Expenditures 4.4 Sri Lanka's fiscal year coincides with the calendar year. The budget is presented to the Parliament in November. In addition, a rolling PIP cover- ing a five-year period, is issued in May. This document contains, inter alia, a list of all projects, both ongoing and new, to be implemented during the five year period; the (actual) budgetary allocations for the first year; indicative budgetary allocations for the next four years; and sources of finance. The PIP is thus presented after the budget and reproduces the budget figures for the first year. The interactions between the budget and the PIP are as follows. By February/March of each year, Ministries present their current and capital requests to the Ministry of Finance for the following year, and an estimate of the capital requirements for the following four-year period. A first round of cuts generally takes place at this stage after which the five-year investment plan is sent to the Cabinet for review and dpproval; after a second round of adjustment, they form the basis for the PIP to be issued in May. By August, a first draft of the budget is sent to Cabinet, and a third round of adjustments takes place then. Capital allocations tend to follow those agreed upon for the May PIP. By September, the Budget is essentially ready to be discussed with the Cabinet and the President, before it is sent to Parliament in November. 4.5 In recent years, supplementary budget allocations, both current and capital, have been frequent, as actual expenditures have often surpassed budget targets. On the whole, however, the planning and budgetary systems have worked fairly well. It allowed Sri Lanka to avoid many of the problems that are frequently found in other developing countries, such as lack of adequate fund- ing for on-going projects and/or resources spread across too many projects with the result that there is a large number of unfinished projects and an excessive volume of invested capital that is not yielding adequate returns. The appraisal system is also well structured. Except for health, comprehensive strategy papers outlining development priorities have been recently prepared for most sectors in the economy: agriculture (1984); transport (1987); power (annually and periodic Master Plans); industry (1987); and education (1981). All proposed projects are to be reviewed in light of these sectorkl strategies by sector specialists in the Ministry of Finance before they are presented to the Development Secretaries 1/ for review. Only after the Development Secretaries' review is a project sent to Cabinet for its approval and inclusion in the PIP. This procedure, however, has not prevented projects with ques- tionable economic benefits to by-pass the Development Secretaries, to be presented directly to the Cabinet and included in the PIP, especially when foreign financing was readily available and a politically powerful Ministry was sponsoring the project. 1/ The Development Secretaries is a working group that meets every week, consisting of the Secretaries to the Ministries in charge of economic-related matters. -38- 4.6 While the appraisal system is well designed, the reporting of public expenditures does not facilitate analysis and decision making because of two shortcomings. First, the budget format does not provide an adequate economic classification of expenditures. Two important budget categories, current and capital transfers to PEs which, in the last few years, have accounted fz-r between one-fourth and one-fifth of the total budget, (over one-third in the early 1980's) include expenditures which are very different in nature. For example, current transfers to PEs include (i) outright operating subsidies, e.g., subsidies to the SLTB, and to the National Savings Bank (NSB); (ii) the operating budget of decentralized units of Government, such as the Paddy Marketing Board, the Ceylon Tourism Board, and the Bureau of Ceylon Standards; (iii) the costs of maintenance programs, such as those carried out by the Rioad Development Authority (RDA) which is in charge of highways maintenance; both its operating budget and the cost of the road maintenance programs under its responsibility are classified as transfers to PEs in the budget. 4.7 Similarly, capital transfers to PEs include (i) investment projects executed by a decentralized unit of Government, e.g. transfers to the Ceylon Tourist Board or the Mahaweli Authority of Sri Lanka; (ii) payments of Govern- ment guaranteed foreign loans which a public corporation is unable to service; Air Lanka, the Ceylon Shipping Corporation and the Cement Corporation have been the most notable cases in recent years; (iii) equity contributions to assist PEs' investment plans. For example, the Government-owned tree crops planta- tions have been the recipient of relatively large Central Government transfers to help finance their investments in rehabilitation undertaken in the last few years; and (iv) some maintenance programs e.g., capital transfers to Mahaweli include the costs of maintaining irrigation schemes in the Mahaweli areas. In addition, the budget and the PIP use different concepts of capital expendi- tures. For example, support to PEs such as Air Lanka, Sri Lanka Cement Cor- poration, and Sri Lanka Sugar Corporation, are excluded from the PIP; however, they are capital expenditures both from a budgetary and economic point of view. 4.8 Second, the rolling five-year PIP does not provide a full picture of the investments being carried out by the public sector. Investment projects carried out through non-budgetary funds (i.e. earmarked taxes for tea and rubber) are not included in the PIP. The portion of project costs self-financed by CEB is not included in the PIP either; if a project is fully self-financed by CEB, the project is not even shown in the PIP. A similar situation is encountered in the case of the Ceylon Petroleum Corporation which has undertaken important investment projects in the recent past, none of which have been included in the PIP. Until last year, investments carried out by the JEDB and SPC were also not included in the PIP while cn-lending of loans from aid institutions to the private sector are sometimes included in the PIP (e.g. loans to the industrial sector) but sometimes not (e.g. loans to coconut smallholders). While investment projects of major PEs should be included in the PIP, this is to improve reporting of public expenditures and not to increase controls on PEs, nor to subject their investment projects to the approval procedures which guide investments by Central Government agencies. -39- Table 4.3: PUBLIC EXPENDITURES SUMMARY, 1984-88 1984 1985 1986 1987 1988 Rs Mn %CDP Rs Mn %CDP Rs Mn %CDP Rs Mn %CDP Rs Mn %CDP Current Expenditure 24,630 16.0 32,645 20.1 33,967 18.9 39.607 19.9 40,548 18.0 Operating Expendicures 9,195 6.0 16,288 10.0 15,156 8.4 20,007 10.0 19,129 8.5 Civil Administration 2,288 1.5 3,095 1.9 2,884 1.6 3,434 1.7 5,140 2.3 Education 2,572 1.7 3,208 2.1 3,518 2.0 3,812 1.9 3,923 1.7 Healta 1,535 1.0 1,729 0.1 1,810 1.0 2,559 1.3 2,465 1.1 Defence 2,180 1.4 7,269 4.5 6,263 3.5 9,842 4.9 5,963 2.7 Others 620 0.4 987 0.6 681 0.4 360 0.2 1,638 0.7 Interest 6,738 4.4 7,428 4.6 8,762 4.9 10,220 5.1 11,962 5.3 Transfers to Households 5,553 3.6 6,896 4.2 6,612 3.7 7,716 3.9 7,328 3.3 Food & Kerosene Stamps 1,801 1.2 1,728 1.1 1,799 1.0 1,925 1.0 2,105 0.9 Pensions 2,180 1.4 2,728 1.7 2,964 1.7 3,316 1.7 3,477 1.5 Others 1,572 1.0 2,440 1.5 1,849 1.0 2,475 1.2 1,746 0.8 Transfers to Local Govts 444 0.3 501 0.3 600 0.3 641 0.3 833 0.4 Transfers to Public Corporations 2,700 1.8 1,532 0.9 2,837 1.6 3,008 1.5 2,336 1.0 Sugar Corporation - - - - - - - - 275 0.1 SLTB 382 0.2 153 0.1 215 0.1 305 0.2 152 0.1 RDA 155 0.1 32 0.0 162 0.1 260 0.1 260 0.1 Fertilizer 1,037 0.7 748 0.5 613 0.3 500 0.3 600 0.3 Railways Losses 629 0.4 72 0.0 408 0.2 422 0.2 188 0.1 Others 497 0.3 527 0.3 1,439 0.8 1,521 0.8 861 0.4 Unallocated - - - - -1,985 -1.0 -1,040 -0.5 Capital Expenditures 19,915 13.0 21,530 13.3 23,236 1..9 23,271 11.7 27,017 12.0 Capital Investment 5,850 3.8 7,375 4.5 7,788 4.3 10,736 5.4 15,532 6.9 On Railways 1,059 0.7 1,237 0.8 1,057 0.6 1,C97 0.5 1,028 0.5 SLTB 129 0.1 44 0.0 421 0.2 13 0.0 20 0.0 Health 216 0.1 318 0.2 400 0.2 1,240 O.e 1,437 0.6 Education 537 0.3 930 0.6 1,092 0.6 1,032 0.5 1,091 0.5 Irrigation (except Mahaweli) 639 0.4 670 0.4 770 0.4 1,037 0.5 793 0.4 Reconstruction - - - - - - - - 4,500 2.0 Others 3,270 2.1 4,176 2.6 4,048 2.3 6,407 3.2 6,663 3.0 Transfers to Public Corporations 13,861 9.0 13,441 8.3 14,874 8.3 11,636 5.8 10,729 4.8 Air Lanka 935 0.6 800 0.5 2,403 1.3 1,117 0.6 944 0.4 Cement Corporation - - 236 0.1 - - 260 0.1 - - Sugar Corporation 410 0.3 508 0.3 131 0.1 185 0.1 155 0.1 Shipping Corporation 200 0.1 275 0.2 274 0.2 54 0.0 200 0.1 RDA 346 0.2 679 0.4 876 0.5 940 0.5 895 0.4 Mahaweli 7,057 4.6 7,233 4.5 5,952 3.3 5,087 2.6 5,050 2.2 CEB 1,015 0.7 153 0.1 109 0.1 60 0.0 165 0.1 Others 3,898 2.5 3,557 2.2 5,129 2.9 3,933 2.0 3,320 1.5 Net Lending 3,291 2.1 1,059 0.7 11911 1.1 2,919 1.5 4,969 2.2 to CEB 507 0.3 371 0.2 1,371 0.8 2,461 1.2 4,017 1.8 SLTB 385 0.3 291 0.2 465 0.3 - - - - JEDB and SPC - - - - 392 0.2 782 0.4 836 0.4 DFCC and NDB - - - - 154 - - - 462 0.2 Others (Net) 2,399 1.6 397 0.2 -391 -0.2 324 0.2 -346 -0.2 Total Expenditure and Net Lending 47,836 31.1 55,234 34.0 59,194 33.0 65,797 33.0 72,534 32.2 Source: Central Bank of Sri Lanka and Bank staff estimates. -40- As discussed elsewhere in this report improving PEs' efficiency requires increasing their autonomy, an objective which requires freedom to design, finance and implement their own investment program. 4.9 To overcome the shortcomings discussed above, this report recommends forming a working group including representatives of the Central Bank, the Treasury and selected Ministries, to design a reporting system that allows the prompt identification of the economic nature of public sector expenditures, and provides a complete picture of public investment projects being carried out by the public sector. In addition, this report recommends that the already estab- lished principle according to which all projects have to be reviewed by the Development Secretaries before they are sent to Cabinet for approval, be strictly adhered to and extended to Government guarantees as well as for any new program that requires additional current expenditures. Finally, this report recommends that the medium-term approach for the planning of capital expenditures be extended to current expenditures as well. This would allow a better planning of maintenance programs and translation of sectoral strategies into expenditure programs. C. The Public Expenditure Review 4.10 The remainder of this Chapter analyzes the cost-effectiveness, equity and returns to the economy of selected expenditure programs: (i) transfers to households, mainly the NFSP and the National Kerosene Stamp Program (NKSP), and subsidies to the railways, the Sri Lanka Transport Board (SLTB), and fer- tilizer; (ii) support to some public corporations: Air Lanka, Ceylon Shipping Lines, Cement Corporation, Sri Lanka Sugar Corporation and Pelwatte, and (iii) public expenditures on power, transport, Mahaweli and other irrigation schemes, health and education. The recently created subsidy for sugar is analyzed together with the Sri Lanka Sugar Corporation and Pelwatte. The expenditure items reviewed in this Chapter account for nearly 60% of the 1988 budget excluding public expenditures on interest, defense and reconstruction. Capital expenditures on health and education, transport, power and irrigation, account for 50% (60% if capital defense expenditures are excluded) of the 1987-91 Public Investment Program (PIP). Public outlays on wages are reviewed in the next Chapter of this report, together with the effectiveness of the Central Government administration. A more detailed discussion of the above expenditure items is in Annex 2 to 8 The 1988-92 PIP is not yet finalized, but preliminary data for investments planned during 1988-92 are available for some sectors and are also liscussed in this report. -41- Table 4.4: PUBLIC INVESTMENT PROGRAM (1987-91 AND 1988-92) 1987-91 1988-92 Rupees Rupees Million % Million Z Reconstruction Program - - 16,265 10.1 Agriculture 33,805 26.6 n.a. of which Mahweli 19,441 13.0 21,615 13.4 Irrigation Projects 4,942 3.3 5,440 3.4 Capital Transfers to SLSC and Sugar related projects 790 0.5 n.a. n.a. Integrated Rural Dev. Projects 3,185 2.1 n.a. n.a. Water Supply 4,767 3.2 n.a. n.a. Industries 538 0.4 n.a. n.a. Transport 14,066 9.4 27,665 17.1 Power 20,640 13.8 25,179 15.6 Housing and Urban Development 5,643 3.8 n.a. n.a. Infrastructure for Health and Education 13,963 9.3 n.a. n.ea. Administrative Overheads a/ 27,897 18.7 n.a. n.a. of which Defence 22,556 15.1 n.a. n.a. Miscellaneous 11,121 7.4 n.a. n.a. New Projects (to be identified) 13,921 9.3 n.a. n.a. TOTAL 149,574 100.0 161,433 b/ 100.0 a/ Includes annual programs of maintenance and repairs of Government buildings. b/ Estimated based on the share of capital expenditures in CDP, growth rates and inflation rates expected under the 1987-90 Adjustment Program. It is assumed that these three variables in 1991 and 1992 would be the same as in 1990. Source: Ministry of Finance and Planning. 4.11 The main conclusion of this public expenditure review (see Table 4.j) is that, except for some limited recurrent expenditures and a few (but size- able) investment projects with low rates of return, increasing the efficiency of public expenditures will require time and far-reaching institutional chan- ges. The most important of these is the reform in the Central Government administrative structure proposed by the ARC, both in terms of providing the administrative environment that will enable further institutional changes to take place, and in terms of changing the philosophy and mentality that has so far shaped the Central Government's modus-operandi and interventions in the economy. In parallel with the implementation of the ARC recommendations, two Table 4.5: PUBLIC EXPENDITURE REVIEW - SUMMARY Allocation in Share of GDP Share in Expenditure 1988 Budget in the 1988 1987-91 Potential Savings Item Reviewed Millions Budget (%) PIP Major Problems Recommended Objectives/Actions to the Treasury Rupees US$ Equi. Wages to Civil 10.000 323 1/ 6.0 1/ - Overstaffing, Implement ARC recommendations. None in the short term, but Servants efficiency substantial in the longer run. Could be reduced by 30-40%. Transfers to House- holdes Welfare Programs & Subsidies Pensions 3.477 112 1.5 - Equity Examine the rationale of the None in the short term, but pension at 55 after 10 years of probably moderate in the longer service rule. run. Food and Kerosene Mistargetting Corsolidate existing programs None in the short term; to be Stamp Programs 2/ 2.105 86 1.2 - and efficiency into one for nutrition, and one assessed for the longer run, for poverty. probably substantial. Railway subsidy 188 6 0.1 - Efficiency and Improve targetting of the sub- None in the short term, but targetting sidy; i.e.. improve SLR manage- substantial in the longer run. ment and perational .fficiency. Improve cost accounting system. SLTB subsidy 152 5 0.1 - Efficiency and Rationalize the subsidy. None in the short term, but targetting Equity Improve cost accounting system. substantial in the longer run. Fertilizer subsidy 600 19 0.3 - and efficiency Eliminate the subsidy. Substantial. Sugar subsidy 275 9 0.1 - Production of a Eliminate the subsidy. Substantial. commodity for which Sri Lanka has no compara- tive advantage. High taxation of consumers. Transfers to Public Corporations Air Lanka 994 30 0.4 - Mismanagement Continue the on-going None in the short tem. but in the past. restructuring program, could be eliminated in the Excessive debt- Privatize the airline longer tur equity ratio. by 1990. Sri Lanka Cement Corp. - 3/ rlanned expansion Suspend all investment in the Substantial. of an old plant to sector until a comprehensive produce cement that strategy is prepared. Give could be produced priority to the expansion of at much lower cost the private sector. in the north or be imported. Sri Lanka Sugar Corp. 155 5 0.1 0.5 Production of Change the current policy Could be eliminated a commodity objective of substituting import by restricting for which Sri up to 60% of domestic consump- production. Lanka has no tion. Suspend all investment comparative in the sector until marginal advantage. production costs are assessed. High taxation Domestic producer prices should of consumers. be fixed in line with cif prices. Ceylon Shipping Cor 200 6 0.1 - Excessive Launch a study to analyze the Has to be assessed. debt-equity corporation's problems and ratio and prepare a plan of action. excess capacity. Sector Expenditures Power 4.182 135 1.9 13.8 None. None. None. Transport 2.203 70 1.0 9.4 Insufficient Increase investment in transport None. investment in in line with the rer-mmendations the past. mis- of the National Tr. iport Study. management of Reorganize SLR; change RDA's SLR. poor high- highways maintenance methods; way maintenance improve regulatory framework for methods. bus transportation. Irrigation and 5.843 188 2.6 16.6 Large with low Suspend all major new investments Could be redticed Mahaweli returns projects. in Mahaweli until a study of how substantially. to improve benefits from such investment is undertaken and completed. Health (Capital) 1.437 46 0.6 4.7 Improve management systems. None. Complete the strategy paper for the sector. Health (Current) 2.465 126 1.1 - Education (Capital) 1.091 35 0.5 4.6 Management prob- None. None. lems. absence of a comprehensive strategy. Education (Current) 3.923 126 1.7 - None. None. Memo Items Total Above 39.241 1.266 1988 Budget 72,534 2.340 1/ Excludes civil servants in decentralized units of Government. 2/ Includes other nutritional programs and income supplement schemes. 3/ US$ 20 million expected to be included in the 1988-92 PIP. i.e.. 0.4% of the total. -44- types of actions can be taken to increase the efficiency of public expendi- tures, and make way for the Reconstruction Program as well as other investments that the country urgently needs. First, all public investment projects with low rates of return should be gradually eliminated from the PIP and subsidies unjustifiable on economic and/or social grounds should be discontinued. Most of the projects in health, education, power, and transport are well justified in economic terms, even though important institutional changes are necessary to ensure that their potential economic returns are realized. Projects with low rates of return are a serious problem, however, in irrigation, in the context of the AMDP, and in two public corporations: the Sri Lanka Cement Corporation and the Sri Lanka Sugar Corporation. This report recommends that the decision to launch and/or continue such projects be reviewed as soon as possible. Likewise, most of the subsidies and transfers to households included in the budget can be justified on economic and/or social grounds except for fertilizer and sugar. Both could be discontinued over a few years. 4.12 Second, institutional reforms are necessary to: (i) increase the cost effectiveness of services provided by the Govern- ment; this is particularly relevant in the case of health and educational services. In the case of health, the Government has already decided to under- take basic analytical work to formulate a strategy. (ii) ensure that planned investments achieve their potentia. returns; this is crucial in the case of investment in railways which will not generate their potential benefits unless the Sri Lanka Railways (SLR) undergoes a fun- damental restructuring to reduce existing staffing levels (probably by half) and to be more commercially oriented, but it is alsc relevant in the case of investments in power where heavy system-losses in distribution operated by local authorities have reached unnecessarily high levels because of overloading and inadequate investments. (iii) ensure that a given subsidy and/or transfers to households effec- tively achieves its objective; for example, the subsidy to the SLR does reduce transport costs to consumers but also encourages the railways to be ineffi- cient. Similarly, there is ample evidence that the income supplement provided to households through the National Food Stamp Program does not reach those who really need it while it is insufficient to maintain adequate nutrition levels for those who are below the poverty line. (iv) reduce the burden that public enterprises put on the budget. The case of four public enterprises reviewed here which have put a heavy burden on the Treasury in recent years suggests that the financial problems are the result of economically unjustifiable policy objectives (e.g. substitute for imports of sugar) or mismanagement and that the budgetary cost is in most cases a fraction of the economic costs. -45- 4.13 In the medium and long term, the reduction in overstaffing should bring a substantial reduction in public expenditures, probably 1.5-2% of GDP. The elimination of the fertilizer and sugar subsidies, and support to public enterprises could reduce public expenditures by a further 1% of GDP. Other reductions in public expenditures, such as in pensions, are probably possible, but only in the longer term and are difficult to quantify. Postponing or slowing the execution of Mahaveli System B, for which a World Bank loan has just been declared effective, should reduce public expenditures by a further 1-1.5% of GDP in the next few years but whether Mahaweli System B should be postponed or not is a complex question. On micro-economic grounds, once a decision to start the project is taken, delaying its completion would only reduce even further an already low rate of return. From a macro-etonomic point of view this may be a reasonable approach, however, if it allows projects with much higher rates of return, such as those in transport, to be accommodated in the budget. D. Transfers to Households and Subsidies Transfers to Households 4.14 In principle, a transfer to households is a Government outlay aimed at increasing the real consumption and/or income level of a target group of the population. The main transfers to households in Sri Lanka are pensions of Government employees, the NFSP and the NKSP, and a variety of small welfare programs. Each of them raises different questions regarding their equity and efficiency in increasing the consumption levels of the target group. Total transfers to households in the 1988 budget amount to Rs 7.3 billion, i.e. over 3% of the GDP anticipated for 1988. Pensions account for about half.of that amount; the NFSP and the NKSP account for one-fourth; a variety of small programs account for the remaining 252. 4.15 Pensions. While civil servants have been penalized by a serious ero- sion in their real wages, they have had the privilege of a generous pension scheme. Retirement in the Government service is voluntary at age 55 and man- datory at age 60, following ten years of service (see para 5.13). There are at present 185,000 pensioneers (including widows and orphans of public servants) and the rate of retirement is approximately 12,000 new retirees annually. In addition, about 22,000 are over 55 years end technically, could retire at any time. Even taking into account the relatively high mortality rate among pen- sioners, the number of pensioners could increase rapidly in the medium term. With the implementation of the recommendations of the ARC whereby pensions will be increased in real terms in line with the increase in civil servant6' real wages, the cost of pensions, now slightly below 2% of GDP, may thus increase substantially. Since the Government has decided to realign/raise civil ser- vants' pay over a two-year period, it may be the time to review the rationale of the existing pension system. -46- 4.16 The NFSP. The NFSP was introduced in 1979 to replace the across-the-board rice consumption subsidy to which the entire population was entitled. In addition to food stamps, kerosene stamps are issued automatically to families which qualify for food stamps and live in villages without elec- tricity. While food stamps may be used to buy a range of essential items, kerosene stamps can be used only for kerosene. Since their inception, the two programs have suffered from substantial leakages away from the intended beneficiaries. On the basis of 1982 data, it has been estimated that only 40% of the stamps were going to the principal target population consisting of families in the first expenditure quintile, while 15% of total payments were going to families in the top two expenditure quintiles. As a result, a major retargetting exercise was undertaken in 1986--at which time the administration of the program was transferred from the Ministry of Food to the Department of Social Services (DSS), in the Ministry of Social Services. The proposed restructuring of the program, however, met with considerable political protest. It ended up with the same number of beneficiaries as before (7.3 million) and, presumably, with the same problem of leakages as before since the income dis- tribution is unlikely to have worsened to such an extent that close to half of the population would have fallen below the poverty line. The popularity of the program is based on its being both an income supplement scheme and a vehicle to increase nutritional levels. 4.17 While Sri Lanka has been much more successful than other developing countries in ensuring minimum nutritional levels to the poorest segments of the population and the NFSP and NKSP have certainly had an important role in this, there is evidence of declining per capita calorie consumption among the poor and that malnutrition is a particularly serious problem among very young children--where there is the most danger of lasting damage. This has been a compelling reason for the Government to continue both programs in spite of their cost (US$70 million budgeted for 1988) and criticism of leakages and/or mistargetting. However, it is difficult to assess the distribution of benefits within a family, and thus to determine whether or not they are an effective means of combatting child and infant malnutrition. Also, as expenditure rises, food stamps are less and less a means of getting additional calories to families, as the marginal propensity to spend on food declines. For all these reasons, food stamps are a relatively inefficient mechanism to combat malnutri- tion. 4.18 This report recommends that the food stamp program be consolidated with other small nutritional programs (Infant Milk Subsidy, Mid-Day Meal, Triposha to which the budget contributes the equivalent of US$10 million in 1988) into a nutrition program targetted to reach the vulnerable groups of the population. It is more than likely that better nutritional results could be achieved at a lower cost to the budget. As far as the income supplement aspect of the NFSP and NKSP is concerned, they should be consolidated with the existing program run by the DSS aimed at providing financial assistance to the very poor and to those permanently incapacitated by disease. The program provides monthly -47- allowances to about 250,000 families at a total estimated cost of Rs 200 mil- lion in 1988 (US$6 million equivalent). Under this program each family gets the equivalent of Rs 60 monthly, on the average, i.e., about 8-9 kg of rice. It is important to review the eligibility criteria guiding these programs and to identify overlaps with the food stamp program. It is also important to quantify the number of poor families not obtaining sufficient financial assis- tance. It is recommended that data collected by the new 1986-87 CFS, to be completed in the second half of 1988, be used to identify the geographical and socio-economic distribution of the poor and assistance programs be designed on that basis. Again in this case, it is likely that better results in terms of poverty relief could be achieved at a significantly lower cost to the budget. Subsidies 4.19 As indicated earlier, most subsidies are included in transfers to public corporations. Historically, the main ones have been for: (i) the National Savings Bank; (ii) railways; (iii) SLTB; and (iv) fertilizer. A subsidy for sugar was introduced in the 1988 budget, it is discussed separately in the context of the sugar policy and the problems besetting the Sri Lanka Sugar Corporation. The above five subsidies have amounted to about Rs 1.2-1.4 billion in the recent past; Rs 1.4 billion are included in the 1988 budget. This may well turn out to be insufficient, however, since the return to nor- malcy in the North and the East has not materialized and this was the main reason for reducing the subsidy to the CTB and the railways. The reason for the subsidy to NSB has been discussed in para. 1.15. The size of the subsidy has been declining gradually from Rs 400-500 million in the early 1980's to less than Rs 200 million in the last three years. The subsidy to the NSB is expected to continue to decline with the reduction in the domestic borrowing requirement of the budget and, with it, the need for the NSB to invest in Government securities. 4.20 Subsidy to the Railways. The subsidy to the railway is necessary to compensate the Sri Lanka Railways (SLR) for the inefficiency with which it runs its operations for services it provides for social reasons. SLR is over- staffed, follows poor maintenance and operational procedures, and its managerial and administrative structures are basically unsuited for what should be a commercially oriented enterprise. In addition, its accounting system does not permit an identification of costs and revenues on a route-by-route basis making it difficult to set cost-based tariffs. Increasing tariffs to compen- sate for these inefficiencies would not make economic sense. It would raise the price of railway transport services well above its efficient economic cost of supply, and divert consumers to other transport modes. What is urgently required is a thorough restructuring of SLR, transforming it into an autonomous body, thus freeing SLR of the constant political interventions it is subject to as a Ministry's Department. This is a precondition to run SLR efficiently. Once this objective is achieved, routes that do not generate sufficient revenues to cover their costs can be kept for externality and/or social reasons through an earmarked budgetary subsidy. -48- 4.21 Subsidy to the SLTB. The reasons for the subsidy to the SLTB are less related to managerial and/or efficiency problems than the SRL. Since the Ceylon Transport Board (CTB) was reorganized into the Sri Lanka Central Tran- sport Board (SLTB) and the Regional Transport Board (RTBs) in 1984, substantial gains in efficiency have been achieved. SLTB and RTBs' fares are fixed at levels competitive with private bus operators, which are unregulated regarding tariffs and schedules. Thus, the subsidy to the SLTB is intended to finance: (i) fare concessions to students, the military, and other groups; and (ii) the cost of covering loss-making routes. However, while within the context of the National Transport Study (NTS) some revenue/costs analysis was performed at the individual route level, costs and revenues are unknown for a large number of SLTB's and RTB's routes. Thus, it is difficult to quantify the exact cost of fare concessions to selected groups of passengers, as well as the cost of providing a service on a specific route at a certain time, for social or other reasons. It is thus essential that a route by route and service-by-service cost/revenue analysis be carried out by SLTB so that the decision to operate a route for social reasons be made on an informed basis. This would also allow the assessment of the cost of fare concessions, a system which could be more efficiently financed by the Central Government through direct payments to the beneficiaries, rather than through a subsidy to SLTB (also see para 4.51). 