Report No. 17761-CE Sri Lanka Recent Economic Developments and Prospects May 1, 1998 Poverty Reduction and Economic Management South Asia Region Document of the World Bank CURRENCY EQUIVALENTS Sri Lanka Rupee (SLR) US $1.00=SLR 62.61 (April 24, 1998) FISCAL YEAR (FY) July 1-June 30 ACRONYMS AND ABBREVIATIONS BOI - Board of Investment BOO/BOT - Build Own Operate/Build Own Transfer CEA - Central Environmental Authority CEB - Ceylon Electricity Board CPC - Ceylon Petroleum Corporation CWE - Ceylon Wholesale Establishment FDI - Foreign Direct Investment GDP - Gross Domestic Product GST - Goods and Services Tax IDA - International Development Association IFC - International Finance Corporation IMF - International Monetary Fund NDB - National Development Bank NEAP - National Environmental Action Plan PMB - Paddy Marketing Board QE II - Queen Elizabeth II Berth SLCTB - Sri Lanka Central Transport Board SLT - Sri Lanka Telecom WTO - World Trade Organization Vice President - Ms. Mieko Nishimizu Country Director - Mr. Roberto Bentjerodt Sector Manager - Mr. Roberto Zagha Task Leader - Mr. Eric Bell TABLE OF CONTENTS Page No. Preface Overview I. Recent Economic Developments ...................................................................2 A. Overall Economic Performance ...................................................................2 B. Economic Growth, Savings and Investments ..................................................... 2 C. Fiscal Developments ...................................................................3 D. Monetary Policy and Prices ...................................................................5 E. Balance of Payments ...................................................................6 F. Structural Reforms ...................................................................7 G. The Civil Conflict and its Costs ...................................................................9 IH. Issues and Recommendations ...................................................................9 A. Introduction ...................................................................9 B. Continuing Fiscal Adjustment .................................................................. 10 C. Containing Inflation .................................................................. 11 D. Sustaining the Growth Process ........................................................... ....... 12 E. Improving the Quality of Health and Education .16 IH. Medium-term Prospects and Financing ................................................................. 16 A. Medium-term Outlook Under Structural Reforms .............................................1 7 B. Financing Requirements ................................................................. 18 C. Reconstruction and Rehabilitation of the North and East .................................. 20 List of Text Tables Figure 1: Real GDP Growth and Unemployment ................................................... 2 Figure 2: Inflation ............................................................2 Figure 3: Total Central Government Debt ............................................................ 4 Figure 4: Total Revenues and Expenditures ........................................................... 5 Figure 5: Fiscal Deficit ............................................................5 Figure 6: Current Account Deficit and Capital Inflows .......................................... 7 Figure 7: Gross Official Reserves ............................................................7 List of Figures Table 1: Summary of Central Government Operations, 1994-98 .......................... 4 Table 2: Key Economic Indicators Under a Structural Reform Scenario .............. 18 Table 3: Sri Lanka - External Financing Requirements ........................................ 19 Annex Tables ................................................................. 21-33 This document was prepared by Eric Bell (Senior Country Economist, SASPR). LIST OF ANNEX TABLES Table A.l: Key Economic Indicators, 1987-1997 .................................................... 21 Table A.2: Sectoral Composition and Increase in Gross National Product, 1989-1997 .................................................... 22 Table A.3: Sectoral Growth Rates, 1990-1997 .................................................... 23 Table A.4: Macroeconomic Balances, 1987-1997 .................................................... 24 Table A.5: Balance of Payments, 1987-1997 .................................................... 25 Table A.6: Merchandise Exports, 1987-1997 .................................................... 26 Table A.7: Merchandise Imports, 1987-1997 .................................................... 27 Table A.8: Summary of Central Government Fiscal Operations, 1988-1998 .............. 28 Table A.9: Government Revenue (economic classification), 1988-1998 ..................... 29 Table A.10: Government Expenditure (economic classification), 1988-1998 ............... 30 Table A.1 1: Monetary Developments, 1987-1997 .................................................... 31 Table A.12: Colombo Consumer's Price Index (CCPI), 1975-1997 .............................. 32 Table A.13: Selected Real Sector Indicators, 1989-1997 ............................................... 33 Preface This update reviews Sri Lanka's economic developments and policies since the previous Aid Group Meeting in November 1996. It describes macroeconomic developments over the last one and a half years and summarizes the main challenges facing the Government as well possible avenues for reform. It also presents some preliminary views on the medium-term framework for achieving the Government's development objectives in an effective and sustainable manner. On request from the donor community, an accompanying document that reviews developments and policies in Sri Lanka's social services (health, education and social welfare) has also been prepared. Overview 1. The civil conflict continues to dominate the Sri Lankan political agenda. While considerable progress has been achieved by the Government in re-establishing normal life in Jaffna, the conflict continues unabated and suicide bomb attacks have increased in frequency over the last year. The Government continues its efforts to reach an internal political consensus for greater devolution of responsibilities to local authorities as a means of meeting the aspirations of moderate Tamils and achieving a permanent solution to the civil war. Provincial elections are slated for the latter part of this year. 2. Following a serious setback in early 1996, due to drought conditions and an escalation of the conflict, economic reforms have received increased attention over the last 18 months, with the macroeconomic policy framework strengthening noticeably. A credible start has been made in fiscal adjustment and there have been several significant accomplishments in economic restructuring, namely, privatization and private participation in infrastructure, public sector management, and financial sector strengthening. These policies, helped by a more favorable external environment (e.g., tea prices, revival of tourism), have led to a rebound in economic growth to over 6 percent in 1997, and the stock market has shown considerable optimism lately. Yet, the economic improvements of 1997 should be viewed with caution as they come on the heels of a significant slowdown in 1996. Also, the East Asian crisis has reinforced the need for greater vigilance in economic policy management. 