4.22 The Fertilizer Subsidy. Fertilizer has been subsidized in Sri Lanka since 1962 to encourage the adoption of modern techniques in rice cultivation. Most of the subsidy (60%) thus accrues to paddy farmers. Of the remAining 40%, two-thirds accrues to tea producers, 10% to coconut producers, and the rest is spread among a variety of crops. The subsidy may have been justified at the early stages of the introduction of the new paddy technologies and during periods when paddy prices were kept artificially low through marketing restric- tions. It is, however, difficult to justify now that most farmers with access to irrigation have largely shifted to high yielding rice varieties. For those without access to irrigation, such a shift has yet to take place but this is primarily a function of the adequacy of available technologies rather than a low price for fertilizer. The subsidy also introduces distorted economic signals to the farmer now that domestic rice prices are above international levels, with a consequent negative impact on cropping patterns and the efficiency of agricultural production. The efficiency loss of producing paddy at above fts economic price has been estimated at Rs 220 million in 1986, i.e., 0.1% of GDP and it is a loss that may increase if the cif price of rice con- tinues to decline relative to the price of the domestic rice. Finally, the subsidy cannot be justified on equity grounds since two-thirds of it accrues to the large rice farmers in the irrigated zone. 4.23 The produc i impact of the subsidy on tree crops appears to be negli- gible. In the case ot tea, the two state corporations, JEDB and SPC, are the main beneficiaries of the subsidy. A ailable information indicates that they do not vary the use of fertilizer in response to its price, a behavior which implies that the subsidy has limited effect on output. In the case of -49- coconuts, there are large potential gains to be obtained through a more intense use of fertilizer with a two to three-year lag. Use to date has been limited although offtake does appear to respond to higher prices for coconut products. This suggests that demand will primarily be a function of providing the farmer with confidence in the longer term pofitability of the crop, e.g., through avoidance of both expocL controls and high export taxes supported by extension and credit facilities rather than by promoting use through the subsidy. Fiaally, rubber producers have been traditionally reluctant to use fertilizer while public estates, which produce 30% of the country's rubber production, follow the practice of applying the agronomically recommended doses on their trees. E. Transfers to Public Corporations Introduction 4.24 Public sector enterprises have been developed in all sectors of the economy either via direct investment by Government or expropriation. The Government now owns PEs in agriculture (tea, rubber, and coconut plantations); in industry, both light (shoes, ceramic products) and heavy (cement, oil refinery, steel); in services (bus and railway transportation, insurance com- panies, consulting firms, hotels, a restaurant, an airline). In theory, PEs involvement in such a variety of sectors helps to diversify risks and should have ensured, at the aggregate level, that PEs generate a net positive surplus to the Government. 4.25 This has however never been the case because, as illustrated in four case studies discussed below, the creation and/or the operations of PEs has been guided mainly by non-economic considerations. PEs have often been instructed to achieve objectives inconsistent with efficient growth, e.g., to increase employment in regions of the country where unemployment rates are considered to be high; to develop depressed areas; to keep prices low to con- sumers; and to expand even when there were clear indications that this was not economically sound. Thus, it is not surprising that these enterprises have had a recurrent need for budgetary support. In addition, as indicated earlier, the budgetary support is often a small part of the total cost that PEs impose on tiie economy. While there are no accurate estimates of the contribution of PEs to GDP, the evidence suggests that they probably account for about 15-20% of GDP. Thus, unless the economic efficiency of PEs is increased, they will continue to put a burden on the economy and to slow growth. 4.26 To improve PEs' efficiency, the ARC has proposed to set up a Public Investment Corporation (PIC) to be responsible for the management of PEs, and (i) appoint their Boards and Chief Executives; (ii) approve their Corporate Plans; (iii) appoint their external auditors; and (iv) privatize PEs as decided by the Cabinet. The ARC's approach is that while the privatization of PEs, a principle that the Cabinet has already endorsed, is a goal that should be pursued, it cannot be achieved in the short term. Thus, increasing PEs' -50- efficiency is the only way to increase PEs contribution to growth in a rela- tively short period of time as well as reducing their cost to the Treasury. This report strongly endorses the ARC's approach. No system, however, is immune to individuals (and vice-versa) and in the absence of a firm Government commitment to efficient management for PEs and rigorous selection of strong entrepreneurial managers for the PIC and the FES, the creation of a PIC may turn into just another layer of bureaucratic control. 4.27 The ARC proposal is an extension of the approach that the Government has already taken for a selected group of PMEs. As it was done in that case, one of the first PIC tasks will be to establish an inventory of existing PEs, evaluate their assets, identify their main problems, and design a course of action to address such problems. As discussed below, in some cases the origin of PEs' problems has already been identified and corrective actions are under- way (Air Lanka) while for others the exact nature of their problems is not entirely understood (Ceylon Shipping Corporation). Since there are some 130 PEs (about 40 of which are PMEs), the task ahead of PIC is complex. Also, in some cases, the restructuring of PEs calls for a redefinition of sectoral Government policies, as in the case of sugar and cement, which have been designed to pursue non-economic objectives. Air Lanka 4.28 Air Lanka was established in 1979 as the successor of Air Ceylon. Euphoria following liberalization in 1977, easy access to international capital markets, and the rapid growth in tourism, led the Government to support the creation of a state-owned airline in spite of the previous unsuccessful experience of Air Ceylon. However, since its inception, Air Lanka has never recorded a profit. With the Government guarantee it borrowed US$270 million at high rates in the international market, of which US$120 million is still out- standing. The airline has required about US$250 million from the Treasury since 1983 both to cover its losses and to service is debts. 4.29 A combination of inappropriate financial planning and management deci- sions is at the root of Air Lanka's dismal financial performance. The company (i) expanded rapidly without an adequate equity base; since its inception, interest charges have always exceeded 20% of revenues, in comparison with 2-4% for most airlines in the world; (ii) flew too many routes with low traffic; and (iii) chose a fleet inadequate to operate its routes. Excess capacity, plane ranges and capacities incompatible with the routes and the deman1 mix for passengers and cargo, were the main problems of such a fleet. 4.30 A first attempt at addressing the airline's problems was t.ade in 1985 when a consulting firm was hired to analyze the airline's operatio al and financial problems. Few of its recommendations were implemented. The air- line's continued large losses and its constant need for budgetary s .pport led the President to appoint a Presidential Committee of Inquiry which I oduced a -51- comprehensive report in 1987, highlighting the airline's poor management prac- tices and costly errors. A new board of directors was appointed and a number of positive steps, such as strengthening higher management and selling Air Lanka's two B-747s to reduce excess capacity and eliminate unprofitable routes, have been taken since then. 4.31 After these measures were taken, the airline's operational profits (i.e. after depreciation but before interest payments) have been positive. However, since Air Lanka is unlikely to generate a cash flow sufficient to meet its financial obligations in the near future, the Treasury's contribution is expected to be about US$20-25 million in the next two years, falling to zero from 1990 onwards. Closing the airline would imply a US$60-70 million cost to the Treasury because the value of its assets is now well below its outstanding (Government guaranteed) debt. From an economic and financial point of view, continued operation of the airline is preferable. This conclusion would not hold, however, were the traffic to decline by 10% or if the costs were to be 10% higher than what is projected. 4.32 The new board has done a commendable task of reducing the airline's losses, strengthening the management, and improving the route structure. The board's objective is to privatize the airline once the financial and opera- tional restructuring is completed, probably by 1990. It is important for the Government and Air Lanka's board that this objective be achieved. Air Lanka has been one of the most glaring examples of wasteful public expenditures; these outlays contributed to the large fiscal imbalances during that time, and they led to the Government's involvement in an area in which it is hard to find any social or economic reason justifying such involvement. The Sri Lanka Sugar Corporation and Pelwatte 4.33 Since the early 1960s, besides substituting for imports, expanding sugar production has been considered by the Government as an efficient way of reducing the high unemployment levels in the Southern and Eastern part of the country, and providing alternative sources of income to farmers in regions unsuitable for rice cultivation. According to the 1987-91 PIP, the Govern- ment's objective is to increase Sri Lanka's sugar production from 10% at present, to 60% of the country's 350,000 tons of annual consumption. As a first step, production would increase to 100,000 tons by 1990, an objective that requires investments to rehabilitate one of the four factories (Sevanagala) now operating in the country and increasing capacity utilization in the other three from about 30% to 100%. To reach the 60% of domestic con- sumption target would require a fifth large factory (50,000 tons of capacity)--the Moneragela sugar Project which has already been approved by the Cabinet and for which some managerial positions have already been filled; foreign financing is still to be secured, however. 4.34 The problem of unemployment and poverty is a serious one in the southern parts of the country and it is evident that some type of Government -52- intervention will be necessary for its alleviation. The initiation of modern industrial activities in depressed regions of the counr.Lry is very attractive in that it brings a backward isolated region in contact with new and more produc- tive forms of economic and social organizations. However, the policy of bring- ing more dynamism and incomes to depressed regions through the expansion of sugar production has proven to be tremendously costly to the economy, consumers and the budget. 4.35 There is no evidence that Sri Lanka has a comparative advantage in the production of sugar but major investments and policy measures have already been decided before establishing whether there are conditions and/or technologies which could make sugar economically attractive in the southern and eastern parts of the country. The domestic production cost is about US$650 per ton, while the cif price is about US$190 per ton. As a result, with an import duty of 150% sugar is the most highly taxed commodity in Sr Lanka. It is estimated that, as a result of such a high taxation, the poorest 25% of the population pay by the way of taxes on sugar 80% of the income supplement they get through food and kerosene stamps. 4.36 The high import duty is still not sufficient to bring the cif price close to the domestic production cost. In the last two years, consumer prices have been Rs 14-15 per kg while production costs have been at Rs 18-20 per kg; the difference has been covered by the Central Government indirectly out of the Food Commissioner's profit (a marketing agency under the Ministry of Agricul- ture), or directly through a budgetary subsidy which amounts to Rs 275 million in the 1988 budget, i.e., US$770 for each existing job in the sugar industry, direct and indirect. This is substantially higher than the country's per capita GDP. Any expansion in production would exacerbate these costs. 4.37 Any expansion in sugar production would also put heavy additional demands on the budget. It is estimated that expanding production to 100,000 tons would cost the Treasury about Rs 1.3 billion, i.e. Rs. 600 million from foregone duties on imports; Rs 300 million to expand production at the factory at Sevanagala; and Rs. 400 million as a direct Treasury contribution to make up for the difference between the consumer price and production costs. The latter Rs 400 million component of the fiscal cost could be lower if production could be expanded at a declining marginal cost. In addition, since the Treasury has guaranteed a 14.5% rate of return to investors in the sugar industry, there is no upper limit to the Government's contribution. 4.38 Given current trends in demand and supply, the price of sugar is unlikely to increase beyond Rs 12 per kg in the next ten years, i.e. US$ 400 per ton, which is the estimated market clearing price on international markets if all subsidies for sugar in developed countries were to be removed. The Government has taken the approach that ex-factory prices in Sri Lanka should be set on the basis of US$400 per ton, plus a "reasonable" protection of 25% which would bring the final price to US$500 per ton. This approach aims at eliminat- ing the distortions introduced by subsidies in developed countries, thus giving -53- the tariff an anti-dumping role. Such an approach may have some validity when dumping is thought to be a temporary phenomenon and the merchandise dumped may disrupt an already existing industry. Neither of these two conditions seem to apply to Sri Lanka's case. 4.39 Thus, this report recommends a critical review of Government policy in the sugar sector. New investments as well as new guarantees to the private sector should be suspended until such review is completed, and research initiated to establish whether there are conditions and/or technologies which could make sugar an economic crop as well what other crops could be grown in the eastern and southern parts of the country; both have been long standing neglected issues in an agricultural research and extension system biased towards rice. The expansion of Sevanagala and the four new factories should be postponed immediately and the marginal production costs should be assessed with a view to comparing their marginal production costs with cif prices. To the extent marginal costs exceed the cif import price it is less costly to the economy to close these factories, and give severance packages to those now working in the sugar industry. The Sri Lanka Cement Corporation (SLCC) 4.40 Except for a small private klinker factory, SLCC is responsible for all the cement, about 700,000 tons, produced in Sri Lanka. Two of its four produc- tion facilities are in the North and two in the South. One of the two plants in the north is operated by Lanka Cement, a 100% subsidiary of SLCC. This is the only modern and internationally competitive SLCC's plant. It has a 500,000 ton capacity; nearly all the equipment necessary to reach a one million ton capacity has been procured in 1983 but, because of the eruption of the ethnic conflict, it has not yet been installed, and Lanka's cement production has never been over 200,000 tons since then. Low production levels coupled with the need to service the foreign loans contracted to purchase the new equipment has been one of the main reasons for SLCC's need for budgetary support as well as for Lanka Cement's precarious financial structure. With the return of peace in the North, production in the Lanka Cement plant could be brought up to about 1 million tons in a relatively short period of time. This, plus the production of the private klinker factory should be sufficient to meet most domestic consumption at internationally competitive prices. However, the limestone deposits near the Lanka Cement plant will be exhausted in the next ten years and there is a question as to whether the plant will continue to be able to produce at internationally competitive prices thereafter. 4.41 In the context of the Reconstruction Program, the Governir.nt has already taken the initial steps to rehabilitate Lanka Cement and bring produc- tion to one million tons, an objective which, according to SLCC/Lanka Cement's preliminary estimates, should require close to US$10 million. However, in December 1987, to make the country less dependent on cement production in the north and reduce imports, the Cabinet decided to authorize the modernization -54- and rehabilitation of the two plants in the south of the country, the produc- tion of which would otherwise dwindle from 600,000 tons at present to below 200,000 tons in the next two to three years. US$20 milion has been allocated for that purpose, and is expected to be included in the 1988-92 PIP. This new project, together with the rehabilitation of the Lanka Cement plant, would bring domestic production to a level twice the domestic consumption at an average price which would not, however, be internationally competitive. Preliminary calculations by cement consultants for the Ministry of Local Government, Housing and Construction (the SLCC parent Ministry) indicate that, after modernization and rehabilitation, the ex-factory price in the two plants in the south would be US$65-67 per ton, i.e. US$25-27 over the cif price of US$40 per ton. According to the program of Tariff Reform drawn by the Presidential Tariff Commission, the duty on cement will be at 30% from 1989 onwards. Thus a Treasury subsidy of about US$15 per ton will be necessary for each ton produced in the cement plants in the south. Assuming that they produce at 80% of their planned capacity, i.e., 540,000 tons, this would mean a permanent annual subsidy amounting to close to US$10 million, i.e., US$2,500 per SLCC employee. 4.42 Such a large subsidy could be avoided by putting the tariff on cement at around 60%. This would allow the plants in the south to operate without the Treasury's support but would have three negative consequences. Firstly, it would erode the credibility of the Tariff Reform which is one of the main components of the 1987-90 Adjustment Program. Secondly, it would contribute to higher cement costs domestically, thus pushing up the overall cost of construc- tion in general and of the country's Reconstruction Program in particular. Finally, promoting uneconomic production in the southern plants rather than completing and increasing Lanka Cement's production would not only divert resources to uncompetitive activities at a high cost to the economy, but also deprive the North of an efficient source of growth. This approach would weaken the Reconstruction Program thus sending mixed signals to the aid community. 4.43 Before embarking on a course of action which may be costly to the economy, the Government should develop a strategy for the cement sector which takes into account: (i) the proposed higher production costs at Puttalam and Ruhunu; (ii) the limited lime deposits at Kankesanturai which will be exhausted in less than ten years as Lanka Cement returns to full production; a similar problem seems to exist at Puttalam but it has not been assessed as yet; (iii) the high transport cost of cement, and the need to locate production units close to the largest consumer centers; and (iv) the potentially large role that the private sector could play in the cement sector. It is essential that ad-hoc expansion decisions not be undertaken before a careful assessment of alternatives and their associated costs and benefits be completed. Unless such an approach is taken, either the program of Tariff Reforms will be in jeopardy, or domestic production may have to be subsidized, an alternative which will place a new and heavy burden on the Treasury. -55- The Ceylon Shipping Corporation (CSC) 4.44 A decision to expand the CSC's fleet in the early 1980's, when the volume of world seaborne trade was declining, ended what had otherwise been a profitable operation. Since 1983, the Treasury has had to support CSC with close to US$40 million, and annual subsidies of US$15-20 million will be required until at least 1990. As in the case of Air Lanka, the market value of CSC's assets is well below the outstanding amount of the loans contracted to purchase such assets. In contrast with Air Lanka, no decision has been taken to identify a strategy to address the problems now besetting the company. It is urgent to analyze ship productivity and carry out a route-by-route cost/revenue analysis to define a medium-term strategy to address CSC's problems. This is all the more urgent as total world seaborne trade is expected to decline even further in the future. CSC would be in a better financial position if it could identify the services that should be discon- tinued and perhaps sell some vessels. F. Sectoral Expenditures Program Power 4.45 While electricity is still relatively unimportant in total energy supply in Sri Lanka (fuelwood supplies over 70% of the country's energy needs), it is its fastest growing component. With the decline in the country's fuel- wood resources and the development of the modern sector of the economy, the pattern of energy demand will increasingly shift towards electricity. A doub- ling in the country's hydro-generating capacity has already taken place in the last four years as a result of the Accelerated Mahaweli Development Program (AMDP). Two large ongoing projects (Rantembe and Samanalawewa), which account for the bulk of the expenditure program in the 1987-91 PIP, will increase the country's hydro-generating capacity by a further 15% by 1991. Both projects are justified on economic terms and are part of CEB's least cost long-term expansion plan prepared in 1986. However, as a result of the fall in oil prices, the lower growth anticipated in the economy and the resulting lower growth in electricity demand, CEB's latest generation plan, prepared in Novem- ber 1987 to serve as a basis for the 1988-92 PIP, has some important differen- ces with the 1987-91 PIP. The main differences are postponing from 1993 to 1998 the commissioning of the first coal-fired unit at Trincomalee, and intro- ducing substantial investment in diesel units. However, the load forecast underlying CEB's 1987 plan is based on an economic growth of over 6% per year. Using a more realistic 4.5-5% growth rate would require dalaying the diesel unit to be commissioned to be postponed from 1993 to 1995 and the first phase of Trincomalee to be delayed till 1999. In addition, to achieve a better balance between investment in generation and in distribution and to improve the efficiency in power distribution, a new distribution project is recommended for inclusion in the 1988-92 PIP. This would help to reduce the system's losses through the taking over by CEB of the assets now being managed inefficiently by local municipal authorities. -56- 4.46 Once the above modifications are made, the public investment program would be consistent with CEB's least cost expansion plan and is justified economically. In addition, the investment program is supported by well-designed sectoral policies. Since the early 1980's the sector underwent several reforms to improve the efficiency of power-related institutions and setting prices at realistic levels. As a result, CEB's electricity tariffs now exceeds 80% of the economic cost of supply as measured by long-run marginal cost. However, CEB's tariffs are still deficient in signaling the economic cost of supply to different consumer groups, particularly local authorities, and at different points in time, particularly during peak times. To address this issue, the Government has decided to commission a study of CEB's tariff structure and levels with a view to determining reforms to make tariff reflect more accurately economic costs of supply. After completion of the study, it will be important that this new tariff structure be put in place as soon as possible. Transport 4.47 Investments in the transport sector have been crowded out in the last ten years by the priority given to Mahaweli irrigation schemes, housing and power, and, more recently, to defense, and by the absence of a well-articulated strategy which made it difficult to identify and formulate projects for inclu- sion in the PIP. Thus, investments in transport have been insufficient to keep up with normal wear-and-tear of the system's infrastructure and the increasing demand for transport services. An additional impediment to the formulation of policies and investment strategies has been fragmented decision-making with four Ministries being involved with transport -- the Ministry of Transport, the Ministry of Trade and Shipping, the Ministry of Transport Boards, and the Ministry of Private Omnibus Transport. In this overall context, the transport infrastructure and efficiency in the sector have deteriorated drastically. Vehicle operating costs on highways, for example, are twice what they could be on a better maintained infrastructure. 4.48 In 1986, the Government commissioned a National Transport Study (NTS) to formulate a coherent strategy and investment programs. The NTS terms of reference were to (i) analyze SLR operations and prepare an action plan to address management, operational, and financial problems; (ii) review the ade- quacy of highway maintenance programs and methods, and to propose changes to improve their cost effectiveness; (iii) examine the structure and levels of road user charges to identify distortions and potential for mobilizing resour- ces to finance the rehabilitation of road networks; (iv) determine the respec- tive roles of the public and private sector in bus operations and, within the public sector, the respective roles of the SLTB and the Regional TranspCrL Boards (RTBs) which have replaced the Ceylon Transport Board (CTB) since 1984; and (v) prepare an Indicative Transport Investment Program. The final report is expected to be issued in early May 1988. The analytical work undertaken for the study has been used in the preparation of the 1988-92 PIP. The NTS has had -57- an important role in identifying high priority investment projects as well as highlighting the changes required in institutions and policies to improve efficiency in the transport sector. 4.49 As a result, the 1988-92 PIP proposes a substantial increase in public investment in transport that should be made in conjunction with institutional improvements to reduce the service costs of supply. While the overall design and objectives of the projects included in the 1988-92 PIP are adequate to address the backlog of maintenance in highways and railways, and their focus on institutional improvements is appropriate, the overall level of investment on highways and railways may be excessive given: (i) the limited implementation capacity of the RDA; (ii) the inefficient road maintenance planning and methods that will require time to be improved, and (iii) the gains in efficiency that can be achieved through operational changes in SLR that would obviate the need for increased investments in rolling stock. On the other hand, the level of investment in buses proposed in the preliminary 1988-92 PIP is insufficient to ensure the replacement of the existing fleet. 4.50 Provided the institutional changes that are proposed in the NTS are implemented rapidly, the investment proposed in the 1988-92 PIP would bring about a substantial reduction in transport costs and would generate high rates of return (over 50% in the case of highways investments). The main institu- tional changes that are necessary to ensure such results are: (i) reorganizing SLR into a more autonomous, efficient and commercially oriented entity; (ii) changing the RDA's iaintenance methods; (iii) improving the cost accounting system for both the railways and bus systems to determine cost and revenues at route-by-route levels. This would not only permit a more efficient use of existing equipment, but it would also provide the basis for improving the targetting and cost effectiveness of transport subsidies; (iv) reformulating the current subsidy system. As indicated in paras 4.20 and 4.21, as both SLTB and SLR are carrying the costs of providing discount fares to selected groups of the population and of operating routes that cannot be justified on demand considerations, it would be more efficient to replace the fare-discount system by one in which direct allowances would be paid to targetted groups e.g. through tickets. It would also be more efficient that loss making routes be subsidized by the Governmeit through an earmarked subsidy for a specific period of time, and that the rationale for subsidizing a particular route be reviewed periodically according to the evaluation of cost and revenues. 4.51 In line with this restructuring of the bus subsidy it is important that the role of SLTB be confined to that of policy formulation and administration of the subsidy, and that the few routes that it is still operating be trans- ferred to the RTBs. Another important task for SLTB will be to integrate the private and public sector in the provision of bus services. Since 1981, when the public sector monopoly was eliminated, bus transport became an entirely deregulated industry. This has brought about some problems of unsafe Pervices, excess capacity on some routes and scheduling. The renewal of SLTBs and RTBs fleets included in the Public Investment Program is based on the assumption -58- that SLTBs and RTBs will retain their current size and that future increases in demand will be met through increases in services provided by the private sec- tor. It is important that SLTB develop efficient methods to allocate routes among bus operators and ensure that competition contributes to the provision of better, safer and cheaper services. Ideally, the right to operate a route should be auctioned, with both public and private operators participating in the auctions on equal terms. Public Expenditures on Irrigation and Mahaweli 4.52 Investments in irrigation/settlement have had a special place in Sri Lanka's development process. Since Independence, they have been seen as the primary vehicle to (i) reorient agriculture away from tree-crops plantations developed during colonial times to the detriment of food production; (ii) develop land that would have been otherwise remained idle and provide settlement opportunities to landless farmers; (iii) achieve rice self-sufficiency thus shielding the country's consumption levels from shifts in terms of trade; and, last but not least (iv) reduce population pressures in the densely populated southern and western part of the country. 4.53 Attempts to expand the country's agricultural frontier began in the 1930's when the Government launched a program to repair and rehabilitate the ancient irrigation tanks and canals built over two thousand years ago. Because of the focus on rehabilitation, this could be done at a relatively low cost and, in the 1930's and 1940's, irrigation works absorbed only a modest propor- tion of the Government's development plans. In the post-war period, however, beginning with the Gal Oya multipurpose scheme, the Government embarked upon a series of large multipurpose schemes. The Gal Oya scheme was initiated in 1947 and completed in 1966. It brought into cultivation 48,000 ha of new land and settled 12,000 families, but at a very high capital cost - about US$10,000 per family at 1987 prices, i.e. over forty times the per-capita GDP at that time. 4.54 The Government appointed in 1966 an evaluation committee to "ascertain the economic and social returns of investments (in Gal Oya) and provide guidance for future development projects of a similar kind". The committee issued its report in 1970 and found that the entire investment for development of undeveloped land yielded a negative return. It concluded that in the future "policy makers (should) take a long, hard look at the advisability of diverting resources to what is essentially a social welfare function in an economy where the greatest need is to maximize production". 1/ 1/ Government of Sri Lanka (1970): Report of the Gal Oya Project Evaluation Committee, Sessional paper No.1. Summaries can be found it the Peoples Bank Economic Review (March 1977) and USAID (February 1985) Study of Recurrent Cost Problemr in Irrigation Sytems in Sri Lanka, The Final Report. -59- 4.55 Investments in irrigation/settlement were, however, expanded sig- nificantly in the late 1970's with the acceleration of the Kahaweli irrigation project. The use of the Mahaveli river waters for irrigation/settlement pur- poses was an old idea; already in 1961 the Government had requested donors' assistance to survey the Mahaweli Basin and the Dry Zone areas of the Northern and Central Province. The Final Report was issued in 1968 with a Master Plan for the development of several power/irrigation/settlement schemes (so called "systems" and referred to by letters A to L) over a 30-year period to generate 500 MW oi power and bring irrigation to about 260,000 ha of new and 100,000 ha of existing Land. The implementation of the Master Plan commenced in 1970 with the construction of headworks, diversion tunnels and power plants to improve water supply to about 130,000 acres of already irrigated land and to provide full irrigation to about 90,000 acres of new land in the so-called System H. 4.56 Shortly after coming into power in 1977, the Government launched the Accelerated Mahaweli Development Project (AMDP) and decided to undertake simul- taneously over a six-year period a number of projects which were to have been done sequentially under the original Master Plan. Under the AMDP, five major head works to generate 550 MW of electricity and irrigate 120,000 ha of new and 35,000 ha of existing land were to be completed by 1986 with downstream development to be completed by 1988 and at a total cost of Rs 12 billion i.e. US$1.2 billion at 1987 prices. Rates of return were estimated to be between 9 and 11%, depending on the evolution of oil prices. 4.57 In spite of this relatively modest econor'& rates of return, donors and the Government provided a strong support to the L-P as both believed that the benefit of the project went far beyond wlat could be captured by conventional - economic analysis. Donors were attracted by the prospect of financing capital and engineering-intensive projects, but, perhaps more importantly, by the opportunity of demonstrating their support for a shift towards more liberal economic policies after 1977. In the absence of substantial development projects with higher returns ready to absorb the volume of resources donrs were willing to channel to Sri Lanka, focussing on the AMDP seemed a reasonable choice. 4.58 The Government approached the project mostly as a vehicle to transform the economy. The Government felt that after two decades of inward looking policies and slow growth it was necessary to launch a project that could mobi- lize the country's energy and stand as the landmark of the change in the economy that its new policies aimed at achieving. Mahaweli built on old and popular themes: small rice farming and the revival of irrigation schemes built two thousand years ago, the basis of the then thriving Sinhala civilization. The AMDP was part of a set of so-called "lead-projects" which included the creation of a new trade zone north of Colombo and a large housing program. These projects were considered as essential to provide new sources of growth, reduce politically dangerously high rates of unemployment, and improve the housing stock that had deteriorated during decades of rent controls and, in the 1970's, by limits on the number of houses an individual could own. -60- 4.59 The AMDP also had two other important objectives. First, it was intended to make Sri Lanka self-sufficient in rice and, second, by increasing employment opportunities, it would cushion consumption levels thus helping replace the supply of sutidized rice to which the whole population had been -entitled to since World War II by a Food Stamp Program more targetted to the poor. Rice self-sufficiency was a prime goal since it was the basic foodgrain and rice shortages had generated serious rilitical and economic consequences after Independence. Successive Governments had fallen due to their failure to provide an adequate ration of subsidized rice for the people. Moreover, imports of rice had put a heavy burden on a balance of payments already strained by an overvalued currency, the deterioration of the country's terms of trade, import quotas and chronic shortages of foreign exchange. Making the country self-sufficient in rice was therefore expected to facilitate long term economic and political stability. 4.60 The replacement of the free ration of rice by food stamps for those below a certain income level was also considered essential for the country's long-term growth. The cost of the ration scheme had reached 5-6% of GDP by the late 1970's and was a very heavy burden on the budget; its reduction was seen as a pre-condition for releasing much needed resources for investment. Several Governments had tried in the past to remove, or even reduce the free ratiop of rice but, as indicated above, they failed or fell in the midst of clear popular discontent and turmoil. The Government thus felt that it would be too risky politically to eliminate the ration without compensating such a measure with increasing employment and, except for Mahaweli, there was no large employment generating projects ready for implementation. 4.61 Given the macroeconomic developments of the recent past, the burden that the ethnic conflict has put on the economy, the current resource con- straint and significantly lower prices of rice and oil than anticipated at the beginning of the AMDP, a careful reassessment is needed of the costs and benefits of future Mahaweli related investments and, at a more general level, of the emphasis given to irrigation projects in the country's development plans. Mahaweli has benefited the economy in a number of ways. First, it has been the vehicle to mobilize sizeable foreign resources to an economy in great need of foreign exchange. About US$1.4 billion have been committed since 1979, 40% grants and 602 loans, generally on highly concessional terms, for a project with a local cost component between 30% and 40%. Second, Mahaweli has been an important factor in Sri Lanka attaining near self-sufficiency in rice. Rice production increased from 840,000 tons in 1975-76 to 1,800,000 tons in 1985-86 and Mahaweli accounts for 10% of the increase. Third, the AMDP was the main source of expansion in power supply that helped reduce the chronic power-cuts that existed in the 1970's. Finally, AMDP has had an important role (albeit short-lived) in reducing the high rate of unemployment, from 22% of the labor force in the 1970's to 12% in the early 1980's. -61- Table 4.6: THE FISCAL COST OF MAHAWELI, 1979-85 (Rs billion) 1979 1980 1981 1982 1983 1984 1985 Capital Transfers to Mahaweli 1.4 3.4 3.8 7.3 6.4 7.1 7.2 GDP 52.4 66.5 85.0 99.2 121.6 153.7 162.4 % of GDP 2.7 5.1 4.5 7.4 5.3 4.6 4.4 Sour. Central Bank of Sri Lanka. 4.6' While these benefits have been considerable, a number of factors have contributed to lowering returns on investments in the AMDP below those envisaged at the inception of the project. First, the project's costs have been significantly larger than expected even though its scope was reduced under pressure of financial and implementation constraints. Four of the five major headworks have been completed (Victoria, Randenigala, Kotmale and Maduru Oya) but one of the major headworks (Moragahakanda) has been postponed. Of the 120,000 ha of new land to be irrigated under the project, only about 20,000 ha of new land had been brought into production by end-1986. A further 40,000 ha will be brought into production through committed projects, with the balance of 60,000 ha approximately still to be committed. Both because it was carried out on a crash basis and because cost escalations tend to be high in large projects, the 1977 estimate of US$1.2 billion (at 1987 prices) had become US$2.7 billion (US$1 billion of which still remains to be spent and are included in the 1988-92 PIP) for a reduced program. With the increase in costs, the AMDP has put a larger than expected burden on the Treasury, which, at its peak in 1982, reached over 7% of GDP, an extraordinarily large figure. 4.63 On the benefits side, both the price of rice and the price of oil have declined by about half, in real terms, in relation to the levels expected at the beginning of the project. Thus, taking into account the reduction in benefits and cost escalations, the rate of return of about 11% that was envisaged when the program was adopted has probably declined to a negligible level. Indicative of the extent of such decline, the ex-post rate of return of a recently completed scheme (Mahaweli II) in System H mentined earlier is -1%, even though the ex-post evaluation excludes from the cost side the large expen- ditures incurred for the headworks. 4.64 The 1987-91 Program. Public expenditures on Mahaweli amount to Rs 19 billion, i.e. 13% of the 1987-91 PIP, and, probably, the same proportion of the 1988-92 PIP. Most of the expenditures are related to downstream development, -62- i.e. construction of canals and settlement of farmers, on the so-called Systems C and B Left Bank, which are ongoing and B Right Bank which has yet to start. As in the past, the costs of these projects is high. The Rs 19 billion will bring into cultivation 45,000 ha and allow 35,900 families to be settled over a five-year period, i.e. about US$15,000 per ha brought into production and US$18,000 per family settled. The revised ex-ante rate of return estimated in 1986 for System B Right Bank is 3% excluding all sunk costs associated with the headworks (Madura Oya, the Minipe transbasin diversion system and all dams on the Mahaweli system itself). In spite of this low rate of return, both the Government and donors consider that the project is essential to the successful implementation of the Peace Accord. In addition, considerable efforts have been made to secure a financing package, most of it on highly concessional terms; it would be difficult to find alternative uses for these resources in the short term. 4.65 To increase economic returns on investments in Mahaweli, the Mahaweli Authority is placing high priority on crop diversification and on the promotion of commercial activities in Mahaweli areas. Considerable success has been achieved in promoting high value crops in System H though this is partly attributable to temporary factors (water shortages during drought years, favorable markets for chillies and onions arising from interruptions in supply from security-affected areas, etc.). While there is some potential for diver- sification, paddy will continue to be the predominant crop in the foreseeable future. 4.66 A high proportion of Mahaweli costs are aid-financed. Nevertheless, along with other Government programs, the AMDP has had to bear its share of budget stringency. Given inflexibility of major contracts, cuts have con- centrated on downstream and settlement activities, resulting in underutilized upstream facilities, a drawn-out development process and delayed benefits. The next in the series of Mahaweli new projects would be the Moragahakanda dam. There is no reason to suppose that the future will be any different than the past. Once major projects are started they will necessarily receive priority, and budgetary restrictions will continue to delay completion of ongoing settle- ment. Therefore, it is desirable to delay entering into new major irrigation projects. 4.67 Public expenditures on non-Mahaweli schemes consist of two projects (Kirindi Oya and Nilwala Ganga) in the south of the country and four rehabilitation and maintenance programs.l/ The Kirindi Oya project is expected to be less expensive than Mahaweli but, if anything, has taken longer to com- plete with benefits that are less secure than in Mahaweli. The Nilwala Canga project is a flood protection project constructed under turnkey arrangements. 1/ Minor and medium schemes have also been rehabilitated withain the context of rural development projects. -63- The rehabilitation and maintenance projects cover both major and minor irriga- tion schemes, have short gestation periods, cover a significant portion of existing irrigation and have, potentially, high rates of return if operational and management issues can be resolved. 4.68 Directions for the Future. Given the financial constraints facii.g Sri Lanka, a desirable ranking of priorities in the allocation of the funds avail- able in the medium term might be: (a) intensification of existing irrigation schemes through proper policy and incentive signals along with proper water allocation to motivate farmers to diversify their production system; (b) continued emphasis on rehabilitation within the framework of improved water management within a strategy of increased cost recovery and financial self-sufficiency; (c) concentration on completion of the committed Kirindi Oya and on-going Mahaweli Systems C and B Left Bank; (d) concentration on completion of Mahaweli System B Right Bank while reviewing and incorporating lessons learned from previous developments includ- ing rephasing and redesigning components of the project, whenever possible, to increase its rate of return; and (e) postponement of further major new irrigation projects while inves- tigating -- notably in the case of Mahaweli -- the potential for high return, non-paddy cropping systems which in the longer term may provide a viable base for future development. 4.69 At a more general level, it is important that the share of investments on irrigation/settlement in future PIPs be reduced substantially and that future investments concentrate on high return projects in rehabilitating and upgrading existing irrigation schemes. New projects should only be accepted after a thorough review of the planned investments in irrigation, in Mahaweli as well as other schemes. This could call for a major reorientation of exist- ing plans and, particularly, a postponement of plans to complete the fifth dam under AMDP (Moragahakanda). Public Expenditures in Health 4.70 Health indicators in Sri Lanka rival those of many countries with much higher income -- life expectancy is 69 years, the crude death rate is 6 per thousand, and infant mortality is 32 per thousand. The decline in population growth rate from 2.8% in 1955 to about 1.7% at present has challenged tradi- tional assumptions that high levels of per capita GDP are a pre-requisite to favorable demographic change. In spite of these remarkable achievements, the -64- pace of improvement in Sri Lanka's population and health situation has began to slow recently. First, the number of new acceptors of family planning methods is growing at only a modest rate and the population growth has not been declin- ing for several years now. Second, among some segments of the population the patterns of disease now resemble those found in developed countries, thus putting new demands on the health care system to provide expensive tertiary care. Third, there is growing evidence that the standards of care are uneven, with a deterioration of the health services provided at the periphery, i.e., villages and rural areas. There appears to be a disturbing resurgence of infectious and diahorreal diseases and of malaria. 4.71 This situation has emerged more as a result of problems of management and organization, coupled with growing health care requirements, than of inten- tional declines in the share of resources allocated to health (Table 4.1). Both health and education have been generally protected in the expenditure cuts that have taken place in the recent past. As in the case of transport sector, the inefficient volume of resources allocated to health is the direct conse- quence of the absence of a well articulated strategy in the sector which makes it difficult to identify and formulate projects and programs for inclusion in the Government's expenditure programs. Except for a general commitment to the objective of "Health for all by the year 2000" and an adherence to the Primary Health Care system (PHC) 1/ the Government does not have well defined objec- tives in health, nor a plan of action to achieve such objectives. In addition, there are breakdowns in the systems of management, staffing, logistics, main- tenance, and supplies. Indicative of the seriousness of the situation, almost half of the budgetary resources allocated to primary health care remained unspent in 1986 and, in any given year, the capital budget for health is usually underspent by about 30%. 4.72 Unless there is an improvement in the operational management of the health system, additional expenditure on health will only marginally improve the country's health status. The volume of allocations in the current health budget is not an indication of the extent to which needs in the sector will be attended because of the vagueness with which such needs are defined and uncer- tainty as to whether amounts allocated in the budget will be spent. The 1987-91 PIP includes projects amounting to about US$200 million for acquisition 1/ The PHC system is built around a network of preventive and community health activities and peripheral services at the base, which are meant to feed up through a series of referral tiers to more sophisticated levels of treat- ment. The benefit of this approach is that it concentrates resources at the preventive level where they have the greatest impact on health status, and provide an integrated package of services (specially for mothers and children) which meet the basic health needs of most of the population at relatively low cost. -65- of equipment, construction of buildings, and the construction of a Pharmaceuti- cal Capsule Plant (US$25 million). It is unclear why the public sector has felt the need to enter into producing pharmaceuticals that could be easily imported or produced by the private sector. The plant is expected to be com- pleted in 1989 and problems related to its management will have to be addressed in the context of PEs li, general. Other projects in the health sector include a PHC program (US$15 million) which after a slow start, is expected to substan- tially improve primary care, and a welcome project (US$40 million) for the rehabilitation and maintenance of existing assets. The remaining US$120 mil- lion are related to the construction of buildings and acquisition of equipment. However, it is not possible to assess the appropriateness of such investments without a well-conceived framework for improving health services. 4.73 To address this problem, the Government has decided to undertake a Health Strategy and Financing Study to determine the health care requirements more quantitatively and from them the appropriate mix cf different levels and types of services to be provided. Such a Health StraLegy will then provide the framework for an investment program for the sector, Important issues to be addressed in the study are, inter-alia, (i) how to integrate the PHC model into the existing structure of the health service; (ii) how to handle the advent of private practice, specially by Government doctors (a recent proposal to make salary increases for Government doctors conditional to their relinquishing private practice was met with storms of protest and it is still unclear how this problem can be resolved); and (iii) how to finance the increasing cost of tertiary care, analyzing the possibility of insurance for tertiary care. Based on this, it would be possible to design a medium term strategy for the health sector and corresponding investment plans. The Government has also recently begun implementing a project focusing on the management of the health system, without which any investment in the sector would fail to generate potentially very high returns. Public Expenditures in Education 4.74 Since the early 1900's, Sr; Lanka has placed a high priority on the provision of education. The school system has been expanded to provide almost universal free access to primary and secondary education. The result has been achievements well in excess of those attained by other countries at Sri Lanka's development stage - with adult literacy and primary school enrollment rates both approaching 90%. The decline in the share of resources allocated to education (Table 4.1) is not the result of a change in the emphasis given to education; but the consequence of the high share of wages in total Aducation costs (the Ministry of Education employs one-fifth of all Central Government civil servants) and the reduction in real wages in the Government. This has had a profound effect on teachers' morale. 4.75 Historically teachers had been well paid and have enjoyed high social status in Sri Lanka; as a consequence, the profession had maintained high standards and had been able to draw from a pool of high calibre recruits. The -66- situation changed through the 1970's when the rapid expansion of the system meant that many ttachers were taken with little or no training, a problem compounded by adjustment in salaries insufficient to compensate for inflation. At the same time, the established inservice training program was not geared up to handle the massive influx of new teachers. These ptoblems have been com- pounded by (i) a lack of management and supervisory skills among managers drawn from the teacher cadre; (ii) the minimal quality of many facilities built during the expans 'n phase of the system, with the result that many schools now lack such basic amenities as water supply, toilets, and furniture, and (iii) inadequate provision for materials and maintenance for the expanded school system. 4.76 To address these problems, within the overall spirit of the recommenda- tions of the 1981 White Paper entitled "Education: Proposals for Reform" which has established the Government strategy in the sector, the Government has recently (i) launched a major teacher training effort, coupled with higher entry standards and salaries for teachers; (ii) increased maintenance provi- sions, and prepared a project for upgrading schools, (for which it is currently seeking foreign support); (iii) reorganized the school system, with a view to decentralizing management and planning; (a special management training effort for principals and administrators is part of this reorganization). 4.77 A fundamental and longstanding problem is the mismatch between the output of the educational system and the manpower requirements of the economy. An emphasis on examinations and paper qualifications, and social demand for academic-style education have resulted in unemployed secondary and post-secondary graduates, and shortages of people with technical and vocational skills. Thus, the Government has now introduced more technical training in schools, tripled expenditures on vocational training, and increased the propor- tion of science-based streams in university intakes.. 4.78 These general objectives have been translated into expenditure plans. The general approach of the 1987-91 Investment Plan in education is to support upgrading and rehabilitation of the existing infrastructure, rather than new works. The 1987-91 PIP also strikes a reasonable balance between the various levels of education, the allocation to universities being reduced from 60% of the total (because of the construction of a new university) in the recent past to about one-fifth. -67- V. The Administrative Reform A. Introduction The Existing Central Government Administrative Structure 5.1 Compared to other countries of its size and level of development, Sri Lanka's public administration is exceptionally large. Sri Lanka's Public Sector consists of four clusters: i) the Central Government, consisting in turn of 40 Cabinet Ministries, 4 non-Cabinet Ministries, and 25 District Ministries; ii) 86 decentralized units of Government reporting to Central Ministries including the country's eight universities, research institutes, and other agencies with diverse functions such as the Ceylon Tourist Board, and the Mahaweli Development Authority; iii) some 130 public sector enterprises, finan- cial and non-financial; and iv) 25 district administration organizations which are reiatively small. The total number of public sector employees is about 0.8 million people (i.e. 14% of the labor force) and if workers in the state plan- tation3 as well as temporary and casual workers are also included, about 1.1 million people. Thus, the public sector is by far the largest employer in the economy, it employs close to one-fifth of the labor force and accounts for close to one-half of all formal employment. Excluding temporary workers, the Central Government itself accounts for about 440,000 employees. 5.2 Employment in the Central Government grew at slightly over 1% per year in the last 25 years which does not appear excessive for an economy which has been growing by at least 3-4% a year. However, this does not take into account the growth of employment in decentralized units of Government which, for all practical purposes, are performing Central Government functions and where employment, including that in the public corporations, grew much faster: 6-7% a year in the last two decades, excluding the tea estates workers brought into the public sector after the nationalization of the plantation estates in the 1970's (Table 5.1). Each one of the four clusters of Government has its own personnel management, recruitment and pay policies. Those of the Central Government are relatively homogeneous, while in the case of decentralized units of Government and public corporations, such policies depend on the parent Ministry, and can even vary among institutions within the same Ministry. 5.3 Wages and salaries in the Central Government budget have typically absorbed between 20-25% of Central Government current expenditure, i.e. about 4-5% of GDP (Table 5.2); however, the wage bill in the budget does not include the wage bill for decentralized units of Government, which is absorbed out of the budget (see para 4.3) and which accounts for perhaps an additional 1-2% of GDP. All told, the wage costs of the Central Government administration, excluding public corporations, amounts to about 6-7% of GDP, which is high in comparison to other Asian countries. -68- Table 5.1: EMPLOYMENT IN THE PUBLIC SECTOR, 1960-1985 (Figures in Thousands) Decentralized Units Central of Government and Government Corporation Sector a/ 1960 258 n.a. 1964 298 n.a. 1968 304 115 1972 324 146 1980 369 229 1985 436 332 a/ Includes financial and non-financial public sector enterprises as well as decentralized units of Government. Excludes tea state workers in the plantations nationalized in the 1970's, casual and temporary workers. Source: Department of Census and Statistics, Ministry of Plan Implementation; and Central Bank of Sri Lanka. Structural Deficiencies 5.4 In spite of its high personnel cost, there is an acute perception in Sri Lanka that the current administrative system has been ineffective as a catalyst and facilitator of the development process. In addition, salaries in Central Government are extremely low relative to the private sector, a disparity which has brought about lack of discipline and severe morale problems. Consequently, in 1986, the President appointed an Administrative Reforms Committee (ARC) to analyze the sources of the administrative deficien- cies and to propose appropriate remedies. Thanks to the ARC's in-depth work over the last two years, there is now a remarkable degree of consensus in Sri Lanka about the nature and gravity of wage and employment problems in the public sector and about the measures that are needed to address these problems. ARC's reports, issued over the past year, identify four major deficiencies in the current Central Government Administration. The ARC work concentrates mostly on the Central Government however, and does not analyze with the same depth the problems existing in the decentralized units of Government and public corporations. -69- Table 5.2: CENTRAL GOVERNMENT EXPENDITURE ON WAGES AND SALARIES IN SELECTED COUNTRIES (% of GDP) a/ 1979-80 1981-82 1983-84 1985-86 Sri Lanka 4.9 4.6 3.9 4.3 India 2.0 1.9 2.0 n.a. Korea 2.6 2.8 2.7 n.a. Thailand 3.9 b/ 5.4 5.8 n.a. Indonesia 3.5 3.0 2.8 n.a. Malaysia 8.1 8.3 c/ n.a. n.a. Philippines 3.2 b/ 3.1 3.2 n.a. Bangladesh n.a. 2.0 2.3 2.9 a/ No data are available for Pakistan. 