3. The Government now faces the difficult challenge of restoring peace, maintaining the momentum of economic growth, and reducing poverty, all at a time when financing constraints are tightening and popular expectations are rising. Even the well-established gains in human resource development are likely to be difficult to protect in the future. The 1997 growth performance (as was that in the early 1990s) is testimony to the responsiveness of the Sri Lankan economy to prudent financial policies. The fiscal correction that took place has slowed down the continuing increase in the interest bill. These factors should bolster the Government's resolve to address the underlying budgetary problems. While setting the stage for a continuation of healthy growth in 1998, current policy commitments fall short of what is needed for the medium term, especially in some key areas of structural reforms. The most critical area is the fiscal situation, which needs to be strengthened in a permanent way through more forceful restructuring of expenditures. Other priority areas for policy reforms include agriculture, finance and banking, tariffs and public administration. Sri Lanka's medium-term prospects look good if there is no further deterioration in the security situation and a program of fiscal adjustment and structural reforms is implemented effectively. -2- I. Recent Economic Developments A. Overall Economic Performance 1. Real GDP grew by 6.4 percent in 1997 reflecting improved economic performance across the board, although agriculture continued to underperform. National savings increased mainly due to an improvement in public finances, and both domestic and foreign investments recovered from their 1996 slump. Unemployment declined to 10.2 percent at end-1997 (Figure 1). Inflation has fallen from its 1996 peak, although remaining quite high (Figure 2). The balance of payments registered a sizable surplus that helped boost gross official reserves to a comfortable position. Figure 1: Real GDP Growth and Figure 2: Inflation Unemployment (percent) (annual percentage change) 16 1 18 14 --------161--- - - - - - -- - - - - - - 1~~~~~~~~~~~~~~~~~~~~~2 _--- 4tA- ---i- 8 ---------- ------ Growth 12 * y 6 8 ----------4-- ea GO I 4- | 6-- Unemploy. 4 ; - - - i | 2 t 1 e 1992 1993 1994 1995 1996 1997 1992 1993 1994 1995 1996 1997 ! Source: Central Bank of Sri Lanka; IMF. B. Economic Growth, Savings and Investments 2. Industry: Manufacturing activity regained a great deal of momentum in 1997, increasing by 9 percent in real terms. As in the past, private sector-led growth in the production of garments, beverages and light manufactures underpinned the sector's overall performance, and accounts for the 14 percent increase in industrial exports during 1997. Energy production improved considerably reflecting an 8 percent expansion in installed generation capacity associated in particular with the tax and duty incentives introduced in 1996 to encourage self- generation of power by the private sector. The construction sector was buoyed by growing investor confidence and a pick-up in private investment in office and residential building. 3. Services: This sector, which accounts for half of GDP, also showed strong dynamism, growing by 6-7 percent. Telecommunications services expanded considerably with the entry of two fairly large new private sector suppliers in line with the liberalization policies introduced in 1996. Due to the restructuring of the sector during 1996-97, consumer satisfaction is at a historical high. The total volume of cargo handled in the ports increased by 24 percent as the Colombo Port gained importance as a transshipment hub to and from India. Tourism recovered from its 1996 depression, with tourist arrivals increasing by 21 percent. 4. Agriculture: Growth in the agricultural sector, which benefited from good weather conditions, is estimated at 3.1 percent. This compares favorably with the 1996 performance (minus 4.6 percent) which had been adversely affected by drought conditions, but it is a minor -3- achievement when contrasted to a low base. Most of the growth in 1997 came from tea and rice production. Benefiting from good weather conditions as well as the privatized management of tea estates, tea output increased by 7-8 percent, the second year of record output which made Sri Lanka the number one tea exporter in the world; value-added in this sub-sector received an additional boost from a higher degree of processing in Sri Lanka and an increase in world tea prices.' Paddy production has also been quite good, with the Maha harvest increasing by 9.5 percent. 5. Investments and savings. Investors responded positively to the enhanced macroeconomic policy framework, the improved security situation, and the various fiscal incentives offered in the 1997 Budget. Private sector investments are estimated to have increased from 18.0 percent of GDP in 1996 to 18.9 percent due mainly to renewed interests from foreign investors, most prominently in infrastructure projects-- telecommunications and private thermal generation capacity. This increase offset a decline in government investments associated with delays in project implementation and fiscal pressures. In the end, total investment/GDP increased marginally to 24.4 percent. 6. There was an even larger expansion in national savings, from 19 percent of GDP in 1996 to 21.4 percent in 1997. The biggest contributor to the savings increase was the public sector, where dissavings declined from 3.8 percent of GDP in 1996 to 2.2 percent in 1997 due to a significant improvement in government finances. The private sector also increased its contribution to the national saving effort, especially in the form of transfers from abroad. As a result, the savings/investment gap narrowed to 3.2 percent of GDP. Reflecting the improved economic situation and enhanced corporate earnings, the Colombo stock market All Share Price and Sensitivity Price Indices increased by 16-19 percent in 1997; this was followed by an additional 15 percent increase in the first four months of 1998. C. Fiscal Developments 7. The fiscal imbalance narrowed significantly in 1997 due to the various fiscal measures that were introduced since late 1996. After three consecutive years of budget deficits (excluding grants and privatization proceeds) in the range of 9.5-10.0 percent of GDP, the Government succeeded in reducing the overall deficit to 7.9 percent of GDP in 1997. Revenues suffered a setback during the year, and the revenues/GDP ratio declined 0.7 percent, due mainly to a fall in the buoyancy of import duties resulting from the granting of duty waivers and turnover tax exemptions for certain imports,2 and a reduction of the markup on imports. Income tax revenues also dropped from 2.7 percent of GDP in 1996 to 2.3 percent in 1997. This was primarily due to the investment and depreciation allowances, tax concessions granted to the corporate sector, and the adjustment of income slabs for personal taxes. The revenue decline was however more than offset by expenditure containment measures imposed across the board. Hard budget constraints and stricter rules of public finance management were particularly effective with regard to military expenditures, which declined by 0.7 percentage points of GDP. The various price increases for bread flour introduced in late 1996 and early 1997 together with a decline in world market prices for wheat led to the virtual elimination of the wheat subsidy, thus saving the budget the Export unit values for Sri Lankan tea increased by more than 20 percent in 1997 due to its improved quality as well as tighter world market conditions. 2 On products such as machines used for packing milk, tea bags, meat, yarn, tankers, bowsers and trucks. -4- equivalent of 1 percent of GDP. The interest bill fell by 0.2 percent of GDP due to both the underlying improvement in government finances, which led to a decline in interest rates, and the retirement of government debt (Rs. 10 billion) using privatization proceeds (Table 1). Lastly, capital expenditures continued their decline to the equivalent of 5.6 percent of GDP due to implementation and procedural delays in project execution. Table 1: Summary of Central Government Operations, 1994-98 1994 1995 1996 1997 1998 Provisonal Budget Total Revenue 19.0 20.4 19.0 18.4 18.4 Tax 17.2 17.7 16.9 16.1 16.1 Non-tax 1.8 2.7 2.1 2.3 2.4 Total Exp. & Net Lending 29.5 30.5 28.5 26.3 24.9 Current 22.0 23.6 22.7 20.7 18.2 Civil Service wages & salaries 3.2 3.4 3.3 3.1 3.0 Other civilian goods & services 1.5 1.5 1.3 1.3 1.3 Defense 4.7 6.4 5.8 5.1 4.1 Subsidies & transfers 5.9 6.1 6.0 5.1 4.4 Interest payments 6.3 6.2 6.4 6.2 5.4 Capital & Net Lending 7.6 6.9 5.8 5.6 6.6 Overall Deficit (before grants) -10.5 -10.1 -9.5 -7.9 -6.5 Net Extemal Loans 2.0 3.2 1.4 1.1 1.6 Bank 0.2 1.1 0.9 0.8 0.7 Non-bank 6.8 4.5 6.2 5.1 3.3 o/w privatization proceeds 0.5 0.4 0.6 2.5 0.8 Grants 1.4 1.4 1.0 0.8 0.9 Source: Central Bank of Sri Lanka; IMF. 8. Total public debt rose to over Rs. 758 billion by end-1997 but fell as a share of GDP to 85 percent of GDP from 95 percent in 1992. Domestic debt accounted for about 50 percent of total public debt outstanding. The decline in the debt ratio was on account of foreign debt, which rose at a rate much below GDP as a result of weak project implementation and higher amortization payments. Notwithstanding the fact that Sri Lanka continued to benefit from higher levels of concessional foreign aid, interest payments on total public debt still represented a serious burden on the budget and absorbed approximately one-third of total tax revenues. Figure 3: Total Central Government Debt (as percent of GDP) 100 60 E | | | 0[Foreign Debt 40 [E0 Domestic Debt 20 0 1992 1993 1994 1995 1996 1997 Source: Central Bank of Sri Lanka -5- 9. Budgetary policies for 1998 aim at furthering fiscal consolidation--the overall deficit is projected at 6.5 percent of GDP-- although the adjustment effort is less ambitious than that of 1997. The budget does not endeavor to restore the revenue levels of previous years. In fact, several tax revenue concessions have been continued or introduced, e.g., a reduction of the corporate tax to 15 percent for selected industries (agriculture, tourism, etc.), and continuation of the investment tax allowance scheme introduced in 1997.3 The Government has introduced a goods and services tax (GST) in April 1998 that replaces the turnover tax. This new tax will certainly improve Sri Lanka's overall tax system over the long term; however, because of the relatively low rate at which it is being introduced (12.5 percent), there are risks that it may further reduce revenue targets for 1998. 10. All the fiscal adjustment for 1998 is predicated on expenditure reductions, equivalent to 1.4 percent of GDP. The Government plans to cut down defense expenditures again this year by another 1 percentage point to 4.1 percent of GDP in 1998. The lower levels of interest rates and outstanding government debt are expected to generate additional savings of 0.8 percent of GDP. Lastly, a 10 percent cut is being imposed on recurrent expenditures (other than salaries) of all public corporations, state banks, statutory boards and all ministries, except Health and Education. This will generate savings equivalent to another 0.7 percent of GDP. On the other hand, allocations for capital expenditures have been raised by 1 percentage point of GDP in recognition of the country's pressing infrastructure needs. With the reduction in government outstanding debt, the 1998 budget reduced the authorized borrowing limit on Treasury Bills by Rs. 10 billion for 1998. Figure 4: Total Revenues & Expenditures Figure 5: Fiscal Deficit (as percent GDP) (percent of GDP) 12 29 R-enue + lerall8 De'dcit 25 ~~~~~~~~~~~~~~~~~~~~~6 23 ---- -- -------- X Total 4 ~4-1nmat 21 , at Expend. (inc. - Defii net4lending) i 2 - - 15 0 0 0 S %0 --------- - -_ 1 992 1993 1994 1995 1996 1997 998199 I__ -___- _ ____ __ __ - L 19 93 19 95 19 97 19 Source: Central Bank of Sri Lanka. D. Monetary Policy and Prices 11. Monetary policy has traditionally accommodated the large fiscal imbalances in Sri Lanka, which has resulted in relatively high levels of inflation-- in the range of 13-14 percent annually over 1989-96. With the exogenous shocks of 1996 reliance shifted to the domestic nonbank sector, which reached the equivalent of 6.2 percent of GDP. Inflation peaked at 22 percent in September 1996 (12-month basis). Subsequently, the corrective economic policies introduced in late 1996 and improved food supplies have reduced inflationary pressures, and inflation fell to very low levels in mid-1997. The latter part of the year however suffered from reduced supplies of vegetables and rice as excessive rainfalls negatively affected domestic 3 The scheme allows any individual, partnership or company making investments in any manufacturing enterprise or specified service to set off 75-100 percent of such capital investment against 50-75 percent of assessable income. -6- production of these commodities. As a result, inflation on a point to point basis has been in the range of 11-13 percent since October 1997. This recent experience shows clearly that underlying inflation, especially price increases for food items, remains a concern. Deficiencies in the price index stemming from an outdated consumption basket and system of weights make it difficult to get a fully reliable picture of inflation developments. The Government intends to update the index in 1998 based on a consumer expenditure survey carried out in 1995/96. Interest rates reflected the trend in inflation over the period, with the average prime lending rate falling from 18.4 percent in December 1996 to a low of 13 percent in September 1997, and rising once again to 15.5 percent by the first quarter of 1998. E. Balance of Payments 12. External balances in 1997 reflected the underlying economic upturn and a very favorable external environment. Sri Lanka's terms of trade improved significantly (4.2 percent) with the rise in world market prices of tea and garments and declines in the prices of some key imports such as oil, sugar and wheat. Sri Lanka kept its edge in the production and exports of garments which increased by 20 percent. Agricultural exports, spearheaded by tea, grew by about 10 percent. This should however not mask the fact that exports of non-traditional products stagnated during the year, compared with an annual 20 percent increase over the last 4 years.4 The services account, which had suffered badly from a decline in tourism and investment income (associated with the decrease in external assets) in 1996 returned to balance due to sizable improvements in receipts from port services and tourist arrivals. Private remittances increased strongly reflecting the steady increase in labor outflows in recent years. These positive developments more than offset a 7 percent increase in imports, most of which were intermediate and capital goods associated with the recovery in private investments. In the end, the current account deficit (excluding grants) is estimated to have declined from 5.3 percent of GDP in 1996 to about 3 percent in 1997. 