61 Data from 1980 only. c/ Data from 1981 only. Source: Government Finance Statistics - GFS, IMF and Central Bank of Sri Lanka. Proliferation of Administrative Units 5.5 The first and probably the major deficiency in the Central Government adm3nistrative structure is the excessive number of Ministries and administra- tive units which have been proliferating gradually since Independence in 1948. From 14 cabinet ministries then, they have grown to 40 cabinet level ministries at present, with portfolios held by 28 ministers. In addition, there are 5 "Project Ministers" (without cabinet rank), and 25 District Ministers. Linked to these ministries are the 86 decentralized units of Government and 130 public corporations mentioned before 1/ (Table 5.3) as well as the 25 district administration organizations. This proliferation of agencies has led to two serious problems: (i) related functions within sectors are fragmented, leading to duplication and difficulties in coordinating policies. For example, ten agencies of ministerial rank are operating simultaneously in agriculture, four in transportation, and three in education; and (ii) unrelated functions are grouped within one single ministry. For example, the Ministry of Janatha Estates Development is involved in plantations and fertilizer distribution. 1/ A comprehensive, albeit not complete, list of decentralized units of Government and public corporations is in Annex 9. That list, however, does not include public corporations incorporated as public limited liability companies (i.e. private companies) such as Air Lanka. -70- Table 5.3: EMPLOYMENT IN THE CENTRAL GOVERNMENT BY MINISTRIES (as of end of 1985) I Central I I Decentralized I I Government I I Units of I Ministry I Employees I Corporations I Government I Total I I _ _ _ _ _ I _ _ _ _ _ I _ I I I I Departments not coming under a Ministry I 4.831 I 534 I 1,230 6,595 Ministry of Agricultural Development I I I I & Research 1 25,653 I 9,798 1 3,866 I 39,317 Ministry of Coconut Industries j 46 4 - 4,260 1 4.306 Ministry of Cultural Affairs 2.160 I - I 1,669 1 3.829 Ministry of Defense 21.560 1 1.248 1 - 1 22.808 Ministry of Education 1 171,977 - 1 - T 171,977 Ministry of Education Services I 360 I - I 96 1 456 Ministry of Finance & Planning I 5,170 I 25,700 I 2.160 1 33,030 Ministry of Fisheries I 1,462 1 1.290 I 191 1 2,943 Ministry of Food and Cooperatives 4,650 I - I 308 I 4.958 Ministry of Foreign Affairs I 558 I - 1 - I 558 Ministry of Health I 37,160 1 445 I - ) 37,605 Ministry of Higher Education I 1.499 I - | 8,024 1 9,523 Ministry of Highways I 5,508 I - 1 - I 5,508 Ministry of Home Affairs I 12.305 I - 1 - I 12.305 Ministry of Indigenous Medicine I 1,252 I 283 1 - I 1,535 Ministry of Industries & I I | | Scientific Affairs 1 737 I 26.234 I 1.542 I 28.513 Ministry of Internal Security I 18 I - 1 - I 18 Ministry of Janatha Estates Development I - I 12.825 I - 12.825 Ministry of Justice 1 7.429 I - I 19 1 7,448 Ministry of Labor I 3,210 1 - I 165 1 3,375 Ministry of Local Government, I I I Housing & Construction I 5,581 I 14,109 I 48.176 I 67,866 Ministry of Lands & Land Development I 23,754 I 6,821 I 548 I 31,123 Ministry of Mahaveli Development I 69 I - I 17.589 1 17,658 Ministry of National Security 1 18 1 21.648 I - I 21,666 Ministry of Parliamentary Affairs I I I & Sports I 749 I - 1 - I 749 Ministry of Plan Implementation 1 5,078 I - 1 - 1 5,078 Ministry of Plantation Industries I 623 1 848 I 3,740 I 5,211 Ministry of Posts & Telecommunications 1 32,809 I - | - 1 32,809 Ministry of Power & Energy | 80 I 18,371 1 - I 18,451 Ministry of Private Omnibus I 78 - I - I 78 Ministry of Private Security 57 - 1 - 57 Ministry of Public Administration 1 927 - 92 1 1.019 Ministry of Regional Development I 116 I - I 86 I 202 Ministry of Rehabilitation I 62 1 - 1 - 1 62 Kinistry of Rural Development I 823 I - 1 - I 823 Miniszry of Rural Industries I | | Development I 5,181 1 1,022 1 5,966 I 12.169 Ministry of Social Services I 1.174 1 37 I - I 1.211 Ministry of State I 3,801 1 3,784 1 449 I 8,034 Ministry of State Plantations I - I 9,747 1 - 1 9,747 Ministry of Textile Industries 1 3,854 I 10,140 1 55 1 14.049 Ministry of Trade & Shipping I 5.281 I 13,492 I 244 I 19,017 Ministry of Transport 1 26.883 I - 1 - I 26,883 Ministry of Transport Board I 50 I - I 52,343 1 52,393 Ministry Without Portfolio 1 8 1 - - I 8 Ministry of Women's Affairs & I Teaching Hospitals I 10,596 I - 1 - I 10,596 Ministry of Youth Affairs & I I I I Employment __ I 426 I - I 1.521 I 1,947 Total I 435,623 I 178.376 I 154,339 I 768.338 ..urce: . inistry .. .P.a I Ipmnto Departmen Io Cnsa Source: Ministry of Plan Implementation; Department of Census and -71- Overstaffing 5.6 Second, the Central Government is overstaffed. According to ARC's case studies, a major reduction of the order of 20% in central staff should be feasible without any impact on the quality and/or level of the public services rendered. A number of factors have contributed to the growth of Central Government employment in Sri Lanka. First, and perhaps foremost, the state has served as employer of last resort, especially during periods of economic dif- ficulties when the government service has been used for political purposes. This has led to massive hiring sprees at the lower skill levels, particularly in pre-electoral periods, and was institutionalized in the so-called Job Bank, a pool of candidates nominated by members of the Government party for Govern- ment employment in unskilled positions. The proliferation of government agen- cies discussed above has, by itself, created a second source of redundant employees, a development which has been facilicated by the absence of well defined recruitment procedures. Third, cumbersome work procedures have also impelled the government to hire more people to do work which, if simplified, could be performed by fewer hands. Narrow job descriptions have also meant that many public servants are underutilized, and many positions could thus be consolidated as a way of reducing staff. Finally, the uncontrolled growth of line staff in various ministries has implied concomitant increases of staft in support ministries, such as those of public administration and finance. Table 5.4: STARTING MONTHLY SALARIES FOR SELECTED CLASSIFICATION OF GOVERNMENT EMPLOYEES (Rupees) Category 1948 1950 1955 1957 1967 1974 1978 1984 1984 (1948=100) Monthly Labor Engineering Unskilled (Non) 70 92 100 117 152 180 295 796 1015 Semi-skilled 90 94 103 121 156 200 322 826 1027 Skilled 108 124 140 157 193 250 390 891 826 Clerical Grade II 196 237 257 262 287 250 390 891 455 Grade I 378 477 507 507 507 570 710 1276 339 Special Class 516 61' 647 647 647 560 800 1476 286 Administrative Service Class II Grade II 576 677 682 707 522 650 790 1796 312 Class II Grade I 1420 1560 2826 Class I Grade II 1476 1517 1572 1572 1572 1720 1860 3296 223 Class I Grade I 1626 1667 1722 1722 1722 1870 n.a. n.a. n.a. Engineers Class II Grade II 326 407 522 522 612 600 820 1796 551 Colombo Consumers' Price Index 100 104 110 111 124 200 246 533 553 Sources: ILO. Government Pay Policies in Ceylon. Geneva, 1971 Government of Sri Lanka Estimates Various Issues Central Bank of Sri Lanka. Annual Reports. -72- Compensation 5.7 The inappropriate salary structure which underpays higher level civil servants and over-compensates at the lower grades, is the third problem under- mining the efficiency of the Central Government as well as public corporations. The Central Government wage bill at close to 6% of GDP in the 1970's has been gradually declining since then because cost-of-living adjustments have not kept up with inflation. According to the Government's cost-of-living formula, civil servants are entitled each year to a cost-of-living allowance of Rs 2 for each point of increase in the Colombo Consumer Price Index (CCPI). Since the cost-of-living allowance is uniform among civil servants, regardless of their salary level, it means that salary adjustments are proportionately higher at the lower salary ranges. Thus, at higher levels, real wages are less than half of what they were two decades ago while salaries of unskilled workers have increased by over 60%. The ratio between the highest and the lowest wage in the Government salary structure fell from 20 in 1948 to 4 in 1984 (Table 5.4). The salaries for clerical and manual grades in the Central Government are higher than in the private sector, while the opposite is true for the more senior positions (Table 5.5). Consequently, the Central Government finds it easy to recruit at the lower levels, abd very difficult at the higher ones. 5.8 The comparison between public and private sector salaries is compli- cated by the tax exemptions for public servants. On the other hand, fringe benefits are normally substantial in the private sector but relatively unimpor- tant in the public sector. Most allowances were abolished in 1982 while remaining non-wage benefits are limited. 1/ 1/ For example, government housing is available only to high-ranking officials and government agents posted in out-stations, comprising perhaps 1.2% of the public service. Ministers and heads of departments are entitled to to government cars and drivers for public and private use, but this benefit is restricted to less than five hundred people. A limited group of tech- nicians, numbering between 2,000 and 3,000, are entitled to use vehicles for work purposes only. A very limited number of station allowances are given for hardship postings, and telephone benefits amounting to approximately 600 rupees per month are given to heads of departments. No additional health or educational benefits (beyond those available through the national welfare system) are given to public servants. A non-contributary pension scheme is the major non-wage benefit of public service employment. -73- Table 5.5: CENTRAL GOVERNMENT SALARIES COMPARED TO PUBLIC AND PRIVATE SECTOR (as of 1987) Category Public Service Public Sector Corporations /c Private Sector Id Senior Management Rs 102,000-150,000 Rs 300,000-540,000 Group (Secretaries to (Large Companies) Ministries, Heads Re 150-000-360,000 of Large Departments) (Small Companies) Upper Management Re 72,000-108,000 Rs 90,000 (Large Corporations) Re 150,000-360,000 (Heads of Departments) Rs 60,000 (Small Corporations) (Directors) Middle Management Rs 36,000-54,000 (Deputy General Manager) Re 90,000-180,000 (Deputy/Assistant Rs 39,000-46,800 /a (Senior Executive) Heads of Departments) Rs 33,600-45,600 T Rs 30,000-42,000 7a (Chief Operations Manager) Executive Rs 24,000-39,300 Rs 25,200-37,200 /b Rs 30,000-78,000 Rs 22,800-30,000 7a Rs 21,000-30,000 7- Clerical and Rs 16,800-33,000 Rs 15,600-24,000 /a Re 13,100-25,050 Allied Grades Rs 13,450-17,050 T Manual Grades Rs 15,000-27,600 Re 13,200-16,100 Rs 12,200-17,200 /a Large corporations. 7T Small corporations. 7c Free of income tax. 7- Subject to income tax. Source: Administrative Reforms Committee of Sri Lanka. Personnel Management 5.9 The fourth problem identified by the ARC is the absence of a personnel management system. The Ministry of Public Administration (MPA) is, in prin- ciple, responsible for formulating policies, as well as for routine personnel -74- management tasks, such as administration of pensions, appointments, transfers, promotions, etc. However, the MPA has increasingly been absorbed by day-to-day operational activities. There has been no systematic analysis of job descrip- tions, criteria for promotion, and recruitment procedures. Medium-term plan- ning is non-existent. The creation of positions has been haphazard and primarily in response to political pressures. As described in the ARC reports, the determination of job positions has been a reactive process to requests from Ministries, departments and sub-departments for more positions, particularly at the time of budget formulation, a development that gave to the Treasury an important role in personnel policies. It is not the Treasury's function, however, nor is it equipped to analyze the rationale for creating new posi- tions, and whether such requests correspond to legitimate needs. The process is further complicated by time constraints as well as by the substantial pres- sure exerted by requesting organizations. B. The ARC Proposed Reform 5.10 The thrust of the ARC proposals is to address the twin problems of public service overstaffing and low salaries through a strategy which would aim at redefining the existing Central Government administrative structures and creating within the new structure, a strong Ministry of Public Service respon- sible for personnel policies. In the reorganization process, redundancies and/or excessively narrow job descriptions would be id#ntified and eliminated; training programs for redeployment of staff would be defined and carried out and salary disparities remaining after the 1987 salary adjustment (see para 5.17), i.e. salaries inadequate to fill a certain type of positions, would be corrected. The most fundamental aspect of the ARC's proposals is to restruc- ture the Central Government into two clusters. The so-called "guidance cluster" would consist of the office of the President, the Office of the Prime Minister, and four ministries: the Ministry of Public Service and the Ministry of Security and Defence, both of which would be headed by the President; the Ministry of Plan Monitoring and Evaluation to be h....ded by the Prime Minister; and the Ministry of Finance and Planning. The guidance cluster would be in charge of cooreinating and providing leadership for the totality of the execu- tive functions of the Government. The remaining ministries would be grouped in a second cluster, the "executive cluster" made up of twelve ministries in charge of sectors and functions now spread over forty ministries. In the new structure there would be only one Ministry for agriculture, including the plantation sector which is now spread among various ministries, and only one Ministry of Education to replace the three now dealing with education. Tran- sport would still be split into two ministries, one for ports, shipping and aviation and one for highways, railways, and "oad transportation. Reflecting the urgent need for Sri Lanka to expand and diversify its export base, there would be a new ministry to define and implement policies, programs and services related to the promotion of exports, handle matters related to the country's external trade relations, as well as the promotion and development of tourism. A full list of the 12 ministries proposed by the ARC and their responsibilities is in Annex 10. -75- 5.11 A Salaries and Cadres Committee (SCC) was created in January 1988 and put in charge of coordinating the administrative reform process. Its respon- sibilities include defining the functioas that each Ministry should perform, designing a suitable administrative structure and establishing job descriptions and staffing requirements. In the process, the SCC will specify the ministries and/or departments and/or decentralized agencies that need to be eliminated and identify redundant staff. Although the ARC work has concentrated on the Central Government cluster as presently structured, it is inevitable that as the administrative reform proceeds, decentralized units of Government will be affected. In the area of export promotion and tourism, for example, the proposed new Ministry of Export Promotion will be in charge of functions dis- charged and services provided at present by the Ceylon Tourist Board, now under the Ministry of State, and the Export Development Board, now under the Ministry of Trade and Shipping. Whether these two institutions should remain decentral- ized as they are at present, or whether they should become sub-units of the new Ministry is still an open question that will require a SCC decision. There are four other questions that need to be addressed. First, it is likely that the deficiencies of the Central Government identified by the ARC also exist in the decentralized units of Government. This would imply that they should also be included in the administrative reform process. Second, there is a question as to the desirability of continuing to have two categories of civil servants: those in the Central Government who are pensionable, and those in the decentralized units of Government who are not. Third, as discussed in para 5.13, the Central Government pension scheme is overly generous and there may be a case to restructure it as part of the reform process. Finally, exempting civil servants from taxes on their earnings in the public sector discriminates among taxpayers and reduces the transparency and credibility of the tax system. It may be desirable to define a salary structure in gross terms which in net terms, would be equivalent to the ARC recommended salary structure. Reduction in Overstaffing 5.12 The case studies carried out by the ARC indicate that, as a result of the administrative reform, it should be possible to achieve a 20% reduction in staff in the relatively short period of two to three years. This would mean a reduction of about 70,000 based on the current manpower strength in the public sector of 362,000 exclusive of the armed forces, police and health personnel - which the ARC proposes to be reviewed in the context of the reorganization of the management structure of medical institutions. This figure does not, however, include the over 150,000 employed in the decentralized units of the Government, nor does it take into account the ARC staff view that the 20% figure is a minimum and that a serious restructuring of the Central Government administration is likely to lead to even a greater proportion of civil servants being considered redundant. The proposed devolution of power to the Provinces should not affect the new administrative structure proposed by ARC nor the -76- extent of reduction in overstaffing. The ARC recommends that the administra- tive units devolved to the Provinces be subject to the same restructuring that is envisaged for the Central Government administration. Retrenchment Policies 5.13 The ARC proposes to deal with redundancies through training programs and compensation packages. Training programs would enable those found redun- dant to fit job descriptions corresponding to unfilled vacancies in the Central Government or to improve their job opportunities in the labor market. Compen- sation packages would be given to all those leaving the Government service. The compensation packages are still to be defined and will have to t1ke into account the attractiveness of the Central Government pension scheme. Retire- ment in the Government service is voluntary at age 55 and mandatory at age 60, following 10 years of pensionable service. Continued service between 55 and 60, and in some cases even after 60, is only possible if mutually agreed upon between the Government and the employee, a practice that, as highlighted by the ARC, causes considerable stress and uncertainty for the employee. A pension at 85% of the last salary can be drawn at age 55 for all those who have 10 or more years of service. There are at present 22,000 employees in this category. Table 5.6: DISTRIBUTION OF THE CENTRAL GOVERNMENT WAGE BILL Number of Salary Average Annual Employees Salary Bill Grade Salary in Grade By Grade (In '000 Rs) (%) (Rs Million) (%) 1 - 10 116 381 0.1 44 0.4 11 - 20 68 2,757 0.6 185 1.7 21 - 30 44 9,108 2.0 401 3.6 31 - 40 24 432,574 97.3 10,538 94.3 TOTAL 25 444,820 100.0 11,168 a/ 100.0 a/ Based on the salary scale after the November increase, it thus does not match the 1987 budget figures (Rs 8.3 million). In addition, because the table is based on the average, rather than actual, salary in each category, ic also does not match the 1988 budget figure (Rs 10 billion). Source: Ministry of Finance and Planning. 5.14 The Government has made it clear that it would not use compulsory retirement as a way of eliminating redundant employees. The ARC endorses this view and recommends paying pro-rated pensions to all those who have had 10 years pensionable service or more, and paying a lump-sum gratuity, in lieu of a -77- pension, to those who do not have 10 years of pensionable service. The amount of the lump-sum separation package would need to be carefully considered. A voluntary retirement scheme without a sufficiently attractive separation pack- age would be unlikely to succeed. Several public corporations undergoing liquidation have extended severance packages which might provide a model. 1/ 5.15 The ARC estimated that a 20% reduction in staff would bring sbout an equivalent reduction in the wage bill, i.e. about Rs 1.6 billion without taking into account separation and retirement costs. As indicated in Table 5.6, over 90% of the Central Government wage bill is spent on the ten lowest grades of the salary scale which cover 97% of the total staff and where most of the overstaffing occurs. 5.16 While in the long run the reduction in overstaffing will have a posi- tive effect on both the wage bill and (in the budget classification terms) on transfers to public corporations, as well as on related current expenditures such as rents, office supplies, and overtime, the administrative reform may not bring about significant budgetary savings in the near term. The savings from reduced employment in the civil service will, most likely, be absorbed by the cost of severance packages, and increased pensions payments. There are, at present, approximately 185,000 pensioners (including widows and orphans of public servants), and the 1988 pension bill will amount to Rs 3.5 billion. The present rate of retirement is approximately 12,000 new retirees annually. Compensation 5.17 An important aspect of the ARC proposals is to change the distorted salary structure discussed earlier in this chapter. Without such a correction, the administrative reforms may fail. The ARC has already defined a salary scale, net of taxes, that would be competitive with that of the private sector and has proposed that savings to be achieved in reducing overstaffing be used to finance the higher costs of the new salary scale. Without the use of such savings, the new salary scale would imply a 40% increase in the Central Govern- ment wage bill. The Government has, however, decided to begin with the salary increase in two tranches. The first was given in January 1, 1988 and consists of half the increase proposed by the ARC in the revised salary structure, while the second one will be given on January 1989. The Central Government wage bill in the 1988 budget is thus 22% higher than in 1987. 1/ The River Valleys Development Board offered the following retrenchment terms on the ter- mination of surplus staff: (a) 1/2 month's salary for each year past service; and (b) 1-1/2 month's salary for every year of service an employee would have otherwise worked if he continued in employment up to 58 years; provided the total of (a) and (b) not exceed 24 months salary or Rs. 20,000, whichever is less. -78- VI. Tax Restructuring Priorities and Options 6.1 As part of 1987-90 Adjustment Program, the last two budgets have intro- duced a series of tax changes aimed at increasing the elasticity of the tax system and at reducing tax evasion. While bringing about significant improve- ments, these tax reforms have lacked the comprehensive and detailed medium term approach that haa guided the Government in other policy areas. The main pur- pose of thie Chapter is to highlight that, in addition to its low elasticity and high evasion, the current tax system also suffers from unclear objectives, brings about costly misallocations of resources, and worsens income distribu- tion. It would be preferable that tax reforms in the future be part of a through and systematic reform program. Such an approach has been pursued with considerable success by the Presidential Tariff Commission which could be used as a model for future tax reforms. An essential part of this plan should be to provide more resources to the Department of Inland Revenue to improve its tax policy formulation and audit capacities. A. The Main Problems Introduction 6.2 Sri Lanka's tax base is more developed than those of other developing countries, partly because of the high priority placed on public provision of social services. In addition, early on, large exports provided a convenient and administratively simple tax-base. This resulted in tax revenues of over 16% of GDP in the 1950's, gradually increasing to some 18% of GDP in more recent years.l/ However, the system relies heavily on indirect taxes which are responsible far over 80% of tax collections, with taxes on trade accounting for about half that amount and domestic indirect taxes for the other half (Table 6.1). 1/ See Jayasundera P.B., Fiscal Policy in Sri Lanka Since Independence, Ministry of Finance and Planning. In Facets of Development in Independent Sri Lanka Planning. Table 6.1: SELECTED COMPARATIVE DATA ON THE LEVEL AND COMPOSITION OF CENTRAL GOVERNMENT REVENUES As % of Total Revenue % of GDP Tax on Inc. Social Domestic Profits. Security Taxes on Taxes on Capital Contri- Goods & Import Export Internat'l Total Gains butions Services Duties Duties Trade Non Tax Tax Revenue Sri Lanka 1960-64 18.3 0.8 9.3 28.3 15.0 43.3 .. 16.5 1965-69 15.1 0.5 14.9 21.9 13.6 35.5 .. 16.0 1970-74 16.4 0.6 32.8 8.5 11.1 19.6 11.5 17.9 20.6 1975-79 14.0 0.5 31.0 11.2 34.0 45.2 8.1 18.8 20.4 1980-84 15.1 .. 35.4 18.0 18.4 36.4 8.3 17.9 19.6 1985-87 15.8 .. 38.3 24.7 5.5 30.2 15.6 18.0 21.3 India 1975-79 20.7 .. 42.6 15.8 1.2 17.6 17.2 10.5 12.9 1980-84 17.6 .. 39.8 21.9 0.4 22.9 17.8 10.8 13.3 4. Korea 1975-79 24.7 0.9 43.9 15.9 .. 15.9 9.1 14.9 16.5 1980-84 22.7 1.1 44.7 14.5 .. 14.5 12.1 16.0 18.5 Pakistan 1975-79 11.5 .. 35.2 29.2 3.0 34.9 18.2 11.4 13.9 1980-84 14.7 .. 33.5 30.4 0.9 32.7 18.8 13.2 16.2 Thailand 1975-79. 16.9 .. 45.7 22.2 3.7 25.9 9.2 11.8 13.0 1980-84 19.3 .. 47.1 18.8 3.8 22.6 9.1 13.3 14.6 Indonesia 1975-79 67.5 .. 12.6 7.1 3.3 10.3 7.6 18.1 19.5 1980-84 73.6 .. 9.3 3.7 1.1 4.9 10.9 19.5 21.9 Malaysia 1975-79 35.7 0.4 20.8 16.4 12.6 31.6 9.7 20.6 22.9 1980-84 37.7 0.5 17.4 15.2 14.0 26.6 15.5 22.4 26.6 Philippines 1975-79 21.1 .. 34.1 24.6 3.9 28.4 12.0 11.7 13.5 1980-84 21.1 .. 39.5 23.7 1.3 25.4 11.3 10.3 11.6 Industrial Countries 1975-79 40.0 31.6 17.1 .. .. 1.8 7.3 32.0 36.7 1980-84 38.0 32.9 17.2 .. .. 1.3 8.8 .. 28.5 Source: International Monetary Fund. Government Finance Statistics Yearbook (Various Issues) -80- 6.3 Taxes on imports as a share of Lotal tax revenue doubled after the 1977 liberalization, as quotas were replaced by tLriffs; another source of increase in more recent years has been obtained by the decline in the prices of oil, sugar, wheat and rice in the international market and the Government's decision not to pass these price declines on to consumers but rather to raise tariffs. Taxes on exports also increased after 1977 with the devaluation of the rupee, but they have been declining gradually as a result of both the Government's decision to increase profitability in the plantation sector and the sharp decline in the international prices of tea, rubber and coconuts. The design of trade related taxes is relatively simple: there are few specific tariffs, and no levies additional to those explicit in the tariff schedule. Export taxes consist of both specific sales taxes and ad-valorem taxes, the rates of which depend on the level of the commodity price. In recent years the Government has sought to reduce the role of the specific taxes while increasing that of ad-valorem taxes. The design of the main domestic taxes is described in Annex 11 and summarized in Table 6.2. Indirect taxes on goods and services raise well c.er one-third of all tax revenues while direct taxes have been stable at about slightly less than 20% of total tax revenues. The Conflicting Objectives 6.4 As suggested in Table 6.2, domestic taxes have been used to correct distortions generated elsewhere in the economy as well as for a variety of purposes which cannot always be achieved through tax provisions. For example, to compensate civil servants for the erosion of their salaries, they have been exempted from paying income tax on their earnings in the public sector; to help finance the public sector deficit, exemptions have been granted on interest earned on deposits with the National Saving Banks (NSB) which invests all of its assets in Government securities; to stimulate the housing market, debilitate4 by decades of rent controls and limitations on the number of houses that an individual could own, certain rents and income generated in real estate activities are given preferential treatment; to improve income distribution, income earned on small saving deposits have been exempted; and to encourage small companies, they are given a preferential treatment under the company's tax. 6.5 With many objectives being pursued simultaneously, it is not surprising that the purpose of provisions in one tax code are sometimes contradicted by provisions in another. For example, the company's tax aims at encouraging new investments by using a depreciation schedule which follows more accelerated rates than those that would result from a more economic-based depreciation schedule, and by exempting profits for a specific period of time for new projects. On the other hand, under the BTT code, capital goods purchased by manufacturing enterprises are taxed at rates above 10% while taxes paid on other production inputs are exempted. Likewise, while the tariff system aims at protecting paper oduction through high import tariffs, the BTT taxes domestic paper mani uring at a much higher rate than other industries (Table 6.5). Anul r.t ample is the vertical integration which is encouraged -81- Table 6.2: MAIN FEATURES OF SRI LANKA'S TAXES NON-RELATED TO FOREIGN TRADE Company's Personal Income Wealth Tax Tax BTT T:_x Tax Base Corporation's Individual's Sales of Goods Net Assets of net income income and Services Individuals Rates Between 20% and Between 10% and Between 1% and Between 0.5% and 50% depending on 40% depending 5% depending on 2% depending on the size of the on income level the type of good the level of the company, and and/or service. net wealth whether it is Manufacturing quoted or not. Enterprises can Profits and ro- deduct the BTT yalties remitted paid on their abroad are sub- inputs. ject to addi- tional taxe-. Main Sources Tax holidays for A.Tax Exempted on Under-reporting Inadequate of Erosion new ventures in income from updating of the of the Tax a variety of (i) wages paid by value of the Base sectors. the public sector; assets. (ii) a portion of of the interest earned on deposits in the NSB; (iii) the first Rs 12,000 of dividends; and (iv) a certain proportion of rents and a portion of the profits from sales of houses. B.Deductions up to a limit of Rs 150,000 (Rs 50,000 from 1989 onwards), with indefi- nite carry-forward for investments in housing, equity, and other tax- preferred investments. C.Under-reporting. Source: The Commissioner General of Inland Revenue and Bank staff. -82- under the BTT to avoid cascading effects but discouraged under the company's tax which gives a prefereptial treatment to small businesses. Finally, while the personal income tax aims at introducing a certain degree of progressivity in taxation, this is more than offset by high consumption taxes. Import tariffs are 25% on rice; 20% on wheat and over 100% on sugar, while the Busi- ness Turnover Tax (BTT) is 3% for rice, 5% for wheat, and 10% for sugar. These high taxes on food items have meant, in the case of the lower income groups, that the amount of taxes they pay by way of import tariffs on sugar, wheat and rice is higher than the sebsidy they get through food stamps. Over 15% of all tax revenues are generated by taxes on only four commodities: rice, wheat, sugar and oil, which is more than what is generated by taxes on income, both personal and corporate. 