13. The capital account registered a high level of capital inflows in line with a recovery in investor confidence. Net external long-term government assistance and borrowing continued to decline due to slow project implementation and larger amortization flows. To establish a benchmark credit rating for Sri Lanka, the Government issued a US$ 50 million Floating Rate Note in August which was well received by the market -- the interest rate on this loan was 125 basis points over LIBOR. But the biggest success came from private suppliers of capital5: first, there was a large privatization receipt with the conclusion of the Sri Lanka Telecom (US$ 225 million) transaction; and second, Sri Lanka regained part of its normal flow of foreign direct investment, especially in comparison with 1995-96 which were unusually low years. Portfolio investments increased somewhat to US$ 13 million, in line with a recovery in corporate earnings; they however remain well below the levels recorded in the early 1990s (US$ 38 million on average during 1990-94). With these increases in inflows, commercial banks reconstituted their external assets portfolio by about US$ 200 million. The end result of these developments is that Sri Lanka's the overall balance of payments is estimated to have turned around from a deficit in 1996 to a surplus of US$ 163 million in 1997. At the end of 1997, Sri Lanka's gross official reserves was about US$ 2 billion, representing 4.2 months of imports. Both, the debt service These constitute a very small proportion of total exports, hence subject to a great deal of volatility. Total foreign investments (FDI, equity participation and portfolio) were estimated at US$ 433 million in 1997, nearly double the previous highest amount in 1993. -7- ratio and the debt/GDP ratio are estimated to have declined significantly owing to the large increase in exports and GDP, and lower levels of government borrowing in recent years. Figure 6: Current Account Deficit and i Figure7: Gross Official Reserves Capital Inflows (% GDP) (months of imports) lo Cur6. Acx. ex. SNon-mont Capital 3 14. The Sri Lankan rupee was allowed to depreciate somewhat in the first half of 1997 in order to offset the real appreciation that occurred in 1996. Eruption of the East Asian turmoil and the appreciation of the US dollar vis a vis the yen has complicated the situation. The resulting steep depreciation of several trading-partner currencies has since caused a sizable further effective appreciation in the Sri Lankan rupee (10 percent in the second half of 1997). This appreciation is a concern for Sri Lanka's export competitiveness and should be monitored closely. Sri Lanka maintains an exchange system free of current account restrictions (Article VIII of the IMF). Capital inflows are largely unrestricted as are outflows of profits or repatriation of capital from investment. Foreign borrowing is subject to authorization and like other capital outflows are allowed only if related to economic activity in Sri Lanka. Sri Lanka has been spared from the East Asian turmoil because it never benefited from large amounts of short-term capital inflows (due to both the war and the restrictions on capital account transactions). F. Structural Reforms 15. Since November 1996, there have been several accomplishments in economic restructuring. However, the full momentum of reforms has yet to be recovered in several key areas such as public expenditures, the financial sector, and the trade regime. 16. Privatization: The most vigorously pursued area of structural reform has been the privatization of public enterprises. Despite an unfavorable environment of adverse exogenous shocks, domestic insecurity and labor problems, the Government succeeded in leasing out almost all its tea estates, 6 of them since late 1996. There were several additional accomplishments in 1997: the Government passed over a 35 percent shareholding and management control of SLT, it sold its equity stake in the National Development Bank (US$ 73 million), and reprivatized several of the 7 enterprises re-nationalized in 1996. These privatization operations have generated more than Rs. 23 billion (2.5 percent of GDP), of which Rs. 10 billion were used to retire government debt during the year. In its 1998 Budget Speech, the Government reaffirmned its intention to continue the privatization of the economy. The objective is to raise Rs. 8 billion by privatizing enterprises in sectors such as light manufacturing, tourism, hotels, etc., but the list of enterprises has yet to be finalized. -8- 17. Private participation in infrastructure continued to expand in 1997. Several private sector BOO/BOT projects in energy production have (or are about to) come to closure: the 52 Mgw power plant with KHD Great Britain Ltd. is under construction; negotiations have come to a closure on a 22.5 Mgw power plant by Lakdhanavi Pvt. Ltd.; the construction of a 180 Mgw power station in Kelanitissa is under tender; and under the small power procurement program for capacities less than 10 Mgw, construction work on two mini-hydro projects have been completed in 1997. But the largest private sector involvements in infrastructure are in the telecommunications sector and ports. A concession has been awarded to P&O Company for the expansion of the Queen Elizabeth-II berth (QE-I1) in the port of Colombo. More recently, the Government has embarked upon the process of divesting 40 percent equity stakes in the national carrier Air Lanka. 18. Public sector reforms: Management of the public administration improved somewhat in 1997 with tighter control on recruitment (freezing of employment at end- 1996 level), reductions in overtime, survey of staff on board, introduction of an appraisal system for senior staff, and tightened budget allocations based on staff in place rather than the authorized cadre. In addition, the Government has prepared plans for the restructuring of several other government bodies (see para. 35). 