6.6 The result is a system that (i) is overly complicated by numerous rates as well as exemptions; (ii) has lost credibility and fostered considerable evasion; (iii) introduced costly distortions in resource allocation; and (iv) has generated a tax base which relies heavily on indirect taxes and within those, on indirect taxes on items of popular consumption. Elasticity and Buoyancy of the Tax System 6.7 Calculations of tax buoyancy for the period 1975-87, which measures the responsiveness of tax collections to growth in income, suggest that Sri Lanka has a relatively buoyant tax system (Table 6.3). The tax buoyancy captures the changes in tax collections that occur as a result of discretionary policy actions (e.g., changes in tax rates) as well as the changes that take place due to growth in the tax base in response to overall growth of economic activity. Tax collections from import duties, taxes on wealth and capital transfers, and BTT have grown proportionately more than the GDP, whereas the collections from excises and export duties have grown slower than the GDP. A concept related to buoyancy is the elasticity of the tax structure which excludes the effects of discretionary policy changes and provides an indicator of the built-in (i.e. automatic) elasticity of tax revenues, to changes in income. It measures how tax collections would grow if the Government were to leave the system unchanged, i.e., without changing the definition of the tax base or tax rates. Overall Sri Lanka's tax system is inelastic; a feature that may explain the frequent tax changes which have been necessary to maintain the share of taxes in GDP. The estimates of tax elasticities presented in Table 6.3 suggest that the income taxes in Sri Lanka are elastic whereas the Wealth Tax, BTT and trade taxes are inelastic. Both the personal and corporate income taxes have higher elasticity than buoyancy coefficients. This suggests that tax holidays, generous capital consumption allowances, exemptions and qualifying payments have considerably eroded the income tax base. On the other hand the buoyancy of BTT is high, but its elasticity is relatively small. This divergence may be attributable to increases in BTT rates over the past decade. -83- Table 6.3: BUOYANCY AND ELASTICITY OF TAX REVENUES IN RELATION TO GDP Buoyanny Elasticity Peri-d: 1976-1986 Period: 1976-1986 Coefficient Coefficient Tax Revenue 0.97 0.89 a/ Income Tax: 1.00 1.23 a/ Personal 0.99 1.29 Corporate 1.00 1.22 Taxes on Wealth, estates & gifts 1.41 0.53 b/ Taxes on Goods & Services 1.11 0.86 c/ Business Turnover Tax (BTT) 1.48 0.86 Excises 0.66 N.E. Taxes on International Trade 0.83 0.81 d/ Imports 1.53 0.81 d/ Exports 0.63 N.E. a/ Weighted average of individual components. b/ Wealth tax only. c/ BTT estimate. d/ IMF estimates for import duties for the period 1978-83 used. See International Monetary Fund (1985), Selected Taxation Issues in Sri Lanka, October 25, 1985. d/ Not estimated. Source: Commissioner General of Inland Revenue, IMF and Bank staff estimates. -84- Under-Reporting 6.8 Estimates of tax evasion are at best tentative. In the case of Sri Lanka, there is an additional complicating factor in that there are no estimates of the cost in terms of foregone tax revenues of the concessions granted under various tax codes. Thus, it is not possible to separate the impact of tax evasion as such from that of tax concessions. Available data suggest that both problems are serious. According to the National Accounts, the capital income declared for tax purposes ("assessable income") is less than half the income generated in corporations. More seriously, income generated in unincorporated enterprises (small industries, traders, farmers, money lenders) goes almost entirely untaxed. While, in theory, their income should be taxed under the personal income tax, Table 6.4 indicates that taxes on capital are an insignificant proportion of income from unincorporated enterprises. Tax offi- cials believe that most of the under-reporting/erosion of the tax base occurs among wealthy rice and plantation farmers, traders, and small and medium-scale entrepreneurs in general. 6.9 Under-reporting under the wealth tax is difficult to estimate, even approximately, but the simple fact that the economy has been growing while collections from this tax have been declining suggests that some evasion may be occurring. However, it is difficult to separate what could be considered as tax evasion from the foregone tax revenue brought about by an inadequate updat- ing of the the value of assets which constitutes the base of the tax. 6.10 The BTT has proven to be a reliable and growing source of revenues for the Government. It presently accounts for about 25% of total revenues and, in relative importance, ranks second only to import duties. Although it is dif- ficult to estimate the extent of under-reporting in this case, all indications are that it is large. For example, out of more than 14,000 private bus operators, less than 1,500 filed BTT tax returns in 1986. The compliance problem in general is so widespread that in 1986-87, 90% of the field audits resulted in additional assessments. -85- Table 6.4: PERSONAL INCOME TAX - SELECTED INDICATORS, 1982-87 1982 1983 1984 1985 1986 1987 a/ Rs Mn % RR Mn % Rs Mn % Re Mn RsMn % RsMn % Taxes on Labor 720 89 818 92 1,586 9 1,567 93 1.224 81 1,235 80 Professionals and Self Employed 414 51 462 52 605 34 861 51 573 38 625 40 Wage Earners 306 38 356 40 981 56 706 42 651 43 610 40 Taxes on Capital 87 11 73 8 174 10 115 7 289 19 300 20 Interest, Dividends and Rents 17 2 41 5 46 3 45 3 245 16 245 16 Others 70 9 32 3 128 7 70 4 44 3 55 4 Total 807 100 891 100 1,760 100 1,682 100 1,513 100 1L35 100 Memo Items Compensation of Employees 44,561 53,728 63,791 n.a. n.a. n.a. Income from Unincorpo- rated Enterprises 25,218 30,300 35,456 n.a. n.a. n.a. Capital Income b/ 11,942 13,719 15,085 n.a. n.a. n.a. Direct Taxes c/ 1,609 3.220 5,581 n.a. n.a. n.a. Gross National Income at Factor Cost 84,330 100,967 119,913 n.a. n.a. n.a a/ Preliminary Estimates P Includes Savings of Corporations c/ Personal and Corporate Income Tax. Source: Ministry of Finance and Planning and Department of Census and Statistics. -86- Economic Distortions 6.11 An ideal tax system should provide resources to the Government while interfering as little as possible with the production and consumption decisions made by economic agents. In the case of Sri Lanka, the excessive differentia- tion for tax purposes as to sectors of economic activities, type of incomes, forms of business organizations, etc., is bound to alter significantly the economic agents' decisions, thus introducing costly distortions. To illustrate the extent of the problem, the effective rate of taxation on value added in the case of BTT is estimated in Table 6.5. It indicates that the effective rate on value added varies from a low of 0.2% for agriculture to a high of 53% in paper manufacturing. This wide variation is not economically justified nor is it intended by the Government. Ironically, according to estimates prepared by the Presidential Tariff Commission, paper manufacturing has one of the highest rates of effective tariff protection in the industrial sector. This outcome highlights the inconsistencies arising from specific tax provisions being designed in isolation of a thorough analysis of the consequences of other taxes. Table 6.5: 1986 AVERAGE EFFECTIVE BUSINESS TURNOVER TAX (BTT) RATE ON OUTPUT AND VALUE-ADDED BY SECTOR Average Effective BTT Rate (%) On Sector Output Value Added AEriculture & Mining 0.1 0.2 Manufacturing 5.2 11.7 Food, Beverages & Tobacco 9.5 12.8 Textiles, Apparel and Leather 0.6 2.3 Wood & Wood Products 4.4 8.9 Paper 3.9 52.5 Chemical, Petroleum and Coal 6.1 30.7 Non-metallic 3.3 9.0 Basic Metals 9.5 30.5 Machinery 3.9 4.0 Other Manufacturing 4.2 0.5 Construction 0.6 1.0 Transport 0.4 0.8 Trade 1.0 1.2 Finance & Insurance 2.5 3.9 Utilities 1.2 1.4 Private Services 2.4 4.0 All Sectors 3.9 6.2 Sources: Department of Census and Statistics, Central Bank of Sri Lanka and Bank staff estimates. -87- B. Directions for Change 6.12 Several reforms would help in achieving the Government's objective of broadening the tax base and reducing its regressive effects on income distribu- tion and distortionary effects on resource allocation. The first would be a reduction in the number of rates used in the company's tax, and the BTT. In the case of the company's tax, this would mean unifying the existing five corporate tax rates (i.e. 20%, 30%, 40%, 50%) to the level of the marginal tax rate for personal income (now at 40%). This would ensure that capital income at the margin be taxed at no more than other forms of earnings. In the case of the BTT, the five rates used at present (1%, 3%, 5%, 10%, 20%) could be reduced to one or two. This would simplify the system considerably. Commodities considered "luxury goods" which are currently subject to 20% rates such as electrical and electronic appliances, autos, alcohol and cigarettes could be made subject to excises. To improve income distribution, taxation of sugar, wheat and rice should be reduced. 6.13 A second area for reform would be to eliminate and/or reduce tax holidays, and exemptions that erode or narrow the tax base. For the company's tax, this would mean bringing depreciation allowances under the tax code in conformity with economic depreciation and ensuring that the choice of assets is made independent of tax considerations. It would also be desirable to reduce the extent of tax holidays given to new industries. Their effect on investment is unclear and they discriminate against existing industries. Fcr the personal income tax, the Government has begun to broaden its coverage and increase its progressivty. Further steps in this direction would require freezing the basic exemption of Rs 27,000 (2.4 times 1986 per capita GDP). Second, consideration should be given to eliminating other exemptions and deductions and where appropriate, replacing them with tax credits. This would ensure that taxpayers are subject to a marginal rate which is in line with their overall income level and not just the taxed one. Possibilities include, for example, a tax credit against public sector wages rather than an exemption for public sector employees; elimination of deductions for dividends and inter- est; and taxing rental income and real estate profits as ordinary income. In the case of the Wealth Tax, it would be necessary to update regularly the assessments of marKet values. In the case of the BTT, along with broadening the tax base, credits for taxes paid on inputs through all stages of production and distribution should be allowed. With such changes, the BTT would become a value-added tax. -88- VII. The Devolution of Power to the Provinces and Provincial Financing Issues 7.1 The Peace Accord signed between the Governments of Sri Lanka and India on July 29, 1987, is expected to bring about a fundamental change in the country's political and administrative structure. As a result of the Accord, ratified by the 13th Amendment to the constitution that went into effect in October 1987, a new tier of provincial government aimed at giving more autonomy to the regions in fixing their expenditure priorities should be put in place during the course of 1988. As a result, the 25 existing districts will be grouped into 8 provinces that may later be transformed into 9, depending on the result of a referendum expected to be held during the course of the year.l/ A substantial amount of the public services now provided by the Central Minis- tries will be provided by the newly formed Provincial administrations. Each province will be governed by an elected Provincial Council (PC), formed by the majority party in the province, consisting of one Chief Minister and up to four other ministers. A Governor, appointed by the President, will coordinate the relationships between the Central Government and the Province. The next sec- tion examines the major implications of these changes. It highlights the lack of financial autonomy inherent in the financial arrangements that are currently being envisaged and suggests principles along which a fiscal decentralization could take place. A. The Extent of Devolution The Current System 7.2 Because Sri Lanka is a small island with a relatively good communica- tion network and easy internal accessibility, it has always been seen as an entity which could be efficiently administered centrally from Colombo. Vir- tually all public expenditure programs are conceived and carried out by Central Government ministries. This centralized structure is mitigated by the autonomy of the Government Agent (GA), who represents the Government in each of the 25 districts. The GA, appointed by the President, is administratively responsible to the Ministry of Home Affairs, and is hierarchily responsible for all Govern- ment officials in his district, whether they belong to his Ministry or not. The GA has traditionally been the main channel through which provincial needs and priorities have been conveyed to Colombo. As a Central Government offi- cial, however, he is not always considered by the district population as being sensitive to the latter's needs and interests. Even so, his influence on decision-making in Colombo is rather limited. In addition, there is no mechanism within government whereby inter-provincial needs can be compared and fiscal resources allocated accordingly. 1/ The referendum will allow the residents of the Eastern Province to decide whether to con- tinue to be part of one Province togeth',r with the North, or be a separate Province. -89- Table 7.1: SELECTED DEMOGRAPHIC AND SOCIO-ECONOMIC INDICATORS Area Popul. Population Unemploy- CDP/capita Rev./ sq.km. 000 Density/ ment Infant as % avg. Capita (000) (1981) sq.km. Rate a/ Mortality b/ (1981) 1986 Rs.c/ Sri Lanka 67 16,117 238 17.9 3.0 100 137 Western 4 4,194 1,111 24.4 3.0 26 237 Central 6 2,094 358 14.6 4.5 95 143 Southern 6 2,075 361 25.9 2.9 83 86 Northern 9 1,309 133 11.4 1.8 85 158 Eastern 10 1,109 106 10.4 2.1 84 70 N. Western 8 1,885 231 14.2 2.5 94 97 N. Central 10 953 88 9.5 1.8 96 66 Uva 9 988 111 10.1 3.4 93 97 Sabaragamuwa 5 1,588 310 17.8 3.4 96 81 a! Based on the 1981 Census. b/ Per thousand births. c/ Non-Central Government revenues collected in each district. Sources: Central Bank of Sri Lanka, and Department of Census and Statistics. 7.3 Insensitivity to regional issues was seen as an important cause for the 1971 youth uprising, and a first attempt at decentralization was made in 1973 when the Government issued the Political Authority Strategy instructing the ruling party to appoint political committees in each district to keep Colombo informad on economic and political affairs. This, however, did not improve the role of the districts in decision-making and a system of District Ministers was created in 1978 for that purpose. A Minister, chosen from Mem- bers of Parliament (MPs) elected by the district, was appointed by the Presi- dent in each of the 25 districts. He was authorized to sanction expenditures for the district's high priority needs without having to go through the compli- cated channels to secure funds from Colombo. This decentralized budget, however, amounted to only Rs 2.5 million per electorate (there were 160 elec- torates in the country, i.e., about 8 per district) and this is, on average, less than US$1 million per district which is clearly insufficient to attend to the district's priority needs. At the national level, this was less than 5% of the annual Central Government capital budget. The function of the District Minister was reduced to recommending district priorities to the center, which often yielded no tangible results and, in any case, duplicated the work of the GA. In addition, since the District Minister was appointed by the Central Government, he was not seen as a representative of the local population. -90- 7.4 The District Development Councils (DDC) were established in 1981 to overcome the shortcomings of the previous system. In addition to the District Minister, the DDCs consisted of at least five members, some of whom were elected and other Members of Parliament from the district, appointed by the President. The DDCs were put in charge of defining the district's development priorities and preparing developments plans for 15 sectors, including agricul- ture, education, health, rural development and land use and land development. In addition to the District Minister's Rs 2.5 million per electorate, the DDCs were provided with another Rs 2.5 million per electorate to be supplemented by local taxes, primarily on property. As indicated in Table 7.1, total local tax collections amounted to Rs 137 per capita in 1986, compared to Rs 2,000 per capita for taxes collected by the Central Government in the same year. Because of their modest resources, the DDCs have been forced to rely on the Central Ministries for preparing and implementing district development plans. Thus, if a DDC decided to rehabilitate an irrigation scheme, or build a feeder road, it had to depend on the relevant Central Ministry to formulate a project and initiate the procedures necessary for its inclusion in the Public Investment Program. The Proposed Administrative Structure 7.5 According to the 13th Constitutional Amendment, most of the functions now handled by the Central Ministries will be transferred to the provinces. (Annex 12 provides the list of the new provincial tax and expenditure assign- ments.) Several important areas of activity will be devolved to the PCs. First, the PCs will be responsible for provision of agricultural services for all agricultural projects (including integrated rural development projects) except inter-provincial irrigation and land settlement schemes, and plantation agriculture, while the Central Government will oversee national land and irrigation schemes, manage national research institutes and develop overall policy for agricultural development. Second, the PCs will be responsible for planning, designing, implementing, supervising and maintaining all irrigation works, other than irrigation schemes relating to rivers running through more than one province or inter provincial irrigation and land development schemes. Third, except for inter-provincial land development projects, the PCs will be in charge of all land and land development projects. Fourth, after devolution, the PCs will be responsible for food supply and distribution within the Province while the Food Department will continue to be responsible for import- ing food and coordinating food aid. Fifth, the Central Government would be responsible for formulating educational policies. While the PCs would be actually responsible for providing school facilities and recruiting staff for all State schools other than specified National schools, colleges and univer- sities will continue to be administered by the Central Government. Sixth, PCs will be responsible for regulation of transport services both for passengers and goods within the Province and provision of intra-provincial road transport services. -91- Cost and Impact of Devolution 7.6 The devolution of power should not require an increase in administra- tive costs since most of the functions to be devolved are already decentralized and an administrative structure already exists. In the case of irrigation for example, the country is divided into 16 so-called ranges, headed by a Deputy Director (DD), with his own budget for maintaining and operating irrigation facilities. Support staff to the DDs, such as draftsmen, accountants, administrative officers and clerks are resident in the 16 ranges. Instead of higher level staff responding to the Central Ministri6s in the old structure, they would now respond to a Provincial Ministry. Some additional administra- tive costs will be incurred for the new positicus for provincial Governor and his secretariat, and the Chief Minister and his Cabinet. It is important that these costs be kept at a miniraum. In principle, it should be possible to keep them at a modest level. Because of the existing decentralized administrative structure, the devolution of power is also not expected to create any major disruptions in the provision of public services even though it means that a substantial share of the budget and staff now handled by Central Ministries will be transferred to the provinces (Table 7.2). B. The Fiscal Dependency of the Provincial Councils The PCs Budget 7.7 Over one-half of the Central Government budget consists of transfers (current and capital) to public corporations, interest on public debt, and pensions. Most of the other half is expected to be transferred to the provin- ces (Table 7.2). Overall, about 40% of the Central Government budget will be spent by the PCs under the new syst.m. In contrast to their large spending responsibilities, the PCs will have virtually no independent resources. The taxes devolved to the provinces (see Annex 12), of which the BTT on wholesale and retail sales is the main one, will finance 1.ess than 10% of the PCs total expenditure. In addition, the PCs are not allowed to borrow without the Central Government approval, in the domestic or international market, and this also applies to both bilateral and multilateral loans. The PCs will thus be dependent on transfers from the Central Government. A Finance Commission, to be headed by the Governor of the Central Bank, consisting of the Secretary of the Treasury and one representative of each of Sri Lanka's three main ethnic communities, Sinhalese, Tamils and Muslims to be appointed by the President for a three year period, will make recommendations to the President on the provin- cial distribution of Central Government financial resources. According to the 13th Amendment, three parameters should guide the allocation of funds to each Province: i) the population of each province; ii) the per capita income of each province; and iii) the need to reduce social and economic disparities within and between provinces. -92- Table 7.2: DEVOLUTION - SELECTED INDICATORS 1987 As Z Staff Budget Devolved Budget Rs. M. 1987 Total Posted Departments or Ministriy Rs. M. Recur. Capital Total Budget Staff in Prov. Agriculture 973.3 220.1 309.7 529.8 54 3,516 3,000 Agrarian Serv. 191.5 105.7 53.7 159.4 83 5,823 4,000 Irrigation 1,122.0 54.5 1,020.8 1,075.3 96 4,200 3,200 Land Develop. 800.8 56.6 604.1 670.7 84 3,200 1,900 Food Supply & 156.5 149.7 2.3 152.0 97 2,000 1,600 Distribution Education 4,444.3 3,466.9 618.0 4,084.9 92 162,640 160,000 Transport 3,175.5 a/ Local Govt. 650.7 535.8 110.0 645.8 99 50,000 47,000 a/ Expenditures of Regional Transport Boards are mostly funded by their own revenues; existing published data do not provide the regional distribution of the subsidy. Sources: Ministries of Agricultural Development and Research; Lands and Land Development; Food Supply; Education; Local Government, Housing and Construction. 7.8 The PCs' financial dependency on the Central Government is the logical consequence of a centralized collection system. All import taxes as well as export taxes on tea, rubber, and coconuts are collected in Colombo. The Busi- ness Turnover Tax (BTT) and the income tax on corporations and individuals are also mostly collected in Colombo where incomes are higher than in the rest of the country and where most of the corporations have their headquarters. 7.9 The danger of a system where the PCs have large spending respon- sibilities but no fund raising capacities is that it may reproduce, at a more complex level, the DDCs inconclusive experience. The PCs will inherit an infrastructure, staff and functions, i.e., a level and structure of expendi- tures, which is already defined. While in principle the PCs are entitled to hire new staff, the creation of any new vacancy will be subject to the approval of the Ministry of Finance in Colombo. While in principle they will be respon- sible for conceiving and implementing development projects in provincial areas, they will have to obtain the Central Government concurrence for their financ- ing: thus, the only gain in relation to the DDCs will be the PCs' ability to express their economic and social development needs in a more structured fashion through their Chief Minister, and in the process of preparing their budget and discussing it with the Finance Commission. This should provide an -93- opportunity for the budget to be province-based rather than the present sec- tor-based budget formulated by Lhe line Ministries, as well as improve account- ability. 7.10 Only time will tell whether such a system will provide the PCs the degree of autonomy that is intended in the 13th Amendment. Some believe that unless PCs' develop their own tax resources, financial dependency on the Central Government will preclude a truly province-based definition of needs and priorities. Developing provincial tax systems may be undesirable, however. As discussed earlier, Sri Lanka's tax system is heavily biased towards expediency, e.g, taxing where it is administratively simple to tax, a tendency that has introduced large inequities and costly distortions in resource allocation. Because of the cost and complexities involved in developing non-distortionary tax bases, the development of a provincial tax base would necessarily exacer- bate the same tendency. 7.11 Rather than developing a provincial tax-base, the Government could develop, pari-passu with an improvement in its taxation system, stable and well defined criteria to channel resources to the provinces taking a fiscal federalist approach to the sharing of fiscal revenues. This would allow the PCs to work within a medium-term horizon and give a certain financial predict- ability to the PCs' budgets, an essential requirement for any kind of develop- ment planning. Several countries organized along federal lines, such as Brazil, India, Canada and Australia, have already accumulated vast experience on how to promote interprovincial equity through the distribution of fiscal resources. This experience could be used as a basis for estimating provincial fiscal needs and defining stable rules for the allocation of resources to the PCs, thus avoiding the arbitrariness and uncertainty that would necessarily follow from ad-hoc year-to-year decisions based on changing criteria and political pressures. -94-. STATISTICAL APPENDIX Standard Tables Table 1: Sri Lanka - National Accounts Summary (Millions of Rupees at Current Prices) Table 2: Sri Lanka - National Accounts Summary (Millions of US$ at Constant 1982 Prices) Table 3: Sri Lanka - Balance of Payments (Millions of US$ at Current Prices) Table No. 1.01 Population and Vital Statistics, 1963-87 1.02 Employment in the Public Sector, 1975-86 2.01 Gross Domestic Product: Composition and Sectoral Deflators, 1970-86 2.02 Growth Rates of GDP and Its Components, 1970-85 2.03 National Product and Expenditure, 1970-86 3.01 Balance of Payments, 1970-86 3.02 Composition of Exports, 1970-87 3.03 Selected Non-Traditional Exports, 1975-87 3.04 Composition of Imports, 1971-87 3.05 Aid Commitments, 1970-87 3.06 Aid Disbursements, 1970-87 3.07 Overall Aid Pipeline, 1986-88 4.01 External Debt Outstanding, by Type of Debtor, 1980-87 4.02 External Debt Outstanding, by Type of Creditor, 1980-87 5.01 Economic Classification of Government Revenue, 1978-88 5.02 Fiscal Oucturn - Derivation Table, 1978-88 5.03 Summary oi Budgetary Operations, 1978-88 5.04 Economic Classification of Current Expenditure, 1978-88 5.05 Operational Surplus/Deficits of Trading Enterprises, 1978-88 6.01 Interest Rates of Major Credit and Savings Institutions, 1980-87 6.02 Monetary Survey, 1978-87 -95- Table No. 7.01 Volume of Agricultural Production, 1975-86 7.02 Paddy Cultivated Area and Production; Rice Availability, Procurement and Distribution, 1975-87 7.03 Cultivated Area and Production of Subsidiary Food Crops, 1975-86 7.04 Tree Crops Production Statistics, 1975-87 7.05 Tea Producer Margin, 1975-87 7.06 Fertilizer Issues by Crops, 1975-87 8.01 Growth of Industrial Output, 1977-86 8.02 Industrial Investments Approved and Contracted by Greater Colombo Economic Commission, 1980-87 8.03 Industrial Investment Approvals by Foreign and Local Investment Advisory Committees, 1980-87 9.01 Petroleum Imports, 1975-87 9.02 Imports of Crude Oil by Country of Origin, 1975-87 9.03 Petroleum Product Exports, 1975-87 9.04 Domestic Production of Petroleum Products, 1975-87 9.05 Local Sales Volume of Petroleum Products, 1975-87 9.06 Production, Trade, and Apparent Consumption of Energy Petroleum Products, 1975-87 9.07 Petroleum Product Price Changes, 1970-87 9.08 CEB Electricity Generation, 1970-87 9.09 CEB Electricity Sales, 1970-87 10.01 Minimum Wage Rate, 1977-87 10.02 Colombo Consumer Price Index Numbers, 1977-87 10.03 Wholesale Price Index, 1977-87 10.04 Cost Indices for Selected Building Materials and Different Construction Activities, 1977-87 10.05 Administered Prices of Basic Consumer Goods, 1977-87 11.01 Selected Social Indicators, 1946-87 11.02 Health Statistics, 1975-86 11.03 Education Statistics, 1975-86 11.04 Tourism: Arrivals by Regions, 1975-87 -96- Table 1: SRI LANKA - NATIONAL ACCOUNTS SUNNARY (Millions of Rupees at Current Prices) 1980 1981 1982 1983 1984 1985 1986 1987 1. Gross Domestic 1. Product 66,527 85,005 99,238 121,601 153,746 162,375 179,474 199,308 2. Resource Gap (N-X) 15,022 13,666 18,757 18,365 9,132 19,409 20,839 23,529 3. Imports (G+NFS) 36,456 39,558 45,905 50,381 53,417 61,646 63,407 72,682 4. Exports (G+NFS) 21,434 25,892 27,148 32,016 44,285 42,237 42,568 49,153 5. Total Expenditures 81,549 98,671 117,995 139,966 162,784 181,784 200,313 222,837 6. Consumption 59,084 75,061 87,468 104,834 123,170 143,102 157,850 174,669 7. Central Government 5,685 6,310 8,242 9,889 11,935 16,599 18,480 20,469 8. Private 53,399 68,751 79,226 94,945 111,235 126,503 139,370 154,200 9. Investment 20,845 23,279 30,279 35,342 39,558 38,457 42,326 48,339 10. Fixed Investment 19,225 22,948 30,031 35,552 39,408 38,232 42,189 48,168 11. Changes in Stocks 1,620 331 248 -210 150 225 137 171 12. Domestic Saving 7,443 9,944 11,770 16,767 30,576 19,273 21,624 24,639 13. Net Factor Income -430 -1,867 -1,959 -3,214 -3,401 -3,400 -3,861 -4,302 14. Current Transfers 2,260 3,918 5,494 6,441 7,031 7,212 8,251 9,086 15. National Saving 9,273 11,995 15,305 19,994 34,206 23,085 26,014 29,423 Average Exchange Rates: 16. Rupees per US$ 16.53 19.25 20.81 23.53 25.44 27.16 28.02 29.44 17. Rupees per SDR 21.53 22.69 22.98 25.15 26.19 27.58 32.90 37.80 Note: The exchange rates in line 16 were used in converting from US dotli.rs to national currency items 3, 4, 13 and 14, taken from the balance of payments. -97- Table 2: SRI LANKA - NATIONAL ACCOUNTS SUMMARY (Millions of US$ at Constant 1982 Prices) 1980 1981 1982 1983 1984 1985 1986 1987 1. Gross Domestic Product 4,291 4,539 4,769 5,007 5,263 5,526 5,70 5,907 2. Terms of Trade Effect 204 121 0 265 531 180 129 176 3. Goss Domestic Income 4,495 4,660 4,769 5,273 5,794 5,705 5,893 6,083 4. Resource Gap (5-6) 1,080 760 901 759 323 579 642 672 5. Imports (G+NFS) 2,622 2,199 2,206 2,083 1,888 1,840 1,953 2,076 6. Capacity to Import 1,542 1,439 1,305 1,324 1,565 1,261 1,311 1,404 7. [Exports (G+NFS)] 1,338 1,318 1,305 1,058 1,034 1,081 1,182 1,229 8. Total Expenditures 5,371 5,298 5,670 5,766 5,585 6,105 6,405 6,579 9. Consumption 3,711 3,997 4,203 4,418 4,449 5,096 5,207 5,348 10. Central Government 357 336 396 417 431 591 610 627 11. Private 3,354 3,661 3,807 4,001 4,018 4,505 4,597 4,721 12. Investment 1,350 1,238 1,455 1,508 1,464 1,308 1,418 1,534 13. Fixed Investment 1,245 1,221 1,443 1,517 1,458 1,300 1,414 1,528 14. Changes in Stocks 105 18 12 -9 6 8 5 5 15. Domestic Saving 580 542 566 589 813 430 556 560 16. Net Factor Income -28 -100 -94 -132 -116 -116 -124 -128 17. Current Transfers 146 209 264 265 241 245 265 269 18. National Saving 698 652 735 722 937 559 697 701 Rupee Deflators (1982 = 100) 19. Gross Domestic Product 74.5 90.0 100.0 116.7 140.4 141.2 149.6 162.1 20. Imports (G+NFS) 66.8 86.5 100.0 116.2 136.0 161.0 156.0 168.2 21. Exports (G+NFS) 77.0 94.4 100.0 145.4 205.8 187.8 173.1 192.3 22. Total Expenditures 73.0 89.5 100.0 116.7 140.1 143.1 150.3 162.8 23. Government Consumption 76.5 90.3 100.0 114.0 133.0 134.9 145.7 157.0 24. Private Consumption 76.5 90.3 100.0 114.0 133.0 134.9 145.7 157.0 25. Fixed Investment 74.2 90.3 100.0 112.6 129.9 141.3 143.4 151.5 26. Changes in Stocks 74.2 90.3 100.0 112.6 129.9 141.3 143.4 151.5 27. Exchange Rate Index 125.9 108.1 100.0 88.4 81.8 76.6 74.3 70.7 -98- Table 3: SRI LANKA - BALANCE OF PAYMENTS (Millions of US$ at Current Prices) 1980 1981 1982 1983 1984 1985 1986 1987 1. EXPORTS (G+NFS) 1.297 1,346 1.305 1.360 1.75? 1.555 1.521 1.711 2. Merchandise (fob) 1,065 1,066 1.014 1,064 1,472 1,315 1,210 1,413 3. Non-factor Services 232 280 291 296 281 240 311 298 4. IMPORTS (G+NFS) 2.205 2,055 2,205 2.141 2.122 2.296 2.275 2.436 5. Merchandise (cif) 2.051 1,877 1,990 1,920 1.912 2,044 1.973 2.112 6. Non-factor Services 154 178 215 221 110 252 302 324 7. RESOURCE BALANCE -908 -709 -900 -781 -369 -741 -754 -725 8. Net Factor Income -26 -97 -94 -136 -132 -127 -138 -158 9. Factor Receipts 47 33 44 45 58 83 68 48 10. Factor Payments 73 130 138 181 190 210 206 206 11. (M< Interest Paid) (33) (49) (69) (92) (103) (110) (113) (104) 12. Net Current Transfers 136 203 264 274 277 266 285 311 13. Transfer Receipts 152 230 289 294 302 292 317 348 14. Transfer Payments 16 27 25 20 25 26 32 37 15. CURRENT BALANCE -798 -603 -730 -643 -224 -602 -607 -572 M< Capital Inflow 16. Net Direct Investment 43 49 63 37 36 25 28 25 17. Official Grant Aid 134 162 162 171 153 178 182 194 18. Net M< Loans (DRS) 230 342 394 312 295 262 337 160 19. Disbursements 287 386 467 387 394 381 501 405 20. Repayments 57 44 73 75 99 119 164 245 21. Other M< (net) 0 0 0 0 0 0 0 0 22. Net Short-Term Capital 157 31 7 38 26 -4 -13 80 23. Capital Flows NEI and errors and omissions 10 -14 77 86 19 28 149 29 24. Change in Net Reserves (- indicates increase) 220 33 27 -1 -305 113 -76 84 Memo Items: 25. Net Credit from IMF -4 +165 -6 -11 +9 -36 -9 -90 26. Disbursements 39 229 43 38 32 - 57 - 27. Repayments 43 64 49 49 23 36 66 90 Note: Underlying data from Central Bank of Ceylon except for lines 18-20 which are from World Bank's Debt Reporting System, and lines 25-27 from the IMF. -99- Table 1.01: POPULATION AND VITAL STATISTICS, 1963-87 Net Annual Population Birth Death Migration Natural Year Mid-Year Rate Rate Rate Growth Rate ('000)--- -----------(per '000)----------- % 1963 10.651 34.1 8.6 -1.0 2.55 1964 10,889 33.2 8.8 -1.0 2.44 1965 11.133 33.2 8.2 -0.5 2.50 1966 11.439 32.3 8.3 -0.5 2.40 1967 11.703 31.6 7.5 -0.6 2.41 1968 11,992 32.0 7.9 -0.7 2.41 1969 12,252 30.4 8.1 -0.9 2.23 1970 12.516 29.4 7.5 -0.8 2.19 1971 12,608 30.4 7.7 -2.7 2.27 1972 12.861 30.0 8.1 -3.2 2.19 1973 13,091 28.0 7.7 -3.8 2.03 1974 13,284 27.5 9.0 -4.0 1.85 1975 13,496 27.8 8.5 -2.3 1.93 1976 13.717 27.8 7.8 -3.8 2.00 1977 13,942 27.9 7.4 -3.7 2.05 1978 14.184 28.5 6.6 -2.8 2.19 1979 14.471 28.9 6.5 -3.0 2.24 1980 14.738 28.4 6.2 -4.6 2.22 1981 14.988 28.0 6.0 -3.4 2.20 1982 15,189 26.8 6.1 -6.0 2.07 1983 15.417 26.3 6.2 -6.8 2.01 1984 15.599 24.8 6.5 -4.9 1.83 1985 15.837 24.3 6.2 -0.6 1.81 1986 16,117 22.4 6.0 -0.1 1.64 1987 16.361 .. .. .. .. not available. Note: Figures for 1984-87 are provisional. Source: Registrar General's Department. Table 1.02: CIVIr.AN EMPLOTINT IN THE PUBLIC SECTOR. 1975-86 a/ 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 Government Institutions Administrative. Technical and Professional Officers of staff rank 16.133 9.846 16.901 17.512 18.366 18.439 18,525 18.634 18.762 18.987 19.112 19.631 Subordinate Employees b/ 150.891 118.309 185.893 195.922 206.319 207.533 209.242 210.305 212.807 215.361 218.780 223.714 Minor Employees c/ 113.714 124.130 82.514 87.172 94.141 95.908 99.071 99.938 100.172 101.374 103.103 105.423 School Teachers 109.855 111.097 119,004 126.437 133.269 135.270 134.991 136.978 137.302 138.950 140.824 142.630 Others 35.272 32.999 18,335 19,042 18.093 18.936 19.646 19.957 20.429 20.67 21.124 21.604 TOTtT. 425.865 406.381 422.647 446.085 470.188 476.086 481.475 485.812 489.472 495.346 502.943 513.002 Semi-Government Institutions d/ Administrative. Technical and Professional Officers of staff rank 14.793 14.648 11.402 12.239 13.005 13.833 14.304 14.605 14.892 14.505 14.192 13.198 Subordinate Employees b/ 37.596 50.656 50.184 60,711 72.936 80.503 83.309 84.951 85.703 83.474 81.414 75.715 Minor Employees c/ 169.930 455.899 516,806 606.302 621.760 627.656 631.563 632.849 634.039 617.554 602.765 560.571 Others e/ 36865 19.841 38,641 37,782 41.333 47.130 49,023 49,829 51.083 49,755 48,550 45,151 TOTAL 259.184 541.044 617.033 717.034 749.034 769.122 778.199 782.234 785.717 765,288 746.921 694.635 a/ The employees are classified according to categories and status. and include temporary and casual workers. h/ Clerical workers. Z/ Semi-skilled and unskilled workers. ;/ Growth of employment in this category (public corpovetions. universities, research institutions. etc.) was exaggerated in the period by the nationalization of agricultural lands. e/ Principals. teachers and other education workers. Source: The Central Bank of Sri Lanka. Page 1 of 2 pages Table 2.01: GROSS DOMESTIC PRODUCT: COMPOSITION AND SECTORAL DEFLATORS. 1970-86 (Current Factor Prices) 1970 1975 1976 1977 1978 1979 1980 Rs % of Rs I of Rs of Rs % of Rs % of RF Io Rs Z of Mn. GDP Mn. GDP Mn. GDP Mn. GDP Mn. GDP Mn. GDP Mn. GDP Production Agriculture b/ 3.732 28.3 7.798 30.4 8.133 29.0 10.644 30.7 12.332 30.5 13.412 26.9 17.151 27.6 Mining 95 0.7 450 1.8 639 2.3 595 1.7 732 1.8 947 1.9 1.249 2.0 Manufacturing 2,197 16.7 .5.158 20.1 5.620 20.0 8.023 23.1 8,094 20.0 9.484 19.1 11.048 17.7 Construction 744 5.6 1.018 4.0 1.164 4.2 1.13-t 3.3 1.965 4.8 3.218 6.5 5.552 8.9 Services 6.419 48.7 11,267 43.9 12.476 44.5 14.2P-, 41.2 17.356 42.9 22.721 45.6 27.246 43.8 Utilities 101 0.8 164 0.6 171 0.6 '9+ 0.6 239 0.6 398 0.8 601 1.0 Transport/Communications 1.258 9.5 2.079 8.1 2,286 8.1 2,723 7.9 2.994 7.4 4,744 9.5 5.293 8.5 Commercial Services 2.533 19.2 A, 975 19.4 5.456 49.5 6.239 18.0 7.536 18.6 9.435 19.0 10. 898 17.5 Financial Services 152 1.2 336 1.3 419 1.5 5.2 1.6 845 2.1 1.243 2.5 1.785 2.9 Housing Services 399 3.0 639 2.5 726 2.6 832 2.4 969 2.4 1.293 2.6 1,457 2.3 Public Administration 517 3.9 798 3.1 948 3.4 1.177 3.4 1.516 3.7 1.664 3.3 1.965 3.2 Other Services 1.459 11.1 2,276 8.9 2.470 8.8 2.582 7.4 3.257 8.1 3.944 7.9 5.247 8.4 Gross Domestic Product 13.187 100.0 25.691 100.0 28,032 100.0 34.684 100.0 40.479 100.0 49.782 100.0 62.246 100.0 Prices (Implicit Deflators) 0 Agriculture b/ 100.0 202.7 208.9 247.6 272.1 290.2 360.0 Mining 100.0 113.9 111.9 115.4 118.3 145.2 182.6 Manufacturing 100.0 227.9 237.0 340.4 318.5 356.7 412.1 Construction 100.0 156.9 169.9 183.0 247.5 335.2 520.8 Services 100.0 143.8 157.7 172.4 194.7 236.5 262.5 Utilities 100.0 140.2 140.2 148.1 151.3 209.5 287.5 Transport/Communications 100.0 138.9 160.4 181.8 186.3 276.5 287.9 Commercial Services 100.0 172.4 186.4 208.0 230.7 265.7 283.1 Financial Services 100.0 121.7 170.3 183.7 265.7 355.1 444.0 Housing Fnrvices 100.0 138.0 155.5 175.2 194.2 249.6 265.4 Publie Administration 100.0 109.5 124.7 148.8 177.5 183.9 204.9 Other Services 100.0 122.0 125.9 123.0 147.2 165.9 204.0 Gross Domestic Product 100.0 171.4 181.7 215.7 232.6 269.1 318.0 Table 2.01 Page 2 of 2 pages 1981 1982 1983 1084 1985 a/ 1986 a/ Re Z of Rs % of Rs %of R I of Rs Z of Mn. GDP Mn. GDP mn. GDP (n P Mn. GDP Mn. GDP Production Agriculture b/ 21.977 27.7 24.964 26.4 32.180 28.3 40.138 28.7 41.069 27.8 44.355 27.1 Mining 1.514 2.0 2,238 2.4 2,790 2.5 3,153 2.3 3.328 2.2 4.155 2.5 Manufacturing 12.883 16.2 13.601 14.4 15.958 14.0 20.890 14.9 21.849 14.7 24.869 15.2 Construction 7.001 8.8 7.959 8.4 9.807 8.6 11,180 8.0 11.640 7.8 12.272 7.5 Services 35.962 45.3 45.917 48.4 53.134 46.6 64.678 46.1 70.435 52.5 78.062 47.7 Utilities 808 1.0 1.089 1.1 1.428 1.2 1.633 1.2 2.042 1.4 2,252 1.4 Transport/Communications 7.307 9.2 10.666 11.3 12.554 11.0 15.499 11.0 16.554 11.1 17.911 10.9 Commercial Services 14.197 17.9 19.694 20.8 21.759 19.1 27.192 19.4 29.261 19.7 31,808 19.4 Financial Services 2.463 3.1 3.715 3.9 4.183 3.7 4.731 3.4 5.693 3.8 6.840 4.2 Housing Services 1.768 2.2 3.250 3.4 3.696 3.2 3.958 2.8 4.162 2.8 4.578 2.8 Public Administration 2.350 3.0 2.899 3.0 4.100 3.6 5.322 3.8 6.376 4.4 7.945 2.9 Other Services 7.069 8.9 4,604 4.9 5.414 4.8 6.343 4.5 6.347 4.3 6.728 4.1 Gross Domestic Product 79.337 100.0 94.679 100.0 113.878 100.0 140.039 100.0 148.321 100.0 163.713 100.0 Prices (Implicit Deflators) Agriculture b/ 431.2 477.2 567.7 733.7 691.2 727.6 ining 212.3 301.6 349.0 388.3 403.9 479.2 anufactuxing 456.8 460.3 535.7 624.5 620.9 651.8 Construction 677.1 785.7 958.6 1,093.9 1.133.0 1.177.7 Services 325.7 388.6 421.5 482.4 502.6 534.0 Utilities 345.3 423.7 521.1 559.3 658.7 678.3 Transport/Communications 373.4 513.0 570.6 639.4 655.4 687.0 Commercial Services 351.9 460.7 483.3 568.8 587.9 615.1 Financial Services 533.1 718.6 727.5 750.9 822.7 950.0 Housing Services 305.4 513.9 593.3 623.3 644.3 695.7 Public Administration 235.7 263.1 284.9 336.2 378.6 396.9 Other Services 254.4 154.8 182.6 211.8 223.2 246.5 Gross Domestic Product 383.2 435.2 498.5 583.3 588.4 620.6 a/ Provisional. b/ Includes forestry and fishing. Source: The Central Bank of Sri Lanka. Table 2.02: GROWTH RATES OF GDP AND ITS COMPONDITS. 197u- 35 a/ (Rs Million at Constant 1970 Factor Prices) 1970 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 b/ 1985 b/ 1986 b/ Agriculture c/ 3.732 3.847 3.894 4.299 4.532 4.622 4.766 5.097 5.231 5.492 5.471 5.942 6,096 Mining 93 395 571 515 619 652 684 713 742 800 812 824 867 Manufacturing 2.197 2.263 2.371 2.357 2.541 2.659 2.681 2.820 2.955 2.979 3.345 3.519 ?.815 Construction 744 649 685 619 794 960 1.066 1.034 1.013 1.023 1.022 1.027 1.042 Services 6.419 7.833 7.910 8.288 8.915 9.608 10.378 11.042 11.815 12.606 13.409 14.015 14.618 Utilities 101 117 122 131 158 190 209 234 257 274 292 310 332 Transport/Communications 1.258 1.497 1.425 1.498 1.607 1.716 1.838 1.957 2.079 2.200 2.424 2.526 2.607 Commercial Services 2.533 2.886 2.928 2.999 3.267 3.551 3.849 4.034 4.275 4.502 4.781 4.977 5.171 Financial Services 152 276 246 295 318 350 402 462 517 575 630 692 720 Housing Services 399 463 467 4/5 499 518 549 579 611 623 635 646 658 Public Administration 517 729 760 791 854 905 959 997 1.102 1.439 1.583 1.684 2.002 Other Services 1.459 1.865 1.962 2.099 2.212 2.378 2.572 2.779 2.974 2.965 2.995 2.844 2.730 Gross Domestic Product 13.187 14.987 15.431 16.078 17.401 18.501 19o575 20.706 ;1.756 22.844 24.009 25.209 26.293 Annual Growth Rate (Z) Agriculture c/ 3.8 -2.4 1.2 10.4 5.4 2.0 3.1 6.9 2.6 5.0 -0.4 8.6 2.6 Mining 18.5 33.9 44.6 -9.8 20.2 5.3 4.9 4.2 4.1 7.8 1.5 1.5 5.2 Manufacturing 5.7 4.6 4.8 -0.6 7.8 4.6 0.8 5.2 4.8 0.8 12.3 5.2 8.4 Construction 14.4 -8.8 5.5 -9.6 28.3 20.9 11.0 -3.0 -2.0 1.0 -0.1 0.5 1.5 Services 2.8 4.8 1.0 4.7 7.6 7.8 8.0 6.4 7.0 6.7 7.0 3.9 4.3 Utilities 21.0 8.3 4.3 7.4 20.6 20.3 10.0 12.0 9.8 6.6 6.7 6.0 7.1 Transport/Communications 1.4 2.4 -4.8 5.1 7.3 6.8 7.1 6.5 6.2 5.8 10.2 4.2 3.2 Commercial Services 2.4 4.2 1.5 2.4 8.9 8.7 8.4 4.8 6.0 5.3 6.2 4.1 3.9 Financial Services 3.8 29.6 -10.9 19.9 7.8 10.1 14.9 14.9 11.9 11.2 9.6 9.9 4.0 Housing Services 3.6 1.8 0.9 1.7 5.1 3.8 6.0 5.5 5.5 2.0 2.0 1.5 1.9 Public Administration 3.0 6.0 4.3 4.1 8.0 6.0 6.0 4.0 10.5 30.6 10.0 6.4 18.9 Other Services 3.9 5.0 5.2 7.0 5.4 7.5 8.1 8.0 7.0 -0.3 1.0 -4.7 -4.0 Gross Domestic Product 4.3 2.8 3.0 4.2 8.2 6.3 5.8 5.8 5.1 5.0 5.1 5.0 4.3 a/ From 1983 onwards, components do not add to total because new constant price series for 1982-84 with base 1982 has been linked with old series which is in constant 1970 prices. b/ Provisional. c/ Includes forestry and fishing. Source: The Central Bank of Sri Lanka. Table 2.03: NATIONAL PRODUCT AND EXPENDITURE. 1970-86 (Rs Million at Current Prices) 1970 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 PRODUCT GDP at Factor Cost 13.187 25.691 28.032 34.684 40.479 49.78& 62.246 79.337 94.09l 113.878 140.039 148.321 163.713 Indirect Taxes less Subsidies 477 886 2.171 1.723 2.186 2.605 4.281 5.668 7.538 10.315 12.719 16.773 18.872 GDP at Market Prices 13,664 26.577 30,203 36.407 42.665 52.387 66.527 85.005 102.217 124.193 152.758 165.094 182.585 Net Factor Income from Abroad -220 -213 -282 -252 -237 -240 -430 -1.867 -1.959 -3.214 -3.401 -3.400 -3.861 GNP at Market Prices 13.444 26.364 29.921 36.155 42.428 52.14/ 66.095 83.137 100.258 120.979 149.357 161.694 178.724 ERPENDITURE Consumption 11.505 24.422 26.012 29.816 36.148 45.169 59.084 75.061 87,468 104.834 123.170 143.102 157.850 Public 1.623 2,680 3.021 3.118 4.043 4.798 5.685 6.310 8,242 9.889 11.935 16.599 18.480 Private 9.882 21.942 22.991 26.698 32,105 40.371 53.399 68.751 79.226 94,945 111.235 126.503 139.370 Gross Fixed Capital Pormation 2.359 3.699 4.595 5.035 8.521 13,246 20.845 23.279 30.279 35.342 39.558 38,457 42.326 Government 6 Public Enterprises c/ 570 1.095 1.631 1.542 3.077 3.809 4.709 4.126 4.866 5.963 7.075 7.767 9,634 Public Corporations d/ 451 426 588 861 2.056 2.620 7.553 8.360 ) Private 1.338 2.378 2.376 2.632 3.388 6.817 8.583 10.793 ) 25,413 29.379 32.483 30.097 32.692 Change in Stocks 230 441 301 224 33 281 1.620 331 248 -210 150 225 137 Exports of Goods & NFS 3,478 7.306 8.773 12,311 14.835 17.660 21.434 25.892 27.148 32.016 44,285 42.237 42.568 Imports of Goods 6 NPS 3.908 9.291 9.478 10.979 16.872 23.969 36.456 39.558 45905 50.381 53.417 61.646 63.407 Memorandum Items: Gross National Savings e/ 1.930 1.974 4.003 6.539 6.622 7.732 9.272 11,994 -11.844 20,204 34.056 22,861 25.787 External Current Account Balance I/ -659 -2.166 -894 1.280 -1,932 -5.795 -13.193 -11.616 15.223 -15.138 -5.502 -15.597 -16,449 (Percent of GDP at Current Market Price) GDP (at market prices) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 External Resources ("et imports of GNFS) g/ 3.1 7.5 2.3 -3.7 4.8 12.0 22.5 16.1 18.4 14.8 6.0 11.8 11.5 Total Resources Available (= total uses) 103.1 107.5 102.3 96.3 104.8 112.0 122.5 116.1 118.4 114.8 106.0 111.8 111.5 Consumption 84.2 91.9 86.1 81.9 84.7 86.2 88.8 88.3 85.6 84.4 80.6 86.7 86.4 j Public 11.9 9.3 10.0 8.6 9.5 9.2 8.5 7.4 0.1 8.0 7.8 10.1 10.1 Private 72.3 82.6 76.1 73.3 75.2 77.0 80.3 80.9 77.5 76.4 72.8 76.6 76.3 Gross fixed Capital Formation 17.0 13.9 15.2 13.8 20.0 25.3 31.3 27.4 29.6 28.5 25.9 23.3 23.2 Government 6 Public Enterprises c/ 4.2 4.1 5.4 4.2 7.2 7.3 7.1 4.9 4.8 4.8 4.6 4.7 5.3 Public Corporations d/ 3.3 1.6 1.9 2.4 4.8 5.0 11.3 9.8 10.7 Private 9.8 8.2 7.9 7.2 7.9 13.0 12.9 12.7 14.2 ) 23.7 21.3 18.6 17.9 Change in Stocks 1.6 1.7 1.0 0.6 0.1 0.5 2.4 0.4 0.2 -0.2 0.1 0.1 0.1 Memorandum Items: Gross National Savings E/ 14.1 7.4 13.2 17.9 15.6 14.8 13.9 14.1 14.2 16.4 22.2 13.8 14.1 External Current Account Balance f/ -4.8 -8.1 -3.0 3.5 -4.5 -11.1 -19.8 -11.? -15.3 -12.2 -3.6 -9.5 -9.1 a/ Provisional. b/ Estimates. c/ Includes Railways. Ports. larbor. Warehouse. Posts and Telecommunications. Since 1979. the Ports, Harbor. and Warehouse have become Public Corporations and are no longer included under Public Enterprises. d/ Autonomous state-owned enterprises. ;/ Equals Gross Fixed Capital Formation plus Change in Stocks plus External Current Account Balance. 7/ External transactions during 1970-77 converted to rupee values using FEEC rates. g/ Net imports of goods and non-factor services. Source. The Central Bank of Sri Lanka. Table 3.01: BALANCE OF PATMENT.S 1970-86 (US$ Million) 1970 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 5/ 183 / 1984 e/ 1985 s/ 1986 a/ CURRENT ACCCUNT Receipts 382 435 586 644 644 869 k.00 1.235 1.496 1.609 1638 1, 99 2.113 1.930 1.905 Merchandise Exports. f.o.b. 339 367 511 $55 556 747 846 982 1.065 1.066 1.014 1.C4 1.472 1.315 1.210 Port. Transportation. & Insurance 19 28 26 29 25 27 20 29 44 50 59 69 72 70 98* Foreign Travel 4 9 14 18 23 33 48 68 99 117 129 102 102 82 83 Covernment Expenditure 5 5 5 6 6 6 7 8 8 10 13 16 12 it 14 Other Services 10 16 36 20 37 26 29 48 81 103 90 109 95 77 1t5 Investment Income 2 3 6 7 4 12 20 40 47 33 44 45 58 83 68 Private Remittances 3 7 8 9 13 SR 39 60 152 230 289 294 302 292 317 Payments 453 473 764 831 09 71 1133 1.607 2.294 2 212 2.368 2.32 2 337 2 32 Nerchandise Imports. c.i.f. 392 413 701 757 640 716 999 1.450 2.051 1.877 1.990 1.920 1.912 2.044 1.973 Port. Transportation. & Insurance 5 to 10 12 11 12 20 26 34 38 47 60 57 0 101 Foreign Travel 3 2 I 2 3 3 29 29 34 36 40 39 48 46 54 Goverment Expenditure 5 3 4 4 4 5 5 5 7 8 14 12 12 17 1s Other Services 20 38 18 24 21 20 28 30 79 96 110 110 93 109 128 Mon-Honetary Cold - - - I - - - - - - 4 - - Investment Income 23 20 22 25 24 27 35 55 73 130 130 181 190 210 206 Private Remittances 5 7 8 6 6 8 17 12 16 27 25 20 25 26 32 Net Current Account -71 -38 -178 -187 -65 +78 -124 -372 -798 -603 -730 -643 -224 -602 -607 CAPITAL ACCOUNT Non-Monetary Capital (net) 10 86 128 140 132 102 225 356 536 530 680 584 515 534 520 Medius and Long Term Capital i 78 1 7 25 22 21 296 18 13 80 706 652 02 Direct Private Investment 1 1 2 1 I 1 2 49 46 52 66 39 37 26 29 Grants 13 13 42 77 58 60 58 144 138 162 162 Ill 153 178 182 Loans 50 52 70 126 IIl 136 236 186 262 ( ( ( ( ( Suppliers' Credits 14 38 65 52 42 17 - 39 60 (3V9 (576 (496 (462 (462 (491 Remments 34 39 59 100 82 83 68 62 127 83 124 122 137 132 182 Direct Private investment 2 1 1 1 - 2 - 2 3 3 3 2 1 1 1 Loans 19 23 26 39 28 47 43 44 ( ( ( ( ( ( 75 Suppliers' Credits 13 15 32 60 54 34 25 16 (124 (80 (121 (120 (136 (131 6 Short Term (net) +26 +21 + 8 -16 . 2 -29 - 3 - +157 +31 47 +38 -26 -4 -13 WD Allocations +13 - - - - - - +16 +16 +13 - - - - - Capital. a.e.i. b/ + 2 -11 - 7 -10 -10 # 3 - 7 +48 +26 -4 +16 +22 +40 -4t +24 overall Balance c/ +t4 +37 -57 -57 +57 +183 +94 +48 -220 -33 -27 +1 +305 -113 -76 Monetary Novements -14 -37 +57 +57 -57 -183 - -48 4220 33 27 1 -305 113 7 Memorandum Items: INF Transactions d/ - 4 - 5 4.43 428 +10 +47 +20 +67 -4 4165 -6 -11 +9 -36 -9 Draainge 23 21 37 52 32 70 48 105 39 229 43 38 32 - 57 Reparchases 27 26 24 24 22 23 28 38 43 64 49 49 23 36 66 s/ Revised figures for 1985. b/ Includes errors and omissions. Z/ Equals change in net international reserves. d/ IMF Trust Fund borrowings are shown under loans io non-eonetary capital: these amounted to $51 million in 1978. $38 million in 1979, $33 million in 1980. and $0.4 million in 1981. Wote: This table is prepared by the Central Bank usinB unadjusted Custom data for merchandise import and export estimates. TWe trade numbers io this table, as Well as those In tables 3.02. 3.03. and 3.04 thus differ from those used elsewhere by tie S eCentral Bank. &ource. Cetrql Bank of Sri Lanka. Table 3.02: COMPOSITION OF EXPORTS. 1970-87 (US$ Million) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 a/ VALUE ($ Million) Tea * 188 193 194 197 204 274 248 410 411 367 373 335 305 353 620 442 330 321 Rubber 74 52 44 92 111 93 105 107 130 160 157 150 112 121 130 94 94 88 Major Coconut Products 40 47 44 22 59 55 44 36 62 83 46 53 48 60 61 88 57 45 Copra (4) (4) (9) (1) (-) (1) (1) (-) (1) (1) (... ) (3) (3) (3) (3) (4) (3) (2) Coconut Oil (20) (25) (22) (4) (21) (27) (22) (4) (21) (33) (3) (10) (17) (18) (12) (35) (24) (8) Desiccated Coconut (16) (18) (13) (17) (38) (27) (21) (32) (41) (50) (42) (40) (28) 8) 46) (49) (30) (35) Sub-total 302 292 ,282 311 374 422 397 553 603 610 576 538 465 534 811 624 481 455 Other Exports b/ 40 36 53 98 148 136 171 188 245 369 488 555 566 533 641 709 735 752 of which: Precious & Semi-precious stones (1) (1) (2) (22) (16) (26) (31) (34) (34) (31) (40) (33) (33) (40) (24) (21) (27) (45) Petroleum Products (5) (4) (12) (20) 2) 50) (48) (64) (59) (124) (189) (17) (158) 114) (129) (143) (84) (81) TOTAL EMPORTS 342 328 335 409 522 558 568 741 848 979 1.064 1.093 1.031 1.067 1.452 1.333 1.216 1.207 (Percent of Total Export Value) Tea 55.0 58.8 57.9 48.2 39.1 49.1 43.7 55.3 48.5 37.5 35.1 30.6 20.6 33.1 42.7 33.1 27.2 26.6 Rubber 21.6 15.9 13.1 22.5 21.3 16.7 18.5 14.4 15.3 16.3 14.8 13.7 10.9 11.4 8.9 7.1 7.7 7.3 Major Coconut Products 11.7 14.3 13.1 5.4 11.3 9.9 7.7 4.9 7.3 8.5 4.3 4.8 4.6 5.6 4.2 6.6 4.7 3.7 Sub-total 88.3 89.0 84.2 76.0 71.6 75.6 69.9 74.6 71.2 62.3 54.2 49.1 45.1 50.1 55.8 46.8 39.6 37.7 Other Exports b/ 11.7 11.0 15.8 24.0 28.4 24.4 30.1 25.4 28.9 37.7 45.8 50.9 54.9 49.9 44.2 53.2 60.4 62.3 TOTAL EXPORTS 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 10U.0 100.0 100.0 100.0 100.0 VOLUME Tea (million kg) 208 207 190 206 175 213 200 186 193 188 185 183 181 158 204 198 208 178 Rubber (million kg) 161 129 130 128 161 137 136 136 138 128 121 133 131 125 126 120 110 96 Major Coconut Products (million kg) c/ 123 140 180 59 65 114 108 39 71 73 35 56 79 81 46 127 151 74 Copra (million kg) (16) (17) (44) (3) (-) (1) (1) (-) (1) (1) (...) (2) (3) (4) (2) (7) (10) (8) Coconut Oil (million kg) (58) (70) (87) (18) (22) (54) (61) (9) (30) (32) (3) (17) (34) (35) (12) (67) (81) (16) Desiccated Coconut (million kg) (49) (53) (49) (38) (43) (59) (46) (30) (40) (40) (31) (37) (42) (42) (32) (53) (60) (50) a/ Provisional (January-November). / Other export, include coconut by-products, spices, minor agricultural crops, precious and semi-precious stones, manufactured goods, minerals, and petroleum re-exports. c/ The approximate conversi-n ratios for nuts into kilograms for major coconut products are as follows: 4.93 nuts = 1 kg of copra: 13.33 nuts = 1 kg of coconut oil; and 6.80 nuts = 1 kg of desiccated coconut. Note: Due to rounding off. components may not add up to totals. Data not necessarily consistent with exports data as compiled on payments basis (Table '.01). Source: Adjusted Sri Lanka Customs data as r(ported by the Central Bank of Sri Lanka. Table 3.03: SELECTED NON-TRADITIONAL EXPORTS. 1975-87 (uS$ million) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 a/ Food. Beverages and Tobacco 5.64 11.17 11.93 16.42 23.60 18.98 22.88 30.20 22.97 25.71 19.66 25.83 23.05 of which: Fish and Fish Products (3.13) (8.88) (9.30) (14.89) (19.75) (14.95) (17.99) (20.79) (17.89) (23.62) (17.25) (22.27) (17.85) Textiles and Wearing Apparel 3.49 8.24 12.70 30.66 71.18 110.45 157.05 168.27 201.36 297.41 293.04 343.69 380.60 of which: Garments (3.30) (8.12) (11.81) (30.39) (70.88) (109.38) (153.68) (165.49) (197.02) (289.26) (283.51) (330.70) (365.77) Essential Oils 0.96 1.24 1.29 1.63 - - - Chemical Products 1.58 1.39 1.06 1.43 3.15 4.25 3.54 10.80 4.89 7.52 12.98 16.26 13.61 Petroleum Products 50.03 60.27 63.74 59.38 123.72 188.86 175.39 157.62 113.99 129.25 142.71 84.15 81.09 of which: Naphtha (8.09) (12.47) (10.53) (9.72) (28.01) (38.71) (29.30) (20.70) (14.61) (17.20) (29.55) (16.95) (16.98) Bunkers and Aviation Fuel (41.74) (43.77) (42.77) (41.62) (87.56) (119.79) (104.41) (102.03) (79.11) (96.38) (86.02) (61.16) (62.00) Fuel Oil (0.20) (4.03) (10.44) (8.04) (8.15) (30.36) (41.64) (34.89) (20.27) (15.66) (27.14) (6.04) (2.11) Leather. Rubber, Wood and Ceramics 3.10 3.73 1.67 4.49 8.42 15.00 14.83 22.03 21.69 33.26 33.60 41.68 49.44 Natural Graphite 1.76 1.89 2.20 3.80 4.79 4.82 4.56 2.87 2.59 3.60 4.47 4.38 3.95 Metallic Ores and Iron Pyrites 0.96 0.58 - 0.76 3.36 2.89 1.57 2.45 3.01 1.75 3.05 4.59 - Ilmenite 1.04 1.05 0.57 1.52 0.53 0.39 0.82 0.78 0.54 1.70 3.05 5.53 5.02 Precious and Semi-precious Stones 25.56 30.90 28.92 34.02 31.48 40.17 32.95 32.91 39.97 24.24 20.64 26.95 45.35 Other 2.12 0.33 0.45 1.14 1.30 4.97 6.79 10.74 12.02 16.15 24.88 55.84 39.79 TOTAL 96.24 120.79 124.53 155.25 271.53 390.78 420.38 438.72 423.03 540.59 558.09 608.90 641.92 a/ Provisional (January-November). Source: Central Bank of Sri Lanka. I_ I Table 3.04: COMPOSITION Of IMPORTS. 1971-87 a/ (US$ million) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 / CONSUMER GOODS 191.6 178.2 222.5 321.5 376.0 204.7 308.6 358.8 501.7 614.4 479.2 414.0 494.7 434.5 525.0 664.2 641.2 of which: Food and Drink 154.8 152.8 195.0 293.2 357.4 181.3 255.4 263.1 307.5 387.6 254.1 171.1 228.5 196.0 217.4 240.8 213.9 Rice 32.9 26.8 42.2 108.3 150.6 75.9 107.6 44.1 57.2 53.3 51.6 44.4 32.5 7.7 40.1 37.5 15.9 Flour 34.7 32.2 70.8 128.9 142.1 80.7 109.4 145.8 107.0 110.4 1.5 3.0 4.6 1.1 7.6 3.2 3.0 Refined sugar 50.0 41.3 50.2 28.6 35.2 7.6 21.4 32.9 60.1 122.5 146.9 46.6 84.4 52.9 73.1 63.0 68.0 Milk and milk products 7.9 9.5 10.9 10.5 11.6 9.6 11.7 25.4 30.8 32.5 25.1 24.7 41.6 29.5 27.6 32.9 35.7 Fish 12.1 13.7 8.1 *7.5 6.2 3.0 2.1 2.1 12.2 17.8 5.3 15.6 14.9 24.5 27.8 30.1 30.0 Textiles (including clothing) 17.4 8.0 8.6 8.9 2.8 5.8 17.3 34.0 98.7 104.1 121.3 104.1 115.8 116.9 139.9 226.8 236.3 Other Consumer Goods 13.7 10.5 13.1 12.8 5.9 10.6 25.2 49.8 78.9 107.1 93.8 121.7 133.0 121.6 167.7 196.7 190.9 Medicinal & pharmaceutical products 5.7 6.8 5.6 6.6 9.8 7.0 10.5 11.7 16.2 15.7 10.0 17.1 17.3 19.9 22.0 29.7 26.5 INTERMIATE COODS 65.4 83.7 127.3 288.7 267.8 267.0 320.6 358.6 586.4 938.8 932.6 1.039.8 923.2 933.6 940.0 796.4 835.1 of which: Wheat and mealin 5.9 7.3 9.5 17.6 19.3 17.1 17.7 8.7 19.0 34.8 98.2 85.9 99.5 97.1 101.8 84.6 66.6 Fertilizer 9.9 10.5 17.3 33.2 29.5 11.7 31.5 16.1 43.2 81.0 62.6 26.9 26.4 43.4 58.1 45.8 33.2 Petroleum 4.4 6.? 46.1 136.1 123.7 137.6 160.4 154.1 251.2 489.4 448.4 589.7 46R.5 419.9 404.5 224.6 289.0 Chemicals, elements and compounds 11.1 12.2 16.7 34.9 16.3 10.6 16.3 28.6 32.2 32.9 34.5 35.0 35.4 40.4 33.2 56.6 47.6 Dyeing, tanning and coloring . materials 1.9 2.3 1.9 3.3 2.7 3.1 4.5 7.7 9.6 12.3 12.0 11.8 9.4 11.5 10.6 15.5 15.6 Paper and paperboard 8.1 7.0 6.2 9.8 9.9 6.6 7.4 15.3 25.6 27.6 38.1 32.4 29.2 25.0 37.1 41.4 47.8 INVESTMENT GOODS 70.7 73.0 70.6 68.7 92.6 76.0 82.6 215.9 350.5 492.5 413.5 556.9 513.3 478.4 382.4 376.8 345.6 of which: Building materials 19.9 20.2 16.7 22.1 24.0 12.3 9.8 9.6 23.6 36.9 27.3 26.8 50.0 28 6 33.1 32.4 21.7 Transport equipment 12.8 17.8 14.8 13.7 16.4 20.7 27.3 63.3 103.7 146.5 115.9 265.7 162.6 119.2 92.0 52.0 41.3 Machinery and equipment 33.7 30.2 35.0 27.5 45.7 43.0 37.0 118.4 186.2 254.7 201.5 190.5 223.6 209.7 175.6 208.0 202.2 UNCLASSIFIED IMPORTS 7.2 9.2 3.9 5.9 8.4 6.4 9.6 7.6 8.6 7.1 6.9 4.8 4.9 22.4 142.4 111.7 19.8 TOTAL IMPORTS 334.9 344.1 424.3 684.8 744.8 554.1 721.4 940.9 1,447.2 2,052.8 1,832.2 2,015.4 1,936.1 1,68.9 1,989.8 1,949.1 1,841.7 --------------------------------------------------- PERCENT OF TOTAL IMPORTS ------------------------------------------ Memorandum Items A. Consumer Goods 57.2 51.8 52.4 46.9 50.5 36.9 42.8 38.1 34.7 29.9 26.2 20.5 25.6 23.2 26.4 34.1 34.8 B. Intermediate Goods 19.5 24.3 30.0 42.2 36.0 48.2 44.4 38.1 40.5 45.7 50.9 51.6 47.7 49.9 47.2 40.9 45.3 C. Investment Goods 21.1 21.2 16.6 10.0 12.4 13.7 11.4 22.9 24.2 24.2 22.6 27.6 26.5 25.6 19.2 19.3 18.8 D. Food and Drink 46.2 44.4 46.0 42.8 48.0 32.7 35.4 28.0 21.3 18.9 13.9 8.5 11.8 10.5 10.9 12.4 11.6 E. Food. Fertilizer and Petroleum 50.5 49.3 60.9 67.5 68.6 59.7 62.0 46.1 41.6 46.6 41.8 39.0 37.4 35.3 34.2 26.2 29.1 F. Imports other than *" 49.5 50.7 39.1 32.5 31.4 40.3 38.0 53.9 58.4 53.4 58.2 61.0 62.6 64.7 65.8 73.8 70.9 a/ Based on customs data and, therefore, not necessarily consistent with balance of payments data in Table 3.01. b/ Provisional (January-November). Note: Due to rounding off. components may not add up to totals. Source Ad4usted Sri Lanka Customs data as reported by the Central Bank of Sri Lanka. -109- Table 3.05: AID MITIMNTS, 1970-87 (USS mållion) 1970 17 192 197 197 59 19_76 1977 1978 1979 1980 198. 192 1983 1,984 198 198 1987 AID GIROUP A.trall - 2.1 2.1 0.4 7.8 6.1 2.0 1.6 7.3 3.7 2.1 8.6 8.1 4.4 4.5 1.0 lum- - - - - - - - - - 1.6 0.7 0.8 - - Canada 4.9 8.7 4.6 9.7 5.2 19.2 12.4 16.6 27.5 10.4 71.3 30.8 12.6 20.7 53.9 8.2 0.1 47.2 D.-ark - - 2.8 - - 3.7 - 0.5 - 5.8 - 2.3 0.4 6.1 - - 6.7 2.8 EEC 1.2 - - 1.4 7.4 6.5 5.4 6.9 6.7 9.5 10.2 27.8 6.7 - 28.0 ö.5 4. - Finland 1/ - - - - - - - - - - 1.0 0.8 5.6 7.8 8.2 7.7 7.2 11.8 FranC 0.5 6.5 0.7 6.4 7.2 8.2 7.7 6.3 1.0 28.4 17.5 25.6 19.0 - 19.0. 11.6 10.2 24.9 Cerea.y 0.9 5.9 1.5 18.1 18.8 29.7 8.4 3.3 23.0 30.8 17.8 186.6 6.0 10.1 3.8 3-3 102.9 11.2 India - 7.2 - 7.9 0.6 11.0 7.8 8.0 12.4 12.4 - 12.7 - - - - - 19.2 Italy - 1.3 - - 1.4 - - 0.7 . - - - 1.1 - - - - 3.0 Japan 0.1 8.3 11.4 14.0 14.7 16.6 16.7 25.6 66.6 36.1 100.8 96.7 97.1 30.0 70.6 115.5 160.8 170.0 N.therlads - - - - 9.5 11.5 16.0 35.7 13.4 41.3 16.4 11.9 14.3 9.3 11.7 15.3 21.2 N.sy b/ - - - - - - 2.8 6.2 9.1 9.1 8.7 10.2 9.4 10.1 10.3 11.5 8.8 S.d. - 1.6 - 2.5 10.8 12.6 13.5 16.6 19.1 20.6 24.1 22.7 25.8 26.7 33.2 34.0 23.9 25.0 Svitzorland - 0.2 0.2 0.1 - - . 0.5 - 18.1 0.9 - - 0.9 - 6.4 - 1.6 United Kigdom 9.5 16.C 0.1 4.6 6.1 7.4 5.7 23.9 41.1 209.1 e/ 7.1 - - - 21.5 29.1 46.3 0.2 United Stat£ 15.3 17.2 14.7 7.0 3.2 37.4 67.4 14.0 78.9 51.4 66.5 7C.3 83.2 d/ 88.6 107.0 37.4 46.8 68.6 of which: CARE (1.3) (1.8) (1.5) (1.1) (3.2) (4.9) (5.5) (5.0) (5.5) (5.4 (7.8) (6.1) (5.9) (5.4) (7.0) (5.6) (3.3) (6.2) Asien Developent Bank 6.3 7.8 9.3 2.8 2.5 30.0 - 22.6 20.2 36.9 55.0 50.5 45.4 47.6 14.5 98.9 26.9 77.2 UH Group 0.3 4.6 0.9 6.6 2.6 22.3 19.6 15.1 6.4 10.1 13.4 14.2 10.7 16.7 11.8 24.1 21.7 27.1 of hichi WFP (0.2) (1.7) (0.6) (0.4) (1.5) (12.4) (16.4) (8.9) (0.81 (2.7) (1.6) (1.5) (2.8) (4.0) (2.5) (8.7) (6.9) (12.0) FAO (-) (-) (-) (-) (-) (-) (0.8) (2.2) (0.8) (1.4) (-) (-) (-) (-) (-) (1.1) (1.0) (0.3) W,rld Dank Group 29.0 - 6 0 24.0 29.5 - 46.0 25.5 68.0 151.5 161.0 126.9 56.7 42.4 141.9 143.4 19.6 S.b-total Aid Group 68.0 87.4 48.3 87.5 112.5 249.7 178.1 227.1 377.6 567.6 589.6 737.3 471.4 340.8 437.8 546.6 628.7 539.3 o(m-aID GRcup Centrally Planaed 15.5 Ecownmics 24.2 38.2 84.6 - 37.2 60.2 3.5 4.1 10.4 - 32.7 - - - - 110 - - - - - - - - 12.0 - - 14.5 13.6 14.1 - - 8.3 - Kwait fund - - - - - 25.5 0.3 - - - 2.1 - 45.0 - - Iran - - - - 32.0 - - - - - - OPEC Fund - - - - - 8.1 3.2 - - 6.0 14.0 11.0 - - Saudi Fund - - - - 6.7 - - - 1.0 e/ - 50.0 - - 24.2 24.2 - UAE - - - - 12.0 - 5.2 - - - - L.-ya - - - - 15.0 - 0.1 - - Other* f/ .. 0.1 2. . .. 0.1 --0.1 .6- .. . - - - - Sub-total Non-Ald Group 24.2 38.2 84.6 - 49.3 127.1 20.1 22.4 22.5 1.1 47.4 78.5 69.6 14.1 24.2 24.2 23.8 - TOTAL CIII11MENTS 92.2 125.6 132. 7 1.8 376.8 198.2 29.5 4. 57_9 637.0 6 5410 35.6 h 462.0 5708 652.5 539.3 a/ Anual citaente of Fe 4. t3. 25. 45. 50. 50. 45 and 56.7 tillie, respectively d~r.ng 1980 thro.sg 1987. bl Annual c iteenta of 8kr. 15, 32. 40. 45, 50. 65. 70. 75. 85. 89.6 and 65 sillion respectiv.1y during 1977 through 1987. An additionaö comitmant of ¥kr. 45 million (USS7.0 tillion) .as =ade during 1982 f.r Rura: Development Project. l rbantata District. vith anual allocation of kr. 12 million (1982). Hkr. 12 tillso (1983) and Mkr. 15 milion each year during 1984 through 1986 includinag the carry forvard bl«nc o0 Hkr. 24 million from pr is yesr' comåtaents. e/ Excluding the dct cncellttion of U$51.7 million. 4/ Extluding the Houcing Ouarantte Loan and YKS Loan of US$21 and US$2 million. rspectively. / Cyc1on. relief ansixtance. / Excluding the follaiag os tntat Euro-currency Loan of USS50 million in 1979 Euro-currency La af USS75 sllaon 1a 1981 Euro-currency Loan of US100 ballion in 1982 ~.dich Export Credit for Konsal. Pr.ect. HKr. 256.2 million i 1980. Mainufatrer's caner Trust Company Loa. for Victoria Proiect. L 20 million in 1980. Japanese Ten Bonda aounting to Yan 3.000 million in 1982. g/ Inclading Iraq *il wab.idy loan et $5.5 ailion. bl Exlauding caorgency relief aaistancm. USS12.0 million. Note: The 1982 cowitaent figur* far Japan hs bee reviced to Include the co~iant of USS43.4 million fo Colrbo Intarnational Airpor Developient Progrämme. Source Department of Eatenal Resourcea. Miniatry of Finanoce and Planning. -110- Table 3.06: AID DISBURSEMENTS, 1970-87 (tl$ million) 197 l97 197 _ 97 17 99 g 181 1982 1983 198 L9 LS 196 1970 191 192 1 1974 1975 196 1977 1978 1979 1980 98 192 93 184 95 196 97 AID GOUIBP Australia 0.9 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 - Belgium - - - - - - 0.2 0.9 0.9 0.1 - Canada 8.4 5.5 5.6 3.7 5.1 11.5 11.5 14.7 14.0 16.6 27.8 28.9 28.7 34.5 31.2 22.8 19.6 18.0 Denmark 1.2 0.4 0.2 2.1 0.7 0.2 0.6 0.3 0.9 0.5 3.5 2.5 2.9 1.1 0.2 0.4 0.8 4.1 EEC 1.2 - - 1.4 2.2 13.1 0.6 6.2 3.0 4.4 0.3 16.0 11.4 11.3 14.4 12.1 5.6 6.5 Finland . . - - - - - - - 0.6 2.4 4.4 5.5 5.3 5.9 13.4 15.3 France 4.6 2.9 5.6 5.3 3.2 7.1 11.2 3.4 4.5 7,1 5.3 18.5 10.7 13.9 8.6 12.4 9.4 16.3 Germany 3.3 2.3 4.3 9.3 17.7 12.3 8.7 11.5 28.2 24.2 13.4 5.0 18.5 49.0 44.0 47.3 63.5 27.1 India 4.8 2.9 2.4 2.3 3.9 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 Italy 1.7 0.9 1.8 0.3 0.3 1.3 - 0.7 - - - - - 1.1 - - - 3.0 Japan 5.1 7.6 5.5 9.2 9.2 18.1 11.3 17.2 38.1 37.9 37.7 49.9 50.1 54.2 61.9 86.2 118.7 101.2 Netherlands - - - - - 3.3 4.3 9.6 28.3 19.8 11.3 42.4 15.5 13.9 23.9 15.7 10.3 12.7 Norway - - - - - - - 1.1 5.5 8.3 12.3 16.7 11.8 4.7 11.2 8.7 10.1 12.6 Sweden b/ - 1.6 - 2.4 3.5 8.6 6.8 9.4 7.4 34.4 22.8 22.1 21.1 26.4 31.3 34.2 13.8 18.3 Switzerland - - - - - - - - - 0.1 0.6 - 6.9 4.2 4.6 6.2 0.1 United Kingdom c/ 10.3 16.1 7.4 4.6 3.0 4.7 7.4 2.7 8.9 19.1 63.0 43.6 52.6 36.5 28.7 6.3 15.3 7.3 United States 9.9 10.9 25.6 8.5 8.4 26.6 32.7 40.6 39.9 46.2 61.2 37.8 61.7 d/ 66.6 el 88.2 95.7 61.7 44.2 of which: CARE (1.3) (1.8) (1.5) (1.1) (3.2) (4.9) (5.5) (5.0) (5.5) (5.4) (7.8) (6.1) (5.9) (5.4) (7.0) (5.6) (3.3) (6.2) Asian Development Bank 1.5 2.8 4.0 3.8 3.0 5.0 8.2 7.7 28.2 10.3 5.3 10.2 18.0 18.8 37.1 30.9 41.9 48.5 UN Group 0.3 2.3 0.9 0.6 2.6 19.1 16.6 15.1 6.6 12.0 13.4 12.2 12.8 16.7 11.8 24.1 21.8 27.1 of which: WP (0.2) (1.7) (0.6) (0.4) (1.5) (6.9) (13.3) (8.9) (0.8) (2.7) (1.6) (1.5) (2.8) (4.0) (2.5) (8.7) (6.9) (12.0) PAO (-) (-) (-) (-) C-) (-) (1.9) (2.2) (0.8) (3.3) (-) (-) (-) (-) (-) (1.1) (1.0) (0.3) World Bank Group 1.9 7.5 5.6 10.5 15.6 18.7 6.4 13.9 12.8 12.2 20.2 280 59.9 4 107.3 73.3 88.9 84.6 Sub-total Aid Group 5.1 64.7 70.2 66.2 82.6 160.3 333.0 162.0 240.8 265.4 311.5 335.7 392.5 447.1 518.4 482.3 513.1 448.3 Nt-AID GROUP Centrally Planned Sconmies 8.8 35.0 13.2 1.2 29.1 3.9 14.9 12.3 5.4 0.8 0.1 16.8 5.4 1.0 1.8 1.7 - 9.8 HAD - - - - - - - - - - 2.7 3.4 2.0 1.6 3.2 5.1 5.8 2.7 Kwait Fund - - - - - - 9.6 5.3 3.9 1.7 4.7 3.1 1.2 - - 1.2 10.1 3.8 OPEC Fund - - - - - - - 8.0 1.0 - 1.4 9.6 5.5 3.0 4.0 3.1 2.1 3.1 Saudi Fond - - - - - 6.7 - - - - - - - 3.0 7.7 7.9 15.5 2.6 Others f/ - - 3.5g 12.6 h/ 16.1 / 01 0.2 5.5 / 1-. 1.6 0.7 0.3 0.2 0.3 1.6 Sub-total on-Aid Group 8.8 35.0 13.2 1.2 29.1 43.1 37.1 41.7 1.4 2.7 14.4 34.0 15.7 9.3 18.0 19.2 33.8 23.6 TOTAL DISBURSEHENTS 63.9 99.7 83.4 67.4 111.7 205.4 170.1 203.7 251.2 268.1 325.9 36 408.2 456.4 536.4 501.5 546.9 471.9 s/ Ecludes US$1.3 million disbursed under Indosuez Bank and B.P.C.A. (France) Loan for Negambo Water Supply Project. i/ Ecludes.US$2.92. 11.8 and 11.2 million disbursed under Swedish EEport Credit for Kots4e Project. respectively in 1982. 1983 and 1984. 1I Escludes USS10.1 million in 1983 and $15.0 million in 1984 disbursed under Manufacturer's Hanover Trust Company (tiK) Loan for Victoria Project. * d/ Eacludes US$14.43 million disbursed under Salomon Prothers Incorporation (USA) loan for low cost Housing Programme. ;/ Excludes US$6.18 million disbursed under Salomon Brothers Incorporation (USA) loan for low cost Housing Programe. i Eeludes the following loas" Euro-currency loan of US$50 million disbursed in 1980 Buro-currency loan of US$75 million disbursed in 1981 Euro-currency loan of USS100 million of which US$40, 25 and 35 million was disburse1. respectively in 1982. 1983 and 1984. Japanese Ten Bonds of Ten 3.000 million ($2.14 million) disbursed in December 1982. g/ Includes Iran loan of US$32.0 million. h/ Includes UAE convertible currency loan of US$12.0 million. " Includes Libyan loan of 14S$15.'4 million. 1I Represents the Iraq loan for oil subsidy. Note: There are no changes in the disbursement figures provided for the period 1970-85. In the 1986 disbursenentso upward revisions have been made in respect of aid received from Australia. NORAD. Switzerland and USAID. Source: Department of External Resources. Yinistry of Finance and Planning. Table 3.07: 0MERALL AID PIPELINE. 1986-88 (uS$ million) Mahaveli Non-Mahaveli (Accelerated) Of which: Project Project Commodity Food Total Non-Mahaweli 1986 Undisbursed Balance 12/31/85 1.018.1 288.4 100.9 31.3 1.438.7 1.150.3 New Commitments 1986 460.6 120.0 44.4 27.3 652.3 532.3 Total Disbursements 1986 321.3 123.1 53.9 48.6 546.9 423.8 1987 Undisbursed Balance 12/31/86 1.117.6 a/ 284.0 b/ 91.4 10.0 1.503.0 c/ 1.219.0 New Commitments 1987 372.9 70.6 84.8 47.0 575.3 504.7 Disbursements from Past Commitments 244.8 55.6 35.7 10.0 346.1 290.5 Disbursements from New Commitments * 67.5 17.1 4.1 37.5 126.2 109.1 Total Disbursements 1087 312.3 72.7 39.8 47.5 472.3 399.6 1988 Undisbursed Balance 12/31/87 1.165.5 d/ 281.9 136.4 9.5 1.593.3 4/ 1,311.4 a/ The following amounts have been cancelled during 1986. under non-Mahaeli Project. $ Million IDA Tea Rehabilitation 6.73 IDA Water Supply II 8.04 IDA Mahaweli II 7.69 IDA Tree Crops Rehabilitation 4.91 IDA Road Maintenance 1.55 IDA Small and Medium Industry I 0.92 IDA Rubber Rehabilitation 4.00 IDA Power VIII 6.00 39.84 b/ The following undisbursed balance has been cancelled during 1986. under Accelerated Mahawel. $ Million IDA Hahaweli Technical Assistance 1.30 c/ The following amounts have been cancelled during 1987 under non-Mahaeli Project. $ Million IDA Kurunegala IRDP 2.87 IDA Construction Industry 1.00 IDA Tea Rehabilitation and Diversification 7.04 ADB Rural Credit Project 1.82 12.73 Source: Department of External Resources. Ministry of Finance and Planning. Table 4.01: EXTERNAL DMBT OUTSTANDING. BY TYPE OF DEBTOR. 1980-87 a/ (US$ Million) Category 1980 1981 1982 1983 1984 1985 1986 1987 A. Central Government Disbursed 1.286.1 1,497.1 1.674.2 1,905.6 2,085.0 2.549.2 3,111.0 3,642.3 Undisbursed 999.3 1,458.9 1,669.0 1,366.8 1,241.5 1,312.6 1,442.2 ,04.8 Total 2.285.4 2.956.0 3.343.2 3.272.3 3,326.5 3.861.8 4.553.2 5,247.1 B. Public Corporations b/ Disbursed 29.8 118.0 283.2 371.2 361.3 335.3 297.9 2t4.2 Undisbursed 31.4 122.0 64.5 50.5 32.3 9.2 46.9 48 U Total 6I.2 240.0 347.7 421.7 393.6 344.5 344.8 312.1 C. Private Sector with Government Guarantee Disbursed 6.6 6.2 4.1 2.0 9.7 33.6 78.8 135.6 Undisbursed 0.3 - - - 66.7 59.5 32.5 5.3 Total 6.9 6.2 4.1 2.0 76.5 93.1 111.3 141.1 Public and Publicly Guaranteed Debt (A+B+C) Disbursed 1,322.6 1,621.3 1,961.5 2,278.8 2,456.1 2,918.1 3,47.7 %,167.0 Undisbursed 1,030.9 1,580.9 1,733.5 1,417.3 1,340.5 1,381.3 1, 521a i) Total 2.353.5 3.202.2 3.695.0 3.696.1 3.796.6 4.299.4 5.009.3 5- *?0.2 D. Private Sector without Government Guarantee c/ Disbursed 4.7 4.1 2.5 44.0 70.3 111.3 114.6 121.6 Undisbursed 0.1 0.3 0.5 25.1 67.8 33.1 18.9 18.6 Total 4.8 4.4 3.0 69.1 138.0 144.4 133.6 140.2 TOTAL EXTERNAL DEBT (A+B+C+D) Disbursed 1.327.3 1.625.4 1,964.0 2.322.8 2.526.3 3.029.4 3.602.4 4.163.6 Undisbursed 1,031.0 1,581.2 1,734.0 1,442.4 1,408.3 1,414.4 1,540.5 1,676.8 Total 2,358.3 3,206.6 3,698.0 3.765.2 3.934.6 4,443.8 5.142.9 5.840.4 a/ External debt with an original maturity of one year or more, including debt repayable in local currency. b/ Figures for 1984-1986 include IEBRD loans serviced by the Development Finance Corporation of Ceylon and the Ceylon Electricity Board. c/ Non-guaranteed private sector foreign borrowings approved by the Exchange Control Department are included in the figures for 1984. 1985. and 1986. Note: End-year exchange rates were used for conversions. Source: Department of Public Debt. Central Bank of Sri Lanka. Table 4.02: EXTERNAL DEBT OUTSTANDING BY TYPE OF CREDITOR. 1980-87 a/ (US$ million) Category 1980 1981 1982 1983 1984 1985 1986 1987 A. Public and Publicly Guaranteed Debt Disbursed 1,322.6 1,621.3 1,961.5 2,278.8 2,456.1 2.918.1 3.487.7 4.042.0 Undisbursed *1,030.9 1,580.9 1,733.5 1,417.3 1,340.5 1,381.3 1,521.6 1,658.2 Total 2.353.5 3,202.2 3,695.0 3,696.1 3,796.6 4.299.4 5,009.3 5,700.2 Loan from Commercial Banks: Disbursed 72.3 239.8 474.0 593.4 627.3 649.5 685.4 695.7 Undisbursed 31.1 207.2 196.2 117.7 150.1 118.5 168.4 159.6 Total 103.4 447.0 670.5 711.1 777.4 768.0 853.8 855.3 Suppliers' Credits: Disbursed 42.0 50.2 44.2 33.2 21.9 24.3 30.0 37.6 Undisbursed 0.5 8.6 - - 10.8 9.8 6.7 3.2 Total 42.5 58.8 44.2 33.2 32.7 34.2 36.6 40.9 Loans from Multilateral Donors: Disbursed 318.6 370.6 435.8 540.4 652.3 772. . 897.5 1.042.5 Undisbursed 349.0 612.5 653.9 701.0 610.7 758.5 784.3 779.6 Total 667.6 983.1 1.089.7 1,241.3 1.263.0 1,531.3 1.681.7 1.822.1 Loans from Bilateral Donors: Disbursed 889.7 960.7 1,007.0 1,111.8 1,154.6 1,471.4 1.874.8 2.266.2 Undisbursed 650.3 752.6 883.4 598.6 568.9 494.5 562.3 715.8 Total 1,540.0 1.713.3 1,890.4 1,710.4 1.723.5 1,965.9 2.437.1 2.982.0 B. Private Non-Guaranteed Debt Disbursed 4.7 4.1 2.5 44.0 70.3 111.3 114.6 121.6 Undisbursed 0.1 0.3 0.5 25.1 67.8 33.1 18.9 18.6 Total 4.8 4.4 3.0 69.1 138.0 144.4 133.6 140.2 TOTAL EXTERNAL DEBT (A+B) Disbursed 1,327.3 1,625.4 1,964.0 2.322.8 2,526.3 3.029.4 3.602.4 4.163.6 Undisbursed 1,031.0 1,581.2 1,734.0 1,442.4 1,408.3 1,414.4 1,540.5 1,676.8 Total 2,358.3 3,206.6 3,698.0 3,765.2 3,934.6 4.443.8 5.142.9 5.840.4 a/ External debt with an original maturity of one year or more, including debt repayable in local currency. Note: End-year exchange rates were used f or conversions from SDRs to US$. Source: Department of Public Debt. Central Bank of Sri Lanka. -114- Table 5.01: ECONOMIC CLASSIFICATICN OF GOVERNMENT REVEJE. 1981-1988 (RS Million) '981 1982 1983 1984 1985 1986 1987 1987 1988 Budget Proposed Budget Total Revenue 14,775 16.210 23.317 34.061 36,249 37,238 41.531 42.155 46.225 1. Tax Revenue 13.696 14.737 19.912 29.939 30.442 31.272 35.704 35.127 39.785 1.1 Taxes on Foreign Trade 6,519 5.172 7.439 13.082 10.998 11.050 12.880 12.983 14.660 Exports 3,771 2.634 3.392 6.412 2.05 1.636 1,740 1.924 2.215 Tea (1.965) (1.594) (2.222) (5.004) '2. ,1-) (996) (955) (1.152) (1.305) (Specific) (1.879) (1.444) (1.290) (1.768) (1,182) (934) (895) (890) (755) (Ad Valorem) (86) (15r) (932) (3.236) (1.032) (62) (60) (262) (550) Rubber (1.433) (753) (852) (1.009) (254) 37) (520) (530) (725) Coconut (241) (191) (241) (297) (342) (232) (140) (148) (110) Other Exports (132) (96) (77) (102) (15) (101) (125) (94) (75) Imports 2.725 2.538 4.047 6,670 8,093 9.41, 11,140 11,059 12,445 Treasury Format 3.225 3.222 4.836 7.945 8.396 10.014 11.540 11.683 13.045 Less: Duty Rebate (-500) (-684) (-769) (-1.275) (-303) (-600) (-400) (-624) (-600) Receipts from FEECs 23 0 0 0 0 0 0 0 0 1.2 Taxes on Domestic Goods 6 Services 4.866 6.320 8.710 10.888 13.359 1-,797 16,156 15.667 18.707 Turnover Taxes 2.829 4.052 6.224 8.143 10.189 10.088 10.920 10.611 12,450 Manufacturing (1.728) (1.806) (2.718) (3.045) (3.768) . (3.270) (4.010) (3,675) (3.740) Trade. Services 6 Professional (1.101) (1.524) (1.891) (1.928) (2.590) (2.415) (2.760) (2.426) (2.910) Imports (0) (722) (1.615) (3.170) (3.831) (4.403) (4.150) (4.510) (5.800) Selective Sales Taxes 1.942 (2,123) (2.298) (2.551) (2.982) (4.414) (4.996) (4.716) (5.922) Liquor (749) (808) (867) (1.013) (1.104) (1.485) (1.695) (1.644) (2.040) Tobacco (1.123) (1.315) (1.431) (1.537) (1.877) (2.927) (3.300) (3.071) (3.880) Other (70) (0) (0) (1) (1) (2) (1) (1) (2) 1.3 Licence Fees 95 145 188 194 1t8 285 240 340 335 Motor Vehicles (66) (111) (140) (140) (149) (231) (200) (279) (250) 1.4 Taxes on Net Income and Profits 2.029 2.923 3.366 5.480 5.586 4.787 5.105 4.909 4.865 Corporate (1.459) (2.115) (2.475) (3.720) (4.162) (3.274) (3.470) (3.329) (3.425) Non-Corporate (570) (808) (891) (1.760) (1.424) (1,513) (1.635) (1.5 i0) (1.440) 1.5 Taxes on Property 282 322 397 489 499 648 1.563 1.568 1,553 Property Transfers 221 257 336 407 388 505 1.513 1.467 1.493 1.6 Taxes on Capital Transfers 61 65 61 82 111 143 50 101 60 Estate Duty (24) (23) (17) (23) (41) (34) (15) (25) (8) Wealth Tax (24) (29) (32) (45) (48) (81) (27) (61) (45) Gift Tax (8) (8) (8) (11) (9) (9) (3) (12) '4) Other (5) (5) (4) (3) (13) (19) (5) (3) .3) 2. Non-Tax Revenue 1.079 1.473 3.405 4.122 5.807 5,966 5.827 7.028 6.440 Non-tax Current Revenue 1.065 1.453 3.396 4.109 5.792 5.943 5.807 7.015 6.420 2.1 Property Income 584 777 2.606 3.085 3.926 4.731 4.025 4.541 4.556 Surplus of Trading Enterprises (262) (327) (356) (692) (666) (803) (1.098) (1.229) (1.638) Rent (51) (41) (164) (49) (123) (53) (112) (65) (105) Interest (168) (243) (492) (1.075) (2.230) (2,210) (1.536) (1.884) (1.610) Less: Public Debt Interest (JIF) (0) (0) (0) (-708) (-1,044) (-650) (-482) (-480) (-460) Profits 6 Dividends (85) (149) (181) (559) (665) (722) (773) (922) (275) Less: Petroleum Special Levy (0) (0) (-103) (-249) (-231) (-193) (-771) (-805) (-271) National Lottery (18) (17) (16) (17) (17) (7) (9) (3) (9) Central Bank Profit Tranefers (0) (0) (1.500) (1.650) (1.500) (1.779) (1.750) (1.723) (1.650) 2.2 Social Security Contributions 60 71 71 84 89 106 95 127 120 2.3 Non-Industrial Sales 119 272 158 179 475 209 197 583 215 2.4 Fees and Administrative Charges 147 186 202 265 364 347 353 334 460 2.5 Fines and Forfeitures 72 49 55 79 372 169 125 190 155 2.6 Other Current Transfers & Receipts 83 98 304 417 566 381 1.012 1.240 914 Other Current Transfers (70) (98) 200 (1;9) (13) (143) (16) (195) (643) Net Profits from Advance Account (13) (0) (1) (9) (322) (45) (225) (240) (0) Petroleum Special Levy (0) (0) (103) (2.9) (231) (193) (771) (805) (271) Total Current Receipts 14.761 16.190 23.308 34.048 36,234 37,215 41.511 42.142 46.205 Non-tax Capital Revenue 14 20 9 13 15 23 20 13 20 Sales of Capital Goods 14 20 9 13 15 23 20 13 20 Source: Central Bank of Sri Lanke. -115- Table 5.02: FISCAL OUT1URN - DERIVATION TABLE. 1981-88 (Ra Million) 1981 1982 1983 1984 1985 1986 1987 1987 1988 Budget Proposed Budget Revenue (Treasury Data) 16.228 17,808 25.210 37.731 39.010 41.644 44.115 44.900 49.260 Leas: Gross Receipts of Trading Enterprises -1.043 -1.145 -1.310 -1.853 -1.828 -'.041 -2.365 -2.410 -3.158 Add : Operating Surplus of Trading Enterprises 262 327 356 61 2 666 803 1.098 1.229 1.638 Railways (0) (0) (0) 01 (0) (0) (0) (0) (0) Posts (62) (0) (0) (0) (0) (0). (0) (0) (0) Telecommunications (198) (326) (355) (692) (666) (803) ' (1.098) (1.229) (1.638) Other (2) (1) (1) (1) (0) (0) (0) (0) (0) Less: Import Duty Rebates -500 -684 -789 -1.275 -303 -600 -400 -624 -600 Public Debt Interest Paid to JIF and Returned 0 0 0 -708 -1.044 -650 -482 -480 -460 Sinking Fund Transfers 0 0 0 0 0 -1.411 0 0 0 Loan Repayments -172 -97 -149 -526 -252 -508 -435 -461 -455 Equals Revenue for Economic Classification 14.7?5 16.209 23.318 34.061 36.249 37.237 41.531 42.154 k6.255 Current Ezpenditure (Treasury Data) 16.005 20,110 23.963 28,926 33.842 34.772 39:000 37.971 41.760 Less: Gross Payments of Trading Enterprises -975 -1.205 -1.447 -1.842 -1.293 -1.652 -1.708 -1.639 -1.709 Add : Operating Losses of Trading Enterprises 194 387 493 681 131 414 441 458 189 Railways (194) (308) (453) (629) (72) (408) (383) (348) (188) Posts (0) (79) (40) (52) (58) (6) (59) (110) (1) Telecommunications (0) 0 0 0 0 0 0 0 0 Less: Capital Items in Current Votes -230 -453 -633 -1.653 -1.965 -835 -613 -642 -160 Add : Current Items in Capital Votes 155 186 415 501 3.271 2.517 2.634 3.669 2.568 Less: Underexpenditure Provision 0 0 0 0 0 0 -1.919 0 -1.040 Import Duty Rebates -500 -684 -789 -1.275 -303 -600 -400 -624 -600 Public Debt Interest Paid to JIP 0 0 0 -708 -1,044 -650 -482 -480 -460 Equals Current Expenditure for Economic Classification 14,649 18.341 22.002 24.630 32.645 33.966 36.953 38.713 40.548 Capital Expanditure (Treasury Data) 13.373 18,668 21.733 21.750* 30.529 35.112 33.000 34.603 44.620 Less: Public Debt Amortization -1.608 -2.o12 -5.025 -2.229 -6.897 -7.525 -5.393 -5.592 -9.867 Foreign (-607) (-674) (-1.165) (-1.466) (-1.789) (-3.020) (-4.471) (-4.690) (-5.080) Domestic (-1.001) (-1.938) (-3.860) (-763) (-5.108) (-4.505) (-922) (-902) (-4.787) Current Items in Capital Votes -155 -186 -415 -501 -3.277 -2,517 -2.634 -3.669 -2.568 Underexpenditure Provisions (Capital) 0 G 0 0 0 0 0 0 0 Add : Capital Items in Current Votes 230 453 633 1.653 1.965 835 613 642 160 Less: Provision for Underexpenditure (Current) 0 0 0 0 0 0 -31 0 -4 Increase in Treasury Deposits by Government Ccrporations -19 -176 -262 143 207 0 0 0 0 Equals Capital Expenditure plus Lending 11,821 16.147 16.664 20.816 22.%77 25.905 25.555 25.984 32.341 Less: Financial Investment -569 -720 -801 -901 -997 -2.669 -2.204 -3.018 -5.324 Equals Capital Expenditure 11.252 15.427 15.863 19.915 21.530 23.236 23,351 22.966 27.017 Lending minus Repayments Net Lending on Advance Acccunts 1.716 -879 1,120 2.917 314 -170 250 -1.180 100 Add: Financial Investments 569 720 801 901 997 2.669 2.204 3.018 5.324 Less: Loan Repayments -172 -97 -149 -526 -252 -508 -435 -461 -455 Equals Lending minus Repayments 2.113 -256 1.7i2 3.292 1.059 1.991 2.019 1.377 4.969 Financing Data Foreign Borrowing, gross 5.487 5.418 7.477 7.958 8.898 12.081 11.120 10.406 17.600 Less: Foreign Repayments -607 -674 -1.165 -1.466 -1.789 -3.020 -4.471 -4.690 -5.080 Equals Foreign Financing, net 4.810 4.744 6.312 6.492 7.109 9.061 6.649 5,716 12.520 Domestic Non-Market Borrowing 400 1,712 2.385 904 -2.000 -660 0 733 0 Less: Repayments -37 -49 -146 -96 -8 -9 0 -12 0 Change in T Despoits -19 -176 -262 143 207 0 0 0 0 Equals Non-Market Borrowing 344 1.487 1.977 951 -1.801 -669 0 721 0 Domestic Market Borrowing Non-Bank 2.379 5.894 7.761 5.685 10.520 9.838 7.500 7.283 11.000 Least Repayments j/ -933 -1.874 -3.679 -550 -4.861 -3.073 -922 -883 -4.787 Equals Non-Bank Borrowing 1.446 4.020 4.082 5.135 5.659 6.765 6.578 6.400 6.213 Bank Borrowing 3.917 4.006 1.204 -2.644 7.451 2.299 3.470 3.306 2.576 Less: Repayments -32 -11 -36 -117 -239 -12 0 -7 0 Equals Net Bank Borrow Ing 3.885 3 991 1.168 -2.761 7.212 2.187 3.470 3.299 2.576 Add: Cash Balance -38 -315 -69. 666 -2.501 760 0 242 0 Equals Bank Finance 3.847 3.676 474 -2,095 4.711 3.047 3.470 3.541 2.576 GDP at Current Market Prices 85.005 99.i66 121.571 153.746 162.375 179.410 205.000 196.700 226.400 a/ For Rev 1986. adjusted for the sinking fund tr-nsfer of Rs. 1.411 million. Source: Central Bank of Sri Lanka. Table 5.03: SUMMARY OF BUDGETARY OPERATIONS. 1981-88 (Rs Million) 1981 1982 1983 1984 1985 1986 1987 1987 1988 Budget Proposed Bud t Total Revenue and Grants 17.496 19.586 26.790 37.354 39.556 40,991 45.626 46.679 51.225 Total Revenue . 14.775 16,210 23.317 34,061 36.249 37.238 41.531 42.155 46.225 Tax Revenue 13,696 14,737 19.912 29.939 30,442 31.272 35.704 35.127 39.785 Non-tax Revenue 1,079 1,473 3.405 4.122 5,807 5,966 5.827 7.028 6,440 Grants 2.721 3.376 3,473 3.293 3.307 3.753 4.095 4.524 5.000 1rpenditure and Lending minus Repayments 28.014 33.512 39.637 47.837 55.234 59,193 62.323 63,056 72.534 Current 14.649 18.341 22.002 24.630 32.645 33.966 36.953 38,713 40.548 Capital 11.252 15,427 15.863 19.915 21.530 23.236 23.351 22.966 27.017 Lending minus Repayments 2.113 -256 1.772 3.292 1.059 1.991 2.091 1,377 4.969 Current Account Surplus/Deficit (-) 126 -2,131 1.315 9,431 3.604 3,272 4,578 3.442 5.677 Budget Deficit (before grants) -13.239 -17.302 -16.320 -13.776 -18.985 -21.956 -20,792 -20.901 -26.309 Budget Deficit (after grants) -10.518 -13.926 -12.847 -10.483 -15.678 -18.203 -16,697 -16.377 -21.309 Financing 10.517 13.927 12.845 10.483 15.678 18,204 16.97 16.378 21.309 Foreign Borrowing 4.880 4,744 6.312 6.492 7.109 9,061 6.649 5.716 12.520 Domestic Borrowings 5.637 9.183 6.533 3.991 8.569 9.143 10.048 10.662 8.789 Non-Market Borrowings 344 1.487 1.977 951 -1.801 -669 0 721 0 Market Borrowings 5.293 7.696 4.556 3,040 10.370 9.812 10.048 9.941 8.789 Non-Bank 1.446 4.020 4.082 5.135 5.659 6.765 6.578 6.400 6.213 Bank 3,847 3.676 474 -2.095 4,711 3.047 3.470 3.541 2.576 As a % of GDP Total Revenue and Grants 20.6 19.8 22.0 24.3 24.4 22.8 22.3 23.7 22.6 Total Revenue 17.4 16.3 19.2 22.2 22.3 20.8 20.3 21.4 20.4 Tax Revenue 16.1 14.9 16.4 19.5 18.7 17.4 17.4 17.9 17.6 Non-tax Revenue 1.3 1.5 2.8 2.7 3.6 3.3 2.8 3.6 2.8 Grants 3.2 3.4 2.9 2.1 2.0 2.1 2.0 2.3 2.2 Expenditure and Lending minus Repayments 33.0 33.8 32.6 31.1 34.0 33.0 30.4 32.1 32.0 Current 17.2 18.5 18.1 16.0 20.1 18.9 18.0 19.7 17.9 Capital 13.2 15.6 13.0 13.0 13.3 13.0 11.4 11.7 11.9 Lending minus Repayments 2.5 -0.3 1.5 2.1 0.7 1.1 1.0 0.7 2.2 Current Account Surplus/Deficit (-) 0.1 -2.1 1.1 6.1 2.2 1.8 2.2 1.7 2.5 Budget Deficit (before grants) -15.6 -17.4 -13.4 -9.0 -11.7 -12.2 -10.1 -10.6 -11.6 Budget Deficit (after grants) -12.4 -14.0 -10.6 -6.8 -9.7 -10.1 -8.1 -8.3 -9.4 Financing 12.4 14.0 10.6 6.8 9.7 10.1 8.1 8.3 9.4 Foreign Borrowing 5.7 4.8 5.2 4.2 4.4 5.1 3.2 2.9 5.5 Domestic Borrowings 6.6 9.3 5.4 2.6 5.3 5.1 4.9 5.4 3.9 Non-Market Borrowings 0.4 1.5 1.6 0.6 -1.1 -0.4 0.0 0.4 0.0 Market Borrowings 6.2 7.8 3.7 2.0 6.4 5.5 4.9 5.1 3.9 Non-Bank 1.7 4.1 3.4 3.3 3.5 3.8 3.2 3.3 2.7 Bank 4.5 3.7 0.4 -1.4 2.9 1.7 1.7 1.8 1.1 Source: Central Bank of Sri Lanka. Table 5.04: ECONOMIC CLASSIFICATION OF EXPENDITURE. 1981-88 (Rs Million) 1981 1982 1983 1984 1985 1986 1987 1987 1988 Budget Proposed Budget Current Expenditure 14.649 18.341 22,002 24.630 32.645 33.967 36.954 38.13 40.548 Expenditure on Goods & Services 5.224 6.500 7.848 9.195 16.287 15.155 18.366 17.640 19.129 Salaries and Wages 3.579 4.561 4.811 5.554 6.878 8.028 8,278 7.986 10.001 Other Goods & Services 1.645 1.940 3.037 3.642 9.409 7.127 10,088 9.654 9.128 Interest 3.738 5.104 6.606 6.738 7.428 8.762 10.220 10.159 11.962 Foreign 713 915 1.270 1.623 1.970 2.209 2.420 2.564 3.199 Domestic 3.025 4.189 5.336 5.115 5.458 6.553 7.800 7.595 8.763 Transfer Payments 5.687 6.736 7.548 8.697 8.929 10.050 10.286 10.914 10.497 Public Enterprises 557 1,232 1.768 1.762 882 2.350 2.229 2.286 1.736 Other Levels of Governement 182 317 388 444 501 600 641 641 833 Households 4.948 5.187 5.392 6.491 7.546 7.100 7.416 7.987 7.928 Capital Expenditure 11.252 15,427 15.863 19.915 21,530 23.236 23,351 22,966 27.017 Acquisition. Construction and Maintenance of Real Assets 4.026 4.829 5,375 5.849 7.375 7.788 12,051 10.828 15.532 Capital Transfers 7.226 10.598 10.488 14.066 14.155 15.448 11.331 12.138 11.489 Public Corporations 7.073 10.591 10.422 13.681 13,441 14.874 10.521 11.298 10.729 Other Levels of Government 149 167 317 198 481 472 702 732 672 Other 23 15 11 44 26 101 108 108 88 Other -19 -176 -262 143 207 0 0 0 0 Lending Minus Repayments 2.113 -256 1.772 3.292 1.059 1.991 2.019 1.377 4.969 Advance Account 1.716 -879 1.120 2.917 314 -170 250 -1.180 100 Lending to Corporations 569 720 801 901 997 2.669 2.204 3.018 5,324 Repayments of Loans -172 -97 -149 -526 -252 -508 -435 -461 -455 Total Expenditure and Lending Minus Repayments 28.014 33.512 39.637 47.837 55.234 59,194 62.324 63.056 72,534 Source: Central Bank of Sri Lanka. Table 5.05: OPERATIONAL SURPLUS/DEFICITS OF TRADING ENTERPRISES, 1981-88 (Rs Million) 1981 1982 1983 1984 1985 1986 1987 1987 1988 Budget Proposed Budget 1. Railway 1.1 Revenue 408.8 427.3 434.6 503.0 464.5 482.0 485.0 487.0 680.0 1.2 Recurrent Expenditure 602.7 681.5 872.4 1,083.6 522.9 857.3 867.7 834.9 868.0 Add: COLA - 53.8 14.7 48.0 14.0 33.0 - - - Total Recurrent Expenditure 602.7 735.8 887.1 1,131.6 536.9 890.3 867.7 834.9 868.0 1.3 Current Surplus (1.1-1.2) -193.9 -308.0 -452.5 -628.6 -72.4 -408.3 -382.7 -347.9 -188.0 1.4 Capital Expenditure 459.9 377.4 364.7 392.0 969.4 1,046.0 1,007.2 1.061.6 1,897.0 2. Posts 2.1 Revenue 288.5 245.3 342.7 388.4 436.2 481.2 490.0 404.1 548.0 2.2 Recurrent Expenditure 226.2 279.0 378.0 415.5 494.4 460.1 548.6 514.3 548.9 Add: COLA - 45.0 5.0 25.0 - 27.0 - - - Total Recurrent Expenditure 226.2 324.0 383.0 440.5 494.4 487.1 548.6 514.3 548.9 2.3 Current Surplus (2.1-2.2) +62.3 -78.7 -40.3 -52.1 -58.2 -5.9 -58.6 -110.2 -0.9 2.4 Capital Expenditure 15.8 10.8 10.5 10.5 19.7 18.0 20.6 18.4 17.0 3. Telecommunications 3.1 Revenue 344.2 471.8 531.4 961.2 927.6 1.077.3 1,390.0 1,518.5 1,930.0 3.2 Recurrent Expenditure 146.2 145.9 176.7 261.4 252.2 264.5 291.8 290.0 291.8 0o Add: COLA - - - 8.0 9.0 10.0 - - - Total Recurrent Expenditure 146.2 145.9 176.7 269.4 261.2 274.5 291.8 290.0 291.8 3.3 Current Surplus (3.1-3.2) +198.0 +325.9 +354.7 +691.8 +666.4 802.8 1,098.2 1.228.5 1,638.2 3.4 Capital Expenditure 276.9 348.4 469.6 1,074.7 444.0 )96.1 816.6 1,337.8 804.9 4. Other 4.1 Revenue 1.9 0.6 1.3 0.6 - - - - - 4.2 Recurrent Expenditure - - - - - - - - - 4.3 Current Surplus (4.1-4.2) 1.9 0.6 1.3 0.6 - - - - - 4.4 Capital Expenditure - - - - - - - - - Revenue of Trading Enterprises 1,043.4 1,145.0 1,310.0 1,853.2 1,828.3 2.040.5 2,365.0 2,409.6 3.158.0 Ree. Exp. of Trading Enterprises 975.1 1.205.2 1,446.8 1,841.5 1,242.5 1,651.9 1,708.1 1,639.2 1.708.7 (Salaries and Wages) (400.1) (577.2) 670.8 765.6 592.6, 839.0 903.3 870.0 895.1 (Goods and Services) (575.0) (628.0) 776.0 1,075.9 699.9 812.9 804.8 769.2 813.6 Source: Central Bank of Sri Lanka. TablØ 6.01: 2NTEREST RATES OF WJOR CMED!T M4 S.I1C0 ?NSilrrTn. P1-0 A? 11 p.r annm at end t rred) 9 19_ _976 _977 197_8 1979 2980 198 1982 2983 £984 1986 Govermn t0asury B1ls /4.7N 5.10 5.00 9.00 9.00 9.00 11.00 £300 13.50 12.00 14.00 152 1 00 C bntral Bank gate - /6.50 6.50 6.50 10.00 10.00 10.00 12.00 14.00 11.00 17.00 14.00 11.00 1.000 1 00 DEPOSi as 1 o Finød Dppeitt 4.50-4.75 7.00-7.50 7.00 7.10 14.00 15.00 14.00 15.00 14.00-15.00 20.00 20.00-22.00 15.00-22.00 16.00-25.00 14.00-22.00 12.00-18.0 8.50-14.00 B.50-14.On Savings Doposita 4.50 , 550 5.50 7.20 7.70 5.00-Q.00 10.000.00-14 .00-14.00 10.00-14.50 10.00-15.00 10.00-15.00 10.00-13.50 6.00-12.00 6.00-53.00 _avinga Institution National SainRa Bank Seving Dpesits 1.10-4.00 c/ 7.20 7.70 8,40 8.40 8.40 12.00 22.00 12.00 12.00 12.00 12.00 1.020 12 PUnta Pig d Depoaits 4.50 c/ 7.50 7.50 15.00 15.00 15.00 20.10 20.00 20.00 20.00 18.00 5. 11.12.00 l0Sea Sans Certifies 5.00 11.00 11.00 11.00 11.00 11.00 11.00 22.00 11.00 11.00 11.00 11.0 12.00 1.00 LEDIN RATM ce.merc_aI Bank. Secur.d .50-22.00 6.5-23.00 6.N0-.00 10.00-20.00 10.00-20.00 10.00-20.00 11 .00.21 00 I1.00-30.00 11.00-30.00 11.00-50.00 12.00-50.00 11.00-30.OC 10.00-.0 8.80-30.00 Unarcured 8.50-12.00 9.50-14.00 4.50-14.00 18.00-,20.00 18.00-20.00 18.00-21.00 19.00- 50.00 1q.0C0-12.00 14.00-52.00 11.00-30.00 13.80-33.00 3.00-3o.00 9.85..0 9.80-3.00 nn-Tor. Ctedit 1natlitti_ons State mortgag. Bnk å/ 5.00-l0.0 5.00-32.00 5.00-12.00 5.00-12.00 5.00-12.00 5.00-18.00 5.00-20.00 12.00-24.00 12.00-24.00 12.00-24.00 12.00-24.00 10.00-24.00 8.00-20.00 Agricultural *ad Induatrial 8.00-20.00 Credtm Corporation 4/ 9.00 22.00 9.00-12.00 9.00-12.00 12,00-15.00 11.00-14.00 d/ 4/ d/ 4/ d/ d/ d/ d C'7diopaent Flnance Corprationt 0.50.-20.50 .0-12.50 <.50-12.50 4.50-13.00 9.50-53.00 10.50-6.00 10.50-13.00 13.00-27.00 12.00-17.00 11.00-i4.00 11.00-14.00 14.00-21.00 14.00-18.00 24.r4-19.00 National Housing Døpart.ent 11.00 6.00-9.00 6.00-9 6.00-9.00 6.00-9.00 6.00-9.00 6.00-9.00 6.00-9.00 6.00-9.00 6.00-9.00 6.00-9.00 3.00-10.00 3.00-10.00 3.,0-30.00 National Saving Bank T0.00-12.00 / 10.00-12.00 9.00-12.00 9.00-12.00 9.00-13.00 9.00-13.00 9.00-17.00 12.00-17.00 12.00-17.00 12.00-17.00 12.00-17.00 12.00-21.00 2.00-21.00 13.o4-20.00 t/ MIghtød øveragø I 6122 1asu;d on . b/ 8te at vhich Cantral Bank ptovidøs advances to Ceer ige 13 I_i W l981% APROAL, P-d.~Bva.and Tebe.. 3 - - 3 28 - - 14 - 17 49 - - - - 27 - 26 1.782 - - - - 449 - 287 T-ståle. arins APPa*~1. and .ether Product. 6 4 3 1 4 l 5 10 207 210 48 13 95 116 14 1% 282 272 72 30 167 178 28 279 4.172 S.129 I.16 828 2.4141 3.04 963 4.153 IfOod ad ood Prodoett (tU 1 - - - 5 . - 15 - 2 - - 1 2 - 26 - 4 - - 4 20 - 200 - 129 - - 109 popr and Papoer Pod-t. - - - - 25 - - - - - - - 29 - - - Ch~sital.. P4,tr.oln. C~. Rub~ d Plaottc Prodct. 6 5 1 2 1 1 1 2 117 103 78 15 1 19 4 149 169 164 1t0 23 10 27 5 94 899 685 290 992 248 812 459 497 1,m~tallic l~*Mra Producta (~#etPetro mndCot 6 'o t - - 3 2 136 27 23 2 - - 17 48 225 35 27 3 - - 25 61 &.898 69 159 230 - - 334 559 P.b,i.ad 8etal Product. and Tr*prE,* 6 2 3 5 3 - 3 8 5 54 207 14 74 - 38 59 1s 80 250 20 91 - 49 68 1.765 414 593 102 157 - 316 95 ufa.c«ttured Prodct. (.... 14 6 6 4 3 9 136 478 50 67 234 17 59 105 709 1.112 110 9 342 38 73 160 7.463 4.530 1.438 1.733 542 939 816 2.261 s~Ma .2 _- - 2 - 1 3 1.378 09 750 -4 26 3 6 8 3_643 - 5101 8 64 6 _ 20 2,403 - &.MS _ 293 4 . 13 409 1TTAL 44 18 16 13 t5 13 10 31 2.698 985 5.171 t90 436 179 138 591 3.264 3.663 1.6<0 284 678 29 188 eU 20.632 31.408 4.789 4.147 4.010 4.078 2.~s 8.970 P.-1 - 1of-o- - - - - 14 - i- - -28 - 13 - - - 49 - 16 TVxtilom. tecatng App 1e.an .nth På%odoet* 2 3 2 1 3 1 4 350 115 106 64 58 98 23 92 458 153 128 92 103 139 4.5 38 5.062 2.914 2.06 1, 1.487 2.986 1.46,1 2.0 Uv~d 8nt UO.d Prodet. gInd_A.Piure) - - - - - - -- - 2 2 - 4 250 129 - - - Pap.r Und Pe Pr8d-ot, l- -- - -- - - - -- 25-- - - - - - - 29 - - - Chemi-a, . PN~o~es C-il. 01b and Plastio Pcodts 2 3 2 - 2 1 1 68 35 59 17 11 5 19 134 9 15 79 20 14 8 29 163 577 139 339 178 877 522 538 203 N-eWteltet M~*ea Prodaec (~*ceptPt=e ~o dCol 6 l 3 2 - - 3 2 57 18 7 25 - - 50 47 5 5 14 10 - - 18 68 2.35 649 358 389 - - 240 559 Pabriatd dot1 prodatd and Tran~portEquipment 2 3 - 2 e t 5 60 6 1 - 22 16 38 59 97 12 2 - 30 20 49 68 804 140 99 - 143 95 356 95 lanufactured Products cn..> 6 2 4 4 5 - - 389 342 2% 26 263 2 l 15 497 238 461 36 374 5 21 24 4.460 571 2.334 1.368 5.098 24 143 390 SOrvc.. 1 _- 1 2 1 - _- 18 -1 814 _j - - 32 -6123L1U 38 - - - 37 __.- 025 1.190 243 __ _ - - TWAL 25 9 12 10 13 7 7 12 993 312 1.976 gö8 379 135 91 353 1.266 493 2.2% 5.312 597 200 143 467 14.037 4.813 7.661 4.590 4.033 4.075 2.740 3. '45 0.,<3 Grente,r Colobo 8enomic Ceaniboe. CP ?061. 6.09>38 assest4i 0i613gu3n APra043.s av 9401>06 du0 .0Cat. Investien 409tscar cess1uras. 31-I s t03.io 801.,.30 _________ber__lUnite oreig In0e0teent (to .61lica) 7otal Invest.est (8. .illion) taployment Potential (1.) 3980 L9M1 im! 1983 1984 el I M 186 19~1 _9 1962 j i 1J g/ > >2M 1981 1 3961 >962 1 1 oJ 0 190 1.01 -02 19MI 394 al i0_ g3 v3. 10e1.34n inv9sna1f A093s08 C90ff_TTE (FIAC> Pd.8Beverag .ad Toae 9 6 9 4 2 4 1 476 t09 142 22 2 1 1 83 499 939 2s 239 s8 27 92 206 em 340 921 ý22 174 346 18 3.037 Testiles0. U.o3ring Appare. an a.0>the trOd3cte 8 8 32 16 11 1 >9 to 11 30 49 90 si- a 36 46 27 5> 262 240 390 s9 265 66 1.530 2.29 3.28m 4.399 4.4n3 3 2.041 2.42 -ad an ~oo Predsts ( W-cttd -> 1.rnitae 32 6 9 6 1 2 3 3 1 65 1 26 2 1 2 1 6 1S0 1 123 1 .9 39 39 92 34 .02 282 92 392 429 129 Feve -ad P~P-rd-et. Chmet.PMtroe~ ret. ~4>. n På-tå. Prdr.t> 20 1 t0 4 1 10 6 9 292 106 41 24 6 63 29 1 523 227 151 64 99 166 101 39 2.423 79 3.060 39a 20 652 644 5t7 (-,PCp Fer 0t n C-3l 6 4 3 6 6 1 2 9 203 64 27 43B 1 19 2 14 260 93 70 164 136 03 4 49 1.072 SM 67 32 263 406 @ J48 rob,ist..d OC~le PredCm-, at-hi-n,r and Transp-rt 84~40en 9 12 5 12 8 10 6 8 21 234 68 3B 67 64 29 a1 17 391 t36 242 Ist a4 141 116 64> 1.930 30 1.924 458 9u> 1.143 492 df.t...Pdt t iin. .2.A A 2 4 - 1 1 2 _ _ 6 23 -L -2 23 .0 4 23 X 62 22 03 666 - _3IL 17 _36 2.98 M _- ,22, 2 1003 99 91 45 % 35 30 41 41 902 613 337 231 261 220 130 190 1.400 1.03 801 ..031 o6 76 644 672 6.96 1.90 1.95 6.4914 9.063 4.3$1 9.967 1.0>7 LOCAL IWUflUIT lev Ais= C5MIMM-kE LIAC) PF-d. B111rage. fid T~b~.co 40 22 13 20 26 36 19 48 - - - - - - - - - 34 32 11 68 26 64 49 107 9871.323 93I 106 637 1.066 179 2.929 T90t0t34. 8006i V* Appar1. and L t red.et. 160 78 43 47 291 316 10 0 4 ·- ·· - - - - -.. - > 22 60 72 276 91 47 % 9.79 2.946 4.051 4.49 7.09m .242 4.272 6.172 Uned .0d8U0e PrMeda finetu0ng Fe44 ture.7%.$ 3 46 69 å5 09 79 --. -. . .- . .·· - in 9 33 94 10 33 29 1.41 90 446 461 90 36 1.233 §bl Pap.. and Poper Pre40et. Mubber and PleUtkc P?oduct, 162 127 71 15 sa 73 1- 10 kos et..3 176 1t4 19 177 115 3.16 2.00 1.402 1.492 3.40 1.633 1.161 2.029 >7.7ept = PC troleu ~n cu) 66 43 71 92 19 1 1 3- - - - - - - - - 44 22 13 7 36 $ 30 19 2.005 1.110 1.052 1.101 928 236 21 369 e0brIkated 8et.2 ~~d4.1et. ~hi-ery and Transp~rt aq.tp-.t M> i1t 16 60 Yk 93 41 92 - - - - - - - - - 67 69 $2 66 32 63 33 9 2.91 2.99 5 .007 1.347 00w 3.024 933 3.632 tetr.__ _ _ _- A_ _0.. . _. 2 __-, _3 1.422 320 __5 14 - ._ 248 2L4 326 TM1AL. 699 498 27 349 470 344 321 964 - -- - - - - -332 254 231 422 10" 321 40 30 1>.373 10.643 8,429 10.038 21.524 12.0 9.859 34.994 6/ 3aci.des 6.eft estal pred0e.10 N$te1 - . D-e t. ~0on40g off. e«~penest. -er ~t Md 0 p . tot.I. i. he~ C plabl. 2. The P3AC data0.1et4de <948 esilemng 4nd c~n4tm,en srttr. 52!u_cet 7 ~g Imffem-t Ad~-sory C~90 itt~l .01al -Invmo.et~ AdVisory CÖSitt,-;t an the Cen DulBak g, fti LU*k#. 3t4 Il> 90 Table 9.01: PETROLEUM IMPORTS. 1975-87 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 a/ 1987 a/ Value (US$ million) Crude Oil 132.6 135.9 139.2 143.7 201.6 435.8 448.4 488.9 332.9 373.4 335.2 175.1 227.7 Gasoline - - 0.3 0.6 1.2 - - - 4.4 - - - - Avtur 0.5 - 3.3 8.2 22.3 22.5 16.4 1.8 3.2 - - - - Kerosene - 1.3 4.9 3.6 12.1 - - 15.2 15.8 2.5 11.5 3.4 7.9 Automotive Diesel - 1.1 2.8 10.7 51.9 14.8 35.5 56.6 102.0 30.7 31.7 18.7 33.9 Other 8.6 5.8 6.4 8.3 8.6 20.3 14.9 11.4 10.2 13.5 - - - TOTAL 141.7 144.1 156.9 175.2 297.7 493.4 515.2 573.9 468.5 420.1 378.4 197.2 269.5 Volume ('000 tons) Crude Oil 1.464.6 1,447.1 1,529.6 1.443.9 1.444.0 1,861.1 1,710.5 1.940.5 1.492.0 1.733.3 1,657.5 1,639.1 1.778.9 Gasoline - - 2.2 3.7 6.5 - - - 15.0 - - - - Avtur 4.2 - 15.8 55.7 65.3 58.4 45.0 5.4 10.9 - - - - Kerosene - 9.8 32.2 25.4 41.9 - - 43.4 55.8 8.8 44.6 15.4 44.0 Automotive Diesel - 9.2 26.7 82.7 198.6 42.6 110.9 183.9 405.9 131.2 136.8 131.6 206.8 a/ Provisional. Note: 1. Totals may not add up due to rounding. 2. Data may differ with Customs data used elsewhere in this report. Source: uylon Petrc-leum Corporation. Table 9.02: IMPORTS OF CRUDE OIL BY COUNTRY OF ORIGIN. 1975-87 ('000 tons) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Saudi Arabia 1.145.3 796.6 849.0 939.1 787.0 950.0 1.248.8 866.3 346.0 1,387.9 782.4 - - Iran 319.3 650.5 680.7 504.8* 293.4 629.7 432.2 838.7 969.1 126.2 800.2 249.4 761.5 Iraq - - - - 304.7 281.5 - - - - - - Libya - - - - 58.9 - - - - - - - - Malaysia - - - - - 29.4 235.5 177.0 94.4 14.6 236.8 175.7 Qatar - - - - - - - 124.7 - - - United Arab Emirate - - - - - - - - - - 60.3 961.8 596.9 Egypt - - 157.8 214.7 Oman - - 33.3 30.1 Source: Ceylon Petroleum Corporation. Table 9.03: PETROLUM PRODUCT EXPORTS. 1975-87 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 a/ 1987 al AVIATION AND MARINE SALES Value (US$ million) Avtur 7.8 7.5 12.5 14.6 27.5 43.0 47.7 41.9 31.1 28.1 23.9 19.9 17.8 Marine Gas 1.8 1.8 2.9 3.7 7.7 7.7 6.8 7.9 6.0 5.0 4.3 4.7 5.4 Marine Diesel 3.4 3.2 7.1 6.1 10.9 12.3 7.3 8.9 7.2 9.5 9.3 6.7 4.7 Furnace Oil 12.8 12.3 27.2 20.9 42.9 55.8 42.1 39.4 35.0 50.3 46.0 28.6 38.2 Other 0.3 0.3 1.0 0.1 0.6 0.8 0.8 0.8 0.8 0.5 0.2 0.1 0.1 TOTAL 26.1 25.1 50.7 45.3 89.6 119.6 104.7 98.9 80.1 93.4 83.7 60.0 66.2 Volume ('000 tons) Avtur 84.7 68.2 68.1 81.1 73.8 193.0 104.0 91.7 74.1 72.3 63.9 65.3 64.9 Marine Gas 24.5 20.2 22.1 25.3 26.2 19.1 17.8 20.8 16.8 16.5 15.9 26.2 28.5 Marine Diesel 45.2 47.9 52.3 43.0 33.5 30.7 19.0 24.2 21.4 32.7 35.3 37.4 25.2 Furnace oil 340.9 316.4 359.7 263.2 316.6 306.9 203.3 219.0 194.6 293.7 293.0 357.3 386.6 DIRECT EXPORTS Value (US$ million) Naphtha 7.2 7.5 10.6 9.2 28.1 38.2 28.4 20.7 14.2 16.9 29.4 15.3 16.9 Gasoline neg. 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.3 0.4 0.4 0.3 neE. Furnace oil - 3.3 4.4 5.8 8.0 30.1 41.2 34.9 11.2 15.4 27.2 7.4 3.6 a Other 0.1 0.3 0.1 neg. n na 0.1 0.1 0.7 0.7 0.6 1.0 0.7 TOTAL 7.3 11.2 15.2 15.1 36.3 68.5 69.9 55.9 26.4 33.4 57.6 24.0 23.2 Volume ('000 tons) Naphtha 127.7 108.8 101.0 75.0 99.3 130.3 91.2 75.6 54.6 71.6 124.7 130.8 113.1 Gasoline 0.1 0.3 0.3 0.4 0.3 0.3 0.4 0.4 0.7 1.0 1.0 0.8 0.1 Furnace Oil - 92.5 59.1 87.5 55.5 182.9 236.5 212.1 121.5 92.6 185.1 99.3 43.0 TOTAL EXPORTS (US$ million) 55.1 60.1 95.8 60.4 125.9 188.1 174.6 154.8 106.5 126.8 141.3 84.0 89.4 a/ Provisional. Notes: 1. Individual columns may not add up due to rounding. 2. Data may differ from Customs figures used elsewhere in this report. Source: Ceylon Petroleum Corporation. Table 9.04: DOMESTIC PRODUCTION OF PETROLEUM PRODUCTS. 1975-87 (tons) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 a/ 1987 a/ Gasoline 86.788 99.448 103.348 120.623 97.843 109.371 99.553 113.927 94.800 115.865 116.181 123.089 131.126 Kerosene - - - - - - - - - - 156o948 153.629 152.381 Diesel. Automotive 255.178 276.336 276.620 242.200 246.002 384.311 309.583 336.232 175.528 358.727 364.150 406.569 330.376 Diesel. Other 87.259 88.318 91.708 117.243 90.196 95.758 107.186 135.104 213.130 107.572 56,010 60.995 162.973 Furnace Oil 537.473 513.678 545.349 547.377 534.756 744,877 701.419 715.302 492.549 657.776 603.140 559.497 577.209 Kerosene 195.470 188.311 185.447, 211.318 186.936 179.341 148.811 155.233 132.473 148,233 6 169 n.e. Naphtha 107.391 103.484 102.197 82.372 90.237 150.850 137.653 157.616 119.638 144.337 124.423 133,756 117,636 Bitumen 20.721 26.921 25.202 24.872 24.100 26.174 15.516 24.871 23.022 35.227 32.013 47.111 34,470 LFG 1,030 2.130 3.101 5.355 6.199 7.477 6.425 8.197 7,074 8.631 73.933 96.510 17.677 Avtur 54.879 76,884 71.482 34,465 31.325 62,171 83.772 114.985 65.450 115,717 2.191 3.583 70.979 Solvents 1.700 1,863 2,130 2.565 3.374 2.350 3.386 2.549 2.983 4.238 11.815 16.480 4,044 Fuel Gas - - - - - - - - - 511 2,354 Total 1.347,889 1.377.373 1.406.584 1.388,390 1.310.968 1.762,680 1.626.565 1.785.479 1.345.422 1.696.834 1.543.164 1.601.388 1,598.689 Memorandum Items Energy Products 1.218.077 1,245.105 1.277.055 1.278,581 1.193.287 1.583.306 1.457.067 1.600.443 1.199,779 1.513.032 1.382.183 1.416.938 1,375.786 Non-Energy Products 129.812 132,268 129.529 109.809 117.681 179.374 169,498 185,036 145,643 183,802 160.981 184,450 222,903 Light Distillates 196.051 205,968 209,782 209.629 195.954 268.986 258,292 302.279 241.529 270,745 255,534 275,043 270,483 Middle Distillates 593,644 630,806 626,251 606.512 556.158 722.643 651.338 743.027 588,322 733.086 652,477 719,737 716.527 Heavy Ends 558,194 540.599 570.551 572,249 558.856 771.051 716.935 740.173 515.571 693,003 635.153 606.608 611,679 a/ Provisional. Sourcet Ceylon Petroleum Corporation. Table 9.05: LOCAL SALES VOLUME OF PETROLEUM PRODUCTS. 1975-87 (metric tons) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 a/ 1987 a/ LPG 6/ 582 807 3.108 2.432 6.404 7.110 6.663 8.197 7.150 8.718 11,270 16.4)6 18,187 Gasoline 95.057 101.065 111,491 129,994 115.146 107,691 109.028 114.217 117.477 118.831 121,578 130,624 140.401 Kerosene 209.764 206.593 212.886 244,832 229.918 188.288 168.266 174,098 159,146 150.926 153.655 154.182 155.575 Diesel. Automotive 245.515 257.557 261.988 .308.792 349,404 397.710 420.912 464.594 464.268 495.721 488.497 487.332 495.589 Diesel. Marine c/ 5.232 5.183 5,497 5.869 3.726 3.027 2.585 5.515 7.829 3,902 778 513 91 Diesel. Industrial 37,314 35.663 46.245 62,015 64.188 63.953 105,000 143,121 295,885 64,188 37.123 35,997 152.360 Furnace Oil, Domestic 143.664 125.578 135.530 162.556 183.539 259,731 240.326 247.138 253.098 218.913 142.783 129.048 161.369 Furnace Oil. Marine 20,108 20,088 18,762 21.233 16.099 12,887 22.884 26.974 26,881 9,397 85 705 299 Avtur 13.571 8.614 16.499 6.749 8,169 22.843 30,967 31.415 34.262 43.827 54.185 45.742 38.662 Lubricants d/ 15.648 19.696 14.933 17.345 18.899 22.312 20.430 20.614 20,715 21,039 20.635 20.516 20.773 Bitumen 22.444 26,023 25.152 26.190 24.265 10.259 16.477 21.116 24.423 33,099 32.661 43.690 34.648 1 Naphtha - - - - - 33,642 66,063 98,021 75,044 78,431 7.486 Nil Nil a/ Provisional. b/ Since March 1977, reflects transfers to Colombo Gas 6 Water Company. c/ Includes Marine Gas Oil. Marine Diesel Oil and Heavy Diesel. d/ Other than marine and aviation lubricants. Source: Ceylon Petroleum Corporation. Table 9.06: PRODUCTION. TRADE. AND APPARENT CONSUMPTION OF ENERGY PETROLEUM PRODUCTS. 1975-87 ('000 metric tons) 1975* 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Production 1.218 1,245 1,277 1,279 1.193 1.583 1.470 1.600 1.200 1.513 1.383 1.417 1.599 Imports 6 20 78 168 312 102 156 270 488 140 181 147 251 Exports 129 203 160 163 155 314 328 288 179 167 186 100 160 Bunkers 412 385 435 332 377 357 241 264 233 343 347 424 442 Aviation 85 69 68 81 74 93 104 92 74 72 118 111 225 Apparent consumption 598 608 692 871 899 921 953 1.226 1,202 1.071 912 929 1.023 Per Capita consumption a/ 44.31 44.32 49.63 61.38 62.12 62.41 63.58 80.72 77.97 68.66 57.6 57.6 a/ In kilograms. Source: Ceylon Petroleum Corporation. Table 9.07: PETROLEUM PRODUCT PRICE CHANGES. 1970-87 a/ (Rs per Liter; Ra per Imperial Gallon in Parentheses) / d/ e Gasoline Automotive Industrial Diesel Furnace Oil Super Regular c/ Kerosene Diesel Low Sulphur f/ High Sulphur 500 Seconds 800 Seconds 1,000 Seconds Prevailing Price January 1. 1970: 0.78 (3.56) 0.70 (3.16) 0.18 (0.80) 0.37 (1.66) - - 0.22 (3.00) - - 0.15 (0.70) - - Subsequent Changes: 1970 - October 26 0.84 (3.81) 0.75 (3.41) - - - - - - - - - - 1971 - March 1 0.90 (4.10) 0.82 (3.75) 0.20 (0.92) 0.40 (1.81) - - 0.25 (1.15) - - 0.19 (0.85) - - - October 28 1.10 (5.00) 1.00 (4.55) - - - - - - - - - - - - - - 1972 - February 22 1.15 (5.25) 1.06 (4.80) 0.24 (1.08) - - 0.29 (1.30) 0.26 (1.20) 0.21 (0.95) 0.20 (0.10) 0.14 (0.65) - December 31 1.26 (5.75) 1.17 (5.30) 0.29 (1.32) 0.47 (2.14) 0.36 (1.63) 0.34 (1.53) 0.28 (1.28) 0.27 (1.23) 0.26 (1.18) 1973 - August 24 1.44 (6.55) 1.34 (6.10) 0.42 (1.92) 0.60 (2.74) 0.49 (2.23) 0.47 (2.13) 0.41 (1.88) 0.40 (1.83) 0.39 (1.78) 1974 - January 9 2.75 (12.50) 2.64 (12.00) - - - - - - - - - - - - 0.84 (3.80) - January 10 - - - - 0.79 (3.60) 1.06 (4.30) 1.08 (4.90) 1.01 (4.60) 0.88 (4.00) 0.86 (3.90) - - 1975 - October 3 2.93 (13.30) 2.82 (12.80) 0.90 (4.08) 1.17 (5.30) 1.19 (5.40) 1.12 (5.10) 0.99 (4.50) 0.97 (4.40) 0.95 (4.30) 1977 - March 15 - - - - 0.77 (3.48) - - - - - - - - - - I-A 1978 - December 21 4.40 (20.00) 4.07 (18.50) - - - - - - - - - - - - 1979 - June 13 6.60 (30.00) - - - - 2.31 (10.50) 2.64 (12.00) 2.27 (10.30) 2.13 (9.70) 2.09 (9.50) 1.98 (9.00) - September 1 - - - - 2.35 (10.68) - - - - - - - - - - - - 198 - January 26 8.25 (37.50) - - 3.01 (13.68) 2.97 (13.50) 3.41 (15.50) 2.93 (13.30) 2.79 (12.70) 2.75 (12.50) 2.64 (12.00) - June 20 8.80 (40.00) - - 3.34 (15.18) 4.62 (21.00) 5.06 (23.00) 4.58 (20.80) 4.44 (20.20) 4.40 (20.00) 4.29 (19.50) 1981 - January 19 9.35 (42.50) - - 3.89 (17.68) 5.94 (27.00) 6.60 (30.00) 5.68 (25.80) - - - - - - April 4 10.00 (45.50) - - - - - - - - - - - - - - - - 1983 - March 2 12.00 (54.58) - - 5.20 (23.68) 6.75 (30.69) 7.90 (35.91) 6.45 (29.32) - - - - - - July 22 13.50 (61.40) - - 6.58 (29.97) 8.13 (36.98) 9.28 (42.20) 7.83 (35.61) 4.89 (22.22) 4.84 (22.00) 4.72 (21.45) December 5 - - - - - - - - - - - - 5.22 (23.73) 4.87 (22.15) - - 1986 - April - - - - - - - - - - - - 4.22 (19.18) 3.87 (17.59) 3.72 (16.91) 1987 - a/ Prices are Colombo spot prices; a margin to cover transport costs is added to out-station prices for all products except gasoline. which as of April 1981. sells at a uniform price island-wide. b/ Although Sri Lanka has officielly gone metric, prices for petroleum prcducts continue, for the time being, to be specified in imperial gallons terms. Liter prices have been obtained by dividing imperial gallon prices by 4.5461. c/ Marketing of regular grade gasoline was discontinued in early 1979. 4/ Industrial diesel is often referred to as heavy diesel; the two terms ,re used interchangeably in Sri Lanka. Prior to 1972. low sulphur industrial diesel was not marketed. el Differentiated furnace oil was not marketed prior to 1972. T/ As of January 1981, low sulphur industrial diesel is marketed as Super diesel. Sources: Ceylon Petroleum Corporation; and Coiatral Bank of Sri Lanka. Table 9.08: CEB ELECTRICITY GENERATION, 1970-87 Generation Capacity (M) -----------------------------Energy Generated (GWh)----------------- Thermal Energy Components Installed Effective Hydro Thermal Total Kelanitissa Gas Steam Turbines Other a/ Sapuiaskanda 1970 262 243 740.3 41.6 781.9 2.0 - 39.6 - 1971 262 243 825.2 23.8 849.0 17.9 - 5.9 - 1972 262 243 848.3 93.7 942.0 87.5 - 10.2 - 1973 262 243 698.3 281.9 980.2 260.9 - 21.0 - 1974 362 339 997.9 14.3 1,012.2 12.5 - 1.8 - 1975 362 339 1,077.8 1.2 1,079.0 1.2 - 0.1 - 1976 402 377 1,108.5 24.3 1,132.8 23.9 - 0.4 - 1977 402 365 1,214.5 2.1 1,216.6 1.7 - 0.3 - 1978 402 365 1,365.7 19.3 1,385.0 14.0 - 5.2 - 1979 402 365 1,461.2 64.0 1,525.2 58.0 - 6.0 - 1980 422 399 1,479.4 188.8 1,668.2 140.1 18.4 30.3 - 1981 522 519 1,571.3 300.3 1,871.6 98.0 182.7 19.6 - 1982 562 539 1,608.1 457.6 2,065.7 89.1 352.6 16.0 - 1983 592 569 1,217.2 897.2 2,114.4 147.1 734.5 15.5 - 1984 812 799 2.090.7 170.0 2,260.7 11.1 116.9 2.8 39.2 1985 1.016 936 2,394.6 69.4 2,464.0 - 8.9 0.1 60.4 1986 1,065.25 1,055 2,645.3 6.5 2,651.8 - 0.6 0.1 5.8 1987 b/ 1,071.25 11058 2,177.3 530.1 2,707.4 - 314.2 5.4 210.5 a/ Primarily Chunnakam (14.0 HW) and Pettah (6.0 MW) diesel plant and Sapugaskanda diesel (80 Mw) from May 1984. b/ Provisional. Note: Capacity figures are end-year. Sources: Ceylon Electricity Board; and Central Bank of Sri Lanka. -138- Table 9.09: CEB ELECTRICITY SALES. 1970-87 (in GWh) Street Time of Domestic Industrial Commercial Authorities Lighting Day Tariff Total 1970 62.5 343.0 88.0 167.5 10.5 - 671.5 1971 64.6 373.2 92.8 180.5 11.0 - 722.1 1972 72.5 436.4 96.8 193.1 11.5 - 810.3 1973 81.5 466.6 107.6 198.4 12.0 - 866.1 1974 82.6 477.2 118.1 201.9 12.5 - 892.3 1975 84.9 522.6 122.5 222.2 13.0 - 965.2 1976 95.2 516.3 137.4 237.3 13.5 - 999.7 1977 106.5 519.4 147.9 252.8 14.0 - 1,040.6 1978 119.2 592.0 158.9 275.9 15.0 - 1,161.0 1979 153.2 629.9 203.0 296.3 16.0 - 1,298.3 1980 190.8 625.6 223.2 335.5 16.5 - 1,391.6 1981 216.6 647.5 219.9 380.6 8.5 - 1,503.1 1982 258.3 739.2 262.5 417.5 8.6 - 1,686.1 1983 304.8 752.0 291.8 433.0 9.0 - 1,790.6 1984 316.9 790.9 299.6 457.7 11.4 - 1,876.5 1985 346.4 850.4 350.0 502.1 11.8 - 2.060.7 1986 369.2 925.3 381.4 543.3 13.1 - 2,232.3 1987 a/ 384.1. 795.9 399.0 572.6 14.2 82.7 2,248.5 a/ Estimates. Source: Ceylon Electricity Board. -139- Table 10.01: MINIMJM WAGE RATE, 1977-87 (December 1978 = 100) Year Private Public Money Real a/ Money Real a/ 1977 66 78 87 103 1978 95 99 100 105 1979 120 113 117 111 1980 147 111 129 97 1981 152 97 146 93 1982 176 101 188 108 1983 189 96 216 109 1984 229 98 247 107 1985 248 106 284 121 1986 26i 103 297 117 1987 1st Qtr. 269 102 297 113 2nd Qtr. 275 102 297 110 3rd Qtr. 281 102 297 109 4th Qtr. 286 101 297 105 a/ Money wage deflated by Colombo Consumer Price Index. Source: The Central Bank of Sri Lanka. -140- Table 10.02: COLOMBO CONSUMER PRICE INDEX NUMBERS, 1977-87 (By Commodity Group) All Items Food Clothing Fuel Rent a/ Misc. Weights 100.0 61.9 9.4 4.3 5.7 18.7 Index (1978 = 100) 1977 89.2 85.6 98.9 98.3 100.0 92.7 1978 100.0 100.0 100.0 100.0 100.0 100.0 1979 110.8 153.0 102.2 125.3 100.0 112.3 1980 139.7 143.0 106.1 215.1 100.0 130.7 1981 164.8 168.3 114.0 293.0 100.0 153.8 1982 182.6 189.7 121.0 311.4 100.0 167.8 1983 208.2 213.2 128.7 414.9 100.0 192.9 1984 242.9 251.8 136.0 489.4 100.0 221.0 1985 246.4 252.0 143.3 508.2 100.0 233.3 1986 266.0 271.1 165.6 514.2 100.0 266.7 1987 286.6 293.5 177.2 518.4 100.0 289.5 1986 January 257.5 264.6 151.5 513.4 100.0 243.5 February 259.7 266.2 156.1 513.4 100.0 248.4 March 261.3 266.6 157.8 513.4 100.0 255.9 April 262.5 266.1 158.3 513.4 100.0 265.3 May 263.7 267.3 161.2 513.4 100.0 266.2 June 266.7 270.6 167.5 513.4 100.0 267.6 July 266.2 268.8 169.4 514.9 100.0 270.6 August 267.9 270.1 171.0 514.9 100.0 275.1 September 268.2 270.1 171.1 514.9 100.0 277.4 October 269.5 271.8 174.0 514.9 100.0 276.6 November 273.8 278.5 174.0 514.9 100.0 275.2 December 275.5 279.9 175.0 514.9 100.0 279.3 1987 January 277.2 282.5 175.0 514.9 100.0 279.1 February 277.5 282.5 175.0 514.9 100.0 280.9 March 277.7 281.6 175.8 514.9 100.0 285.4 April 280.3 284.7 176.7 514.9 100.0 288.8 may 283.8 290.0 177.1 514.9 100.0 288.1 June 285.4 292.4 177.1 514.9 100.0 288.1 July 286.8 293.9 177.1 514.9 100.0 290.3 August 288.9 296.9 177.8 514.9 100.0 290.6 September 287.8 294.8 177.8 517.9 100.0 291.8 October 292.3 300.4 179.1 526.9 100.0 292.8 November 297.5 307.1 179.1 528.3 100.0 296.9 December 303.5 315.0 179.2 528.3 100.0 300.8 a/ This index reflects controlled rents. Source: The Central Bank of Sri Lanka. Table 10.03: WHOLESALE PRICE INDEX. 1977-87 (1978 = 100) 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1st 2nd 3rd Heights Qtr. Qtr- Qtr- All Items - 100.0 86.4 100.0 109.5 146.5 170.2 180.7 225.9 283.8 240.7 233.5 257.1 254.6 266.9 By commodity: Food 67.8 90.6 100.0 103.8 137.8 160.7 169.6 220.5 293.2 223.1 208.4 241.1 233.5 249.9 Alcoholic drinks 2.9 92.4 100.0 114.8 148.4 185.7 196.5 206.5 27.7 246.3 289.9 319.6 320.2 320.2 Textile and footwear 4.0 70.7 100.0 103.0 104.7 117.1 129.6 121.9 124.1 127.3 129.9 135.4 135.5 135.8 Paper products 1.4 77.0 100.0 127.0 182.6 188.7 189.2 223.0 265.0 282.2 274.5 266.2 283.0 291.4 Chemicals and chemical products 5.1 77.9 100.0 113.7 134.8 215.1 227.6 255.8 305.8 306.9 290.5 279.5 283.5 282.5 Petroleum products 6.4 99.7 100.0 167.4 325.1 427.2 432.6 556.5 626.2 626.2 626.2 626.2 626.2 626.2 Non-metallic products 1.8 68.0 100.0 111.1 160.3 162.0 175.0 203.5 249.2 256.3 244.7 232.6 228.7 226.8 Metal products 0.9 81.4 100.0 129.6 148.9 176.2 196.7 210.5 265.3 277.9 272.1 274.3 274.6 275.2 Transport equipment 0.8 90.0 100.0 104.6 120.8 136.9 141.7 177.2 208.3 216.5 217.6 220.7 221.3 221.3 Electrical appliances and supplies 1.0 94.9 100.0 111.9 124.5 149.9 188.0 205.4 223.2 236.6 237.1 236.6 249.3 256.7 Machinery 1.3 94.0 100.0 113.7 127.5 148.1 153.5 169.2 180.9 182.7 199.2 210.9 213.6 219.0 Fuel and light 1.8 70.7 100.0 125.9 153.2 158.6 161.2 168.6 201.6 247.3 272.9 281.7 286.1 286.1 Miscellaneous 4.8 67.7 100.0 117.0 147.5 151.6 161.3 197.5 202.7 222.4 244.7 256.5 288.0 304.7 By sector: Domestic 50.3 86.2 100.0 107.9 132.2 162.1 178.9 189.5 210.9 226.4 244.2 244.3 252.9 253.7 Imports 27.2 67.0 100.0 118.8 171.2 217.2 212.7 234.4 249.2 256.8 255.7 256.6 255.8 264.2 Exports 22.5 100.0 100.0 105.0 146.6 149.7 160.4 267.5 404.4 247.6 205.3 274.5 256.2 286.2 By sector: Consumer 75.3 89.5 100.0 107.6 144.5 160.9 170.6 220.0 288.5 229.2 219.7 250.8 246.1 260.4 Intermediate 20.5 76.6 100.0 120.8 163.6 208.5 216.3 250.6 275.8 283.5 285.0 286.5 292.0 299.8 Investment 4.2 77.2 100.0 115.4 156.4 180.3 192.1 217.0 235.8 242.0 237.4 234.0 231.3 230.4 Source: The Central Bank of Sri Lanka. Table 10.04: COST INDICES FOR SELECTED BUILDING MATERIALS AND DIFFERENT CONSTRUCTION ACTIVITIES. 1977-87 (1969 = 100) Item 1977 1978 1979 1980 ' 1981 1982 1983 1984 1985 1986 1987 Cement 164 199 292 636 723 814 824 930 1.005 983 1.006 Steel (M.S. Bars) 255 274 458 504 572 573 632 844 877 877 796 Bricks (Hand molded) 156 268 285 393 388 442 461 562 540 556 585 Asbestos Sheet (Corrugated) 286 327 411 607 627 706 799 835 843 832 846 Timber (Sawn) 129 217 378 634 814 814 833 838 964 964 964 Metal (3/4") 168 338 533 617 551 557 632 703 786 799 828 P.V.C. Pipes (3/4n) 284 362 459 520 520 520 562 618 620 613 493 Housing Construction 173 252 347 519 617 645 691 722 831 837 846 Non-Residential Buildings 199 254 320 463 548 586 631 706 739 740 842 Other Construction Works 187 220 278 386 457 493 534 607 637 644 647 All Construction Activities 186 247 327 469 558 592 637 715 753 761 765 Source: Ministry of Local Government. Housing and Construction. Table 10.05: ADMINISTERED PRICES OF BASIC CONSUMER GOODS. 1977-87 (Re) Dec. Dec. Dec. Dec. June Dec. June Dec. June Dec. June Dec. June Dec. June Dec. June Dec. Unit 1977 1978 1979 1980 1981 1981 1982 1982 1983 1983 1984 1984 1985 1985 1986 1986 1987 1987 Rice for Food Stamps kg 2.15 2.15 3.48 4.48 6.15 6.15 6.15 6.15 6.16 6.25 6.72 6.72 6.72 7.22 7.22 7.22 7.22 7.22 Rice (Open Market) kg 3.70 4.24 1.i3 6.72 6.07 8.60 7.69 7.87 7.74 8.94 8.65 8.89 8.60 10.05 8.99 10.17 9.19 11.05 Flour kg 1.32 2.47 3.00 5.23 5.50 6.65 6.65 5.95 6.82 6.82 7.75 7.75 7.75 7.90 7.90 7.90 7.90 7.90 Bread kg 1.32 2.21 2.76 4.52 5.06 5.95 5.95 5.51 6.17 6.17 6.78 6.78 6.78 6.89 6.89 6.89 6.89 6.89 Kerosene liter 0.76 0.76 2.35 3.34 3.89 3.89 3.89 3.89 5.20 6.58 6.58 6.58 6.58 6.58 6.58 6.58 6.58 6.58 Electricity unit 0.12 0.31 0.31 0.35 0.35 0.35 0.40 0.40 0.40 0.40 0.40 0.40 0.50 0.50 0.50 0.50 0.50 0.50 Bus Fare journey 0.50 0.60 0.60 1.60 1.60 1.60 1.60 1.60 2.00 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 Coconuts each 1.42 1.0A 1.82 2.48 2.02 2.58 2.41 2.47 2.54 4.13 3.89 3.98 2.50 2.00 1.80 2.71 2.53 4.75 Coconut Oil bottle 4.58 4.24 7.06 8.38 8.43 8.50 8.23 8.07 10.00 20.80 23.70 19.75 15.06 7.25 6.50 10.00 15.00 20.00 Milk Powder kg 12.13 12.13 18.74 26.28 32.50 31.25 34.47 35.88 52.00 52.00 52.00 58.20 58.20 58.20 58.20 58.20 58.20 58.20 Sugar (Open Market) kg 6.62 6.62 6.62 14.55 16.50 13.50 12.63 11.90 12.50 13.00 12.38 12.50 12.50 14.00 14.50 14.50 16.00 17.00 Source: The Central Bank of Sri Lanka. Table 11.01: SELECTED SOCIAL INDICATOR! 1946-87 1946 a/ 1953 a/ 1963 a/ 1971 a/ 1975 1976 1977 1978 1979 1980 1981 a/ 1982 1983 1984 b/ 1985 b/ 1986 b/ 1987 b/ EDUCATION Adult Literacy (%) .. 69.0 77.0 78.5 * .. .. .. 87.2 . HEALTH AND DEMOGRAPHY Life Expectancy: Male 43.9 58.8 63.3 64.2 .* .. .. .. 66.0 b/ .. 67.8 b/ .. .. .. Female 41.6 57.5 63.7 67.1 ** .. .. .. 70.2 b/ .. 71.7 b/ .. .. .. Infant Mortality (per 'AW-) 141 71 56 45 45 44 42 37 38 34 30 30.5 28.3 23.1 23.5 22.6 Crude Birth Rate (p.: '000) 37.4 38.7 34.1 30.4 27.8 27.8 27.9 28.5 28.9 28.4 28.2 26.9 26.3 24.8 24.3 22.3 22.0 Crude Death Rate (per '000) 20.2 10.9 8.6 7.7 8.5 7.8 7.4 6.6 6.5 6.2 5.9 6.1 6.2 6.5 6.2 6.0 5.8 Rate of Natural Population Increase (Z) 1.7 2.8 2.6 2.3 1.9 2.0 2.1 2.2 2.2 2.2 2.2 2.1 2.0 1.8 1.8 1.6 1.6 Net Migration (per '000) 5.2 5.2 -1.0 -0.9 -2.3 -3.8 -3.8 -2.8 -3.1 -4.7 -3.4 -6.0 -6.8 -4.9 0.6 0.1 Average Age at Marriage: - Male 27.0 27.2 27.9 28.0 27.6 27.6 27.5 27.6 27.8 27.8 27.9 27.8 27.7 .. .. .. .. Female 20.7 20.9 22.1 23.5 23.3 23.3 23.4 23.4 23.7 23.8 24.4 23.4 23.5 .. .. .. Number of New Family Planning "Acceptors" ('000) .. .. .. 42 110 88 68 76 92 171 122 114 173 160 139 c/ 144 c/ 112 c/ Female (Crude) Labor Force Participation Rate (All ages %) * .. 14.1 19.1 * ** * .. . ..17.6 .. . .. . . . .. not available. a/ Census years. b/ Provisional. c/ Including Norplant. Sources: Department of Census and Statistics: Registrar General's Department. and Family Health Bureau. Table 11.021 HEALTH STATISTICS. 1975-86 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 a/ Hospitals (practicing Western medicine) c/ 458 460 467 484 483 480 488 492 493 494 491 Persons per Hospital 29.467 29.819 29,850 29.306 29.961 30.704 30,713 30.872 31.270 31.862 32.255 Persons per Bed 331 334 336 341 341 340 340 350 349 350 353 Central Dispensaries 355 351 356 379 369 347 340 338 353 334 338 Persons per Dispensary 38.027 39,080 39,157 37,425 39,217 42.473 44,082 44.938 43.671 47.125 46.855 Number of Doctors 2.138 2.248 2,168 2.258 2.263 2,051 2,233 2.036 1.939 1.951 2.150 Persons per Doctor 6.312 6.102 6,429 6.282 6,394 7.186 6,712 7.460 7.950 7,995 7.366 Number of Aset. Medical Practitioners 1.075 1,059 1,015 1,178 931 1,008 925 884 933 984 957 Persons per Asst. Medical Practitioner 12.554 12.953 13.733 12,041 12.284 14,621 16.203 17.182 16,523 15.853 16.549 Number of Nurses 5.695 5.732 5.640 6.169 6.848 6.227 6,805 7.574 7,214 7,400 8,091 Persons per Nurse 2.369 2.393 2,472 2.299 2.113 2.367 2.182 2.005 2.137 2.127 1.957 .. Number of Inpatients ('000) 2.146 2.282 2.188 2.174 2.425 2.334 2.283 2.445 2.502 2.524 2.498 .. Ln Number of Outpatients ('000) 27,654 31.649 25.764 28.419 29.400 31.891 30.247 31.696 30.720 31.908 29.570 New Acceptors of Family Planning Methods 109.639 88.215 67,890 76.180 92,156 171.160 121,797 114,481 173,197 160,023 '38.967 4/ 114.791 d/ Loops 32.755 27.030 21.321 23.085 20.187 19.2.32 14.833 16.115 16.328 16.140 13.877 10.069 Sterilization 39.164 35.588 19,055 21.949 35.643 112.926 76.633 61.924 111,777 101.328 71.772 42.856 Other Methods 37.720 25.597 27,514 31.146 31.326 39.002 30.331 36,442 45,092 42.555 53.318 61.866 Recurrent Expenditure (Rs million) 324 386 455 518 632 740 853 953 1.735 1.251 1.731 Capital Expenditure (Re million) 86 114 43 179 381 602 141 174 711 212 235 Total (R million) 410 500 498 697 1.013 1,342 994 1.127 1.024 1.463 1.966 Expenditure per Person (Re) e/ 30.4 36.4 35.7 49.5 70.0 91.1 66.9 74.2 112.6 92.7 124.1 Total Expenditures as Z of GDP 1.6 1.8 1.4 1.7 2.0 2.2 1.2 1.2 1.5 1.1 1.3 .. not available. a/ Provisional. b/ Up to October (provisional). i Includes maternity homes. d/ Including Norplant. e/ Includes capital expenditures, grants and contributions. Sources: Department of Health Services; Department of Census Statistics; and Family Health Bureau. Table 11.03: EDUCATION STATISTICS. 1975-86 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 a/ 1985 a/ 1986 1/ Total Number of Schools 9.675 9.683 9-671 9.726 9.626 9.794 9.879 9.901 9.947 9.914 10'051 10,077 Elementary 7.656 7.657 7.638 4.026 3.873 7.399 3,914 4.623 3,983 4.000 3.998 3.998 Secondary 1.730 1.767 1.773 5.444 5.519 1.718 5.607 4.921 5.592 5.556 5.636 5.718 Others 289 259 260 256 234 677 358 357 372 358 417 421 Number of Government Schools 9,386 8.655 8.673 9.072 9.052 9.117 9.521 9.544 9.595 9.556 9.634 9.656 Total Number of Pupils 2,543.641 2,571,984 2,561,381 3,081,725 3,208.191 3,389,776 3,451,358 3,484.661 34075 3.625.897 3,738633 3,749,317 Grades 1 to 8 2.463.503 2.462.147 2.940.105 3.135.716 .. 2.738.226 2.822.952 2.871.537 2.875.979 .. 3.050.301 Grades 9 to 12 110.481 104.234 93.620 72.475 .. 651.550 628.406 613.124 384.396 .. 699.016 Private School Teachers .. .. .. .. 3.719 2.278 4.213 4.592 2.361 2.313 2.465 Government School Teachers 99.067 105.950 113.379 125.466 138.488 136.714 131.656 129.210 129,480 135.514 142.240 142.630 Pupil/Teacher Ratio 25 23 22 25 24 24 26 26 27 26 25 26 Number of University Students 13.260 13.250 12.739 16.164 18.383 16.384 18.113 18.103 18.496 18.496 18.217 18.913 Number of University Teachers 2.000 2.025 2.048 2.079 1.639 1.604 1.539 .. 2.030 1.941 2.051 1.683 New Admissions 3.482 3.854 4.366 4.717 4.286 4,688 4.806 5.106 5.463 5.630 5.707 .. Number Graduated 3.146 3.350 3.802 3.850 3.372 3.252 2.893 .. 3.953 4.468 4.481 3.998 Recurrent Expenditure (Ps million) 655 788 860 982 1.132 1.388 1.599 2.012 2.324 2.572 3.207 3.518 Capital Expenditures (Ra million) 53 123 116 157 259 458 421 471 507 536 0 1,252 Total (Ra million) 708 911 976 1,139 1.391 1.846 2.020 2.483 2.831 3.108 4.137 4.770 Total Expenditure as 2 of GDP 2.7 3.2 2.8 2.7 2.7 2.8 2.4 2.5 2.6 2.2 2.8 2.9 not available. 8/ Provisional. Source: The Central Bank of Sri Lanka. Table 11.04: TOURISM: ARRIVALS BY REGION. 1975-87 (Number) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Western Europe 60.187 72.624 103.807 125.664 160.664 213.482 245,785 232.290 176.310 191,070 153,004 143.022 121.112 Asia 24,604 25.417 27.447 38.560 58.975 74.676 88.744 135.088 124.620 89.736 79,056 66,150 43.462 North Americe 6.823 6.279 8.907 10.729 11.701 12,878 13.946 15.528 14.686 15.020 10.358 9.232 7.166 Eastern Europe 4.957 5.825 4.480 6.102 5,496 4.906 5.311 4.160 4.488 3.270 3.080 2.764 3.160 Australia 3.683 4.199 5.415 6.629 7.374 8.724 9.584 12.834 10.554 11.970 8.090 5,788 4,448 Others 2.950 4,627 3,609 4.908 5,954 7,114 7,372 7,330 6,872 6.218 3,868 3,150 3,272 TOTAL 103.204 118.971 153.665 192.592 250,164 321,780 370,742 407.230 337,530 317.734 257.456 230.106 182.620 Memorandum Items: Tourist Nights ('000) 1.015 1,194 1,645 2.061 2,777 3.548 3.907 4.048 3.179 2,818 2.365 2.513 2.414 Guest Nights b/ ('000) 656 847 1.109 1.350 1,637 2.008 2.097 2.056 1.652 1.835 1,667 1,651 1.531 Rooms in Graded Accommodation 3.632 4,581 4.851 5.347 5.599 6.042 6,891 7.539 a.852 9.627 9.826 9.794 9.921 Tourist Re-ceipts c/ 41 ($ Million) 22.4 28.2 40.0 55.8 77.7 110.7 132.4 146.6 125.8 104.9 75.5 77.1 64.5 a/ - a/ Estimate. b/ Tourist nights in Graded Accommodation. c/ Data not consistent with the foreign travel receipts data presented in Table 3.01 which are based on The Central Bank of Sri Lanka data. Source: Ceylon Tourist Board. NOTES NOTES MAP SECTION SRI LANKA -- Ntlionai rod - Raiys $ ~4.cted towns and .IiGgfi N Notionol capital - ...Otrict boumnis Pro*.inc bowndarim River J A F F A/ L, L A i T I V U Monk.la,m MANNAR VALUNIYA M ES TRIN .MALe Tnnc~male Meda«ccnChqyc A N UR A D ÅAp R A k Anurad oura POILONINARUWA PUTTALAM S Polonno~-, DombuIIa BATTICALOA e.i KR U UN GALA runega M~ale Konoy BADA Å KeaKA N DTY atnylo.GAP H A K EGA L LA R9o l Boduuo' noe ee aweemy CO..OMBO NuWa Ej.yo - tOM UWAR E tt YA & OM N R A G A L AÅ olui ased er,danermeRafnopurm ~Sfl F nglMa Corp*%. r r ie g s . K ARA OO nake H AMS A NT 0T A G Å L E MATARA m I ee ARmoL19 APRIL 19f