19. Trade and tariff reform: since the 1995 tariff reform, which reduced the number of tariff bands to three (35, 20, 10 percent), there have been two improvements in Sri Lanka's tariff regime: first, quantitative restrictions on imports of several agricultural products were eliminated in October 1996; second, because of widespread leaks between Board of Investment (BOI) enterprises that benefit from preferential investment incentives and non-BOI enterprises, the 1998 Budget harmonized treatment of the two regimes by eliminating duties on yarn, fabrics and all intermediate and capital goods for the textiles/garments industry. Sri Lanka is a member of the WTO and the country's exports and imports are free of licensing or quality controls, except for two products for which the Government has contractual obligations (textiles, wheat flour). Although good success has been achieved in eliminating restrictions, Sri Lanka's imports and exports continue to be constrained by the high import tariffs and a significant number of 6 exemptions are granted on an ad hoc basis to help specific sectors. During 1997, a Presidential Commission on Trade and Tariffs has been studying the possibility for further tariff reform for the next several years, but no recommendation has been announced as yet. 20. Financial sector: improvements in the sector since 1997 have focused on strengthening the overall framework of monetary control and deepening the financial market. With the sharp drop in inflation in early 1997, the Central Bank reduced the statutory reserve requirement from 15 percent to 12 percent between January and March 1997. A new government security, the Treasury Bond, was introduced (March 1997) with a view to developing a medium-term tradable debt instrument. Reflecting the prevailing optimism of investors especially with respect to future interest rates, these bonds became quite attractive. The Central Bank also issued its own Securities in August 1997. A new foreign currency loan scheme was introduced with the 1997 Budget enabling commercial banks to extend foreign currency loans to all non-BOI exporters, subject to the condition that their foreign liabilities do not exceed 15 percent of their capital funds. To deepen the financial market, the 1998 budget introduced several measures, the most G Up until the introduction of the GST in April 1998, etfective protection in Sri Lanka comprised the cascading effects of the customs duty, a tumover tax of 7-20 percent, a 25 percent markup on the tumover tax (reduced to 10 percent in November 1997), and a 6 percent defense levy. -9- important of which include tax incentives to popularize stock market activities, permission to domestic nonbank institutions to provide equity capital to companies listed on the stock exchange (subject to the usual exposure limits), and permission to fully-owned foreign companies to invest in non-deposit taking financial services including investment and merchant banking. G. The Civil Conflict and its Costs 21. The civil conflict, entering its 15th year, remained a major concern during the last 18 months. Despite important military advances in the North and Northeast, the security situation remains tense and there have been several bomb blasts in recent months, one of them affecting Colombo's business center in October 1997. Although its real impact is difficult to quantify, this conflict is taking a huge toll on economic performance. In addition to the well-known costs in terms of infrastructure damage, defense outlays, refugee assistance, pensions to invalids, there are many invisible costs such as foregone tourist visits and private investments, tightening of the labor market for certain categories of the population, high risk premia on international trade, and disruptions in economic activity and social welfare due to the tight domestic security system in place. But more importantly, the human and social costs of the conflict have already reached high levels: over 50,000 lives have been lost, while 800,000 internally displaced are reported to be living in very poor health conditions. Also, as in most countries in conflict, Sri Lanka's social fabric is constantly under pressure due to factors such as conscription of children and women into the guerrilla movement, rising school dropout rates in war-tom regions, and increasing numbers of female-headed households. A less obvious but important impact of the conflict is the distraction of Government from administration and economic policy making. II. Issues and Recommendations. A. Introduction 22. Sri Lanka is now at a critical juncture of its economic and social development process. Undeniably the civil conflict is the most difficult challenge for the country and there is no doubt that its resolution would be the greatest contribution to Sri Lanka's future economic success. It is commendable that the Government has given increased attention to economic reform in 1997 despite the continuing conflict. However, the positive results achieved should be viewed with caution as they come on the heels of a significant slowdown in 1996. In addition, the East Asian crisis, while not expected to have a large economic impact on South Asia, has created an uncertain economic atmosphere which reinforces the need for greater vigilance in economic policy management.7 Also, Sri Lanka continues to face serious problems: unemployment (and underemployment) is relatively high, 22 percent of the population is estimated to live below the poverty line, and education and health outcomes, long time successes in Sri Lanka, are eroding given the country's epidemiological transition and the rising expectations of its population. 23. It is now clear that there can be no sustained improvement in Sri Lanka's overall performance (including social sectors) without bold changes in economic policies. Actions are needed to put Sri Lanka on a higher path of economic growth in a more permanent way. The focus in the next few years should be on implementing a comprehensive set of economic reforms, spanning several years, that will build on the gains achieved in 1997. The priority in this respect The direct impact of the crisis on the South Asian region has been estimated at I percent of exports or 0.13 percent of GDP. The main risks to the outlook for the region seem to be domestic in origin. -10- is consolidation of the fiscal situation and accelerating structural reform of the economy with a view to strengthening the role and abilities of the private sector, as well as improving the performance of the State. B. Continuing Fiscal Adjustment 24. Fiscal consolidation: The fiscal correction and large privatization proceeds of 1997 have contained the continuing increase in the interest bill, thus triggering a process that further promotes fiscal consolidation. This has allowed the Government to reduce its outstanding stock of debt in 1998. Sri Lanka needs to continue along this path in a forceful way in order for the private sector to take up a larger role in the economy. In this context, Sri Lanka can ill-afford the slowdown in the pace of fiscal adjustment that is being planned for 1998. Budget policies for 1998 have weak points that should be monitored carefully. First, the low revenue outturns in 1997-98 put unreasonable demands on expenditure containment, and the I percent reduction in the overall budget deficit is insufficient in the light of the Government's own intentions to reduce the deficit to 4 percent of GDP by the year 2000.' Second, reduction in the overall fiscal deficit is predicated on realizing savings on defense expenditures, which may be difficult to achieve given the current security situation. Third, apart from the GST, there are no actions to correct the major structural problems in public finances, namely a weak structure of public expenditures. In fact, the across the board reduction in recurrent expenditures for a second consecutive year is likely to create difficulties for some departments given the already low level of operations and maintenance expenditures. 25. Public Expenditure Restructuring: The main public finance challenge is to reestablish a more balanced structure of public expenditures that effectively promotes economic growth over the long term. In 1997, Sri Lanka spent about 30 percent of its total current expenditures on interest payments-- a legacy of past fiscal excesses-- 25 percent on defense, and 10.6 percent on pensions to former civil servants. On the other hand, expenditures on other goods and services to all 24 civilian ministries represented only 6.7 percent of total current expenditures.9 Viewed from the angle of functional classification, Sri Lanka currently spends little on education and health (2.7 percent and 1.6 percent of GDP, respectively), with expenditures being well below countries of similar socio-economic backgrounds. These expenditure levels have reached their minima given the challenges facing the country, in particular the epidemiological transition of its aging population and the louder calls for higher quality education and greater financial autonomy to local authorities. Moreover, capital expenditures and net lending have reached their lowest levels in many years. With this structure of expenditures, Sri Lanka is not well poised to promote long- term economic growth and protect its record of human resource development. Presented below are the three major areas where expenditure reductions and restructuring cait take place effectively. 26. Civil service and pensions: The priority area is civil service and pensions. The initiatives taken in 1997 are good (para 22) and have had positive budgetary impact. To consolidate these gains, an early start should be made to strengthen further the management of the authorized cadre. The most immediate needs include: (i) continuing the policy of partial B The GST is being introduced at a very low rate while the previously announced policy of reducing the corporate tax across the board to 30 percent in 1998 has not been implemented. 9 The remaining 21 percent is allocated to salaries to the civil service, and subsidies and transfers to public corporations and the Samurdhi. -11- attrition; (ii) compressing the authorized cadre in line with the attrition policy; and (iii) building capacity within the Ministry of Finance (MOF) to monitor closely employment in the service. The pension system for civil servants, which is totally funded by budgetary resources, also is in need of reforms. A first step was taken in December 1996 with the withdrawal of Circular 44/90, a scheme that was introduced in 1990 as an incentive for early departures. This has led to the early retirement of over 10,000 staff in 1997. Nonetheless, the system in place remains generous relative to those in other countries and the pension bill is unaffordable. Over the medium term, the pension program requires a significant strengthening that would involve unifying the treatment of government and non-government employees by merging the public pension scheme into the provident funds, offering pension annuities based on actuarially sound calculations, and improving the return on pension funds through private management. In addition to protecting retirees and reducing the budgetary cost of pensions, these measures would improve the relative attractiveness of private employment, thus reducing the number of people who are willing to wait a long time to secure employment in the public sector. Unfortunately, even in these two areas, budgetary savings are not likely to materialize quickly. However, returns to the economy as a whole over the medium-term will be very large. 27. Social welfare and poverty: The measures to consolidate and better target social transfer programs taken in 1997 and 1998 have been well received,"0 and the Samurdhi, which has now become the main delivery mechanism for social welfare, has undoubtedly helped in preserving some of the gains achieved in poverty alleviation in Sri Lanka. However, it still remains costly (almost I percent of GDP), and there remains considerable scope for further consolidation without jeopardizing assistance to the poor. The Samurdhi covers more than 50 percent of the population, while the proportion of the population below the poverty line is estimated at 22 percent. Necessary containment measures include reducing the number of mobilizers" (37,000) and maintaining them on a one-year contract, freezing budgetary allocations, and reducing the number of beneficiaries. From a longer-term perspective however, Sri Lanka may need a refocusing of its anti-poverty strategy to reduce reliance on specific (and large) program interventions and redirect expenditures to health and education, for example. While they may have prevented the emergence of destitute poverty, the large poverty programs have been costly, fiscally unsustainable, and have sometimes led to a misallocation of resources. For instance, over the years Sri Lanka has spent more on income transfer programs than on health. Cross-country experience now available clearly indicates that it is virtually impossible to make progress in reducing poverty without high, sustained and broad-based levels of economic growth. A high growth strategy that builds on market mechanisms and eliminates structural obstacles in areas such as rural infrastructure and the labor market has great success in bringing the poor in the economic mainstream in a permanent way. There will of course also be a need to protect the most vulnerable through safety nets based on self-targeting. C. Containing Inflation 28. Monetary policy should continue to contain inflation. Considerable success was achieved in reducing inflation in 1997. Monetary policy was managed flexibly, taking into consideration the liquidity needs of Government, sudden inflows of privatization receipts, the " These included the consolidation into the Samurdhi of the food and kerosene stamps and emergency assistance (outside the North and East), and elimination of the mid-day meal. " Mobilizers are external facilitators who help mobilize the poor through community participation to address socio-economic issues and identify beneficiaries. -12- need to contain interest rate increases, and downward pressure on the rupee following the East Asian crisis. The resurgence in inflation since October 1997 calls for a tightening of current policies. The fiscal adjustment program and other structural reforms will undoubtedly facilitate this task. D. Sustaining the Growth Process 29. Administrative reform: Over the longer-term, the tighter management of the wage and pension bill need to be underpinned by broader administrative reforms that address core issues such as overstaffing, inadequate incentives, absence of management control, and skills mismatch. More substantial improvements in this area would need to be driven not only by fiscal containment and short-term monitoring but also by strengthening the role of Government in a market economy and restoring a high level of efficiency across the board in public services. Longer-tern reforms should include: (i) a redefinition of the role of Government with respect to economic management and as a source of employment creation; and (ii) the introduction of a robust framework for the management of positions, staff and incentives, including in priority the reestablishment of an independent Public Service Commission. Work is currently underway assisted by IDA to formulate measures aimed at improving the legal framework for private sector activity, which currently suffers from weaknesses such as barriers to entry and exit, inadequately enforced regulations and the slow and outdated character of the judicial system. The objective is to open up the process of legislative/regulatory reform for inputs from key stakeholders, reform the existing system, and strengthen the key institutions responsible for regulatory design and implementation. 30. Devolution: The experience as of today is that there has been little devolution of powers to local authorities under the 13th Amendment of the Constitution in 1987. In fact, there often is a dual management structure (one central and one provincial) in place at the district level, and ambiguities of power and management have undermined the delivery of certain government services at the local level. However, because of the relatively little effective devolution, fiscal prudence has been fairly well guarded. Looking ahead, especially as the Government prepares for further devolution, it is essential that these administrative reforms be well designed to serve the needs of both fiscal prudence and efficiency and relevance of government services. A considerable amount of work will be needed in Sri Lanka to secure efficient systems of revenue sharing, expenditure assignments and block grants. 31. Strengthening statutory boards: An important area for additional administrative reforms is the statutory board/public enterprise sector. This sector, which comprises 150 institutions'2 with 167,000 employees-- equivalent to about two-thirds of the central government staff-- remains heavily constricted by Government control. In fact, despite the move to a market economy many years ago, the Government continues to administer the sector (including companies established under the Companies Act) within a regulatory framework similar to government departments. This does not allow statutory boards the autonomy they need to operate in a market environment, and it also subjects them to the well-known political pressures. The various organizations themselves lack adequate incentives systems to promote good performance. Any reform of the sector would have to proceed in stages. The first stage should be to (i) 12 Including 50 fully-owned govemment companies established under the Companies Act, 43 self-financing commercial corporations and 57 nonself-financing entities established under Acts of Parliament. This compares with a total of about 20 such entities in Singapore. -13- streamline and focus the Government's monitoring and control of the sector with the view to allowing adequate autonomy to some of these enterprises, especially the incorporated companies; (ii) impose performance contracts on the management of a select group of such enterprises; and (iii) outright closure of those whose existence continues to forestall reforms in the sectors in which they operate, e.g., Paddy Marketing Board (PMB), Sri Lanka Central Transport Board (SLCTB), Ceylon Wholesale Establishment (CWE). The next step should include: (i) carrying out of an exercise to evaluate overlapping and duplication of mandates among them; and (ii) redesigning of the system of budget transfers to public enterprises that link budget outlays to rigorous performance benchmarks. 32. Privatization, corporatization and public sector restructuring. The achievements of 1997 demonstrate that despite the unfavorable domestic security situation and a somewhat deteriorated external environment, Sri Lanka can still attract a great deal of investors, including foreign partners. The benefits of privatization operations have also been demonstrated in particular in the telecommunications sector where consumer satisfaction is at a historical high. The Government has already set privatization objectives for 1998, but it is critical to move ahead quickly in identifying enterprises for this year's program. This together with fiscal containment, would send a strong signal as to the Government's determination to increase private sector involvement in the economy.'3 The most evident candidates are the National Insurance Company (as soon as the Insurance Board is in place) and parts of the Ceylon Petroleum Corporation. Unbundling petroleum product distribution will promote efficiency and quality of service gains through competition and lay the basis for market determined prices in the future. 33. The Government's current efforts to corporatize some activities of the public sector in 1998 are welcome. Three restructuring programs are being prepared or implemented with assistance from IDA. The first is the restructuring of the Colombo Port (excluding QE-II) which will include the corporatization of some segments of the port infrastructure and enhance private sector involvement in port activities. This restructuring program should be viewed as a key factor in increasing the competitiveness of Colombo Port and raising its status to a regional hub. The second is the restructuring of the Postal Department which, by commercializing some of the activities of that Department, will increase government savings and efficiency while promoting national savings mobilization. The third is the Mahaweli Restructuring project that is already under implementation. The objective is to introduce efficient mechanisms in the delivery of irrigation services by commercializing certain activities of the Mahaweli Authority and restructuring its other activities, including downsizing and transferring operations and maintenance of certain irrigation channels to farmers. 34. Tariff reform: Both, the introduction of the GST-- which will eliminate many of the distortions resulting from the current sales tax and customs duties-- and the harmonization of the BOI and non-BOI regimes for the textiles and garments industry in 1998, are moves in the right direction and will stimulate efficiency gains in the Sri Lankan economy. The next steps should aim at integrating the entire BOI tariff regime with the general tariff regime, and incorporating all remaining non-standard tariffs in excess of 35 percent into the general tariff regime. But the most powerful reform would be a phased move toward a two-band system with tariff rates of 10 and 20 percent. Just like the trade liberalization of the early 1990s is today recognized to be at " A World Bank study carried out in 1997 revealed that the main concerns of foreign investors in South Asia were the unstable macroeconomic environment and the lack of transparency and clarity in govemment's policies. The investors rated fiscal incentives less than these two factors. -14- the origin of the current resilience of the Sri Lankan economy, more forceful tariff reform will have a strong impact on the Sri Lankan economy in the years ahead, especially by helping Sri Lanka regain its edge in tariff policies. This is particularly important given the heightened international competition that has emerged over the last several years with major tariff reforms in competitor countries. Sri Lanka's lead in tariff reform in the early 1990s has eroded considerably: (i) the average statutory rate for East Asia is 11.7 percent (8.5 percent excluding China) compared with 20 percent for Sri Lanka; (ii) India's lag behind Sri Lanka has diminished, moving from 4 times Sri Lanka's tariff level to 2 times by the early 1990s (although there are still considerable restrictions in India); (iii) some low-income countries have moved faster than Sri Lanka in recent years (e.g., Tanzania, Bolivia, Ghana). It is reassuring that, in its 1998 Budget Speeclh, the Government has recognized the need for further improvements in the tariff system, noting that local industries should plan to operate under a lower rate of customs duty in the medium term. 35. Financial sector deepening: Sri Lanka has done well in liberalizing interest rates over the years and there have been substantial improvements in the management of monetary policy in 1997. The priority in this area now is to secure the legal basis for the Central Bank to exercise greater operational autonomy, in particular by expanding the role of the Monetary Board and establishing price stability as the primary objective for the Central Bank. Beyond monetary management, the main concern is the shallowness of the financial sector. This is due to the narrow range of financial instruments and inefficient financial intermediation, most evident in the wide interest spreads. The main constraint is the dominance of inefficient, state-owned banks. Despite two asset clean-up operations in 1993 and 1996 (costing a cumulative 5 percent of GDP) these banks continue to hold fragile portfolios, which remain a constant threat to achieving the fiscal objectives. Since outright privatization does not seem possible under current political circumstances, the second best solution is to grant them appropriate management autonomy, preferably by an Act of Parliament. The Government plans to place the management of these banks under performance contracts with the Treasury in 1998. This greater autonomy is a sine qua non to observe stricter prudential regulations, which are now being imposed by the Central Bank. The greater autonomy of the Central Bank will on the other hand strengthen its hand in carrying out this tighter supervisory function. Last and not least, more forceful liberalization of the financial market, in particular investment opportunities for pension funds and insurance companies, would impose greater market discipline on the government while strengthening market allocation mechanisms across the board. The plan to pass an Insurance Bill and a Finance Leasing Bill in 1998 is welcome. 36. Improving incentives in subsistence agriculture: The efforts that have been made to improve the plantations sector (in particular privatization of estates) have not been accompanied by similar actions in the non-plantation sector, and agricultural value-added has increased by less than 2 percent annually over the last decade. While high levels of profitability and output growth have been restored in the estate sector, there is growing admission that the weak growth outturn in the non-plantation sector is closely related to high rural poverty and low-income rural employment. The main weakness lies in subsistence agriculture, especially paddy, where because of restrictions on land sales,'4 buoyant demand for off-farm rural labor and generous subsidies on irrigation in particular, farmers have little incentive to shift into higher value added crops or sell their land to more entrepreneurial farmers. To end this stagnation, the Government '4 Lack of a well-functioning land market is due to the State's role as dominant landlord, restrictions on land sale and use, and inadequate land registry. -15- should focus on reducing its involvement in agricultural marketing, by phasing out CWE and PMB, and prepare a more vigorous action plan for the establishment of a functioning land market. Land reform has been a key ingredient for the high growth rates of agriculture in Indonesia and Thailand. 37. Improve labor marketflexibility: The unemployment situation remains very difficult in Sri Lanka. First, every year, there are 100,000 new entrants in the labor market that add to the existing 10 percent unemployment rate, and accentuate the political volatility associated with youth and educated unemployment. Second, there is a significant amount of underemployment in the country, particularly in government services, and much of the decline in unemployment in recent years is due to outward migration, military recruitment and discretionary recruitment in the public sector-- 35,000 trainee teachers in 1995, 37,000 Samurdhi animators in 1996-97, and a few thousands in the various state enterprises (Port, Petroleum, etc.). Third, there is a considerable amount of public sector downsizing/restructuring that is taking place or is in the pipeline in Sri Lanka (Ports, Mahaweli, Postal, etc.) that will add to unemployment. Under these circumstances, even a 6-8 percent growth rate will take a long time to absorb all the unemployed, which emphasizes the need for Sri Lanka to address at the earliest the structural weaknesses of both the overall economy and the labor market. While the well-known occupational mismatch of workers is a problem that can be resolved only in the long-term through changes in education and training, the rigidity of labor laws is an obstacle that deprives the economy of its abilities to adjust quickly to the changing environment. Although it may not be possible to bring drastic changes to the basic labor law, it is widely recognized that the economy needs greater flexibility in terminating employment. In this context, the most promising avenue for reform is the process of labor dispute resolution. Indeed, considerable flexibility for termination of employment could be introduced by speeding up and reducing the costs of settlement procedures for labor disputes, training labor commissioners, adjusting the legislation for sub-contracting, tightening the conditions for the creation of trade unions, etc. 38. Strengthening the energy sector: The Government plans significant changes in the energy sector. These plans respond to the demand for higher quality and more customer oriented electricity supply, and the challenges arising from availability of private finance, particularly for electricity generation. The 180 MW Kelanitissa BOO project which is based on competitive bidding is a major step forward, and should lead the way to attracting private investment for the development of all new thermal power stations. The next major steps planned are (i) the set up of an independent regulator for the power sector; (ii) the unbundling of Ceylon Electricity Board (CEB) into separate companies for hydro production, thermal power generation, transmission and distribution. These reforms, which lay the foundations for the development of a competitive power sector market, follow the trend being adopted in many other countries. Implementing them presents formidable challenges, especially in dealing with well-established interest groups. However, since the example of telecommunications shows that privatization can both be successful in meeting the needs of the economy more effectively as well as being acceptable to the public and workers of public enterprises, the Government should also consider privatizing parts of CEB at a later stage. 39. Establish a consistent environmental policy framework. Sri Lanka was one of the first countries to prepare a National Environmental Action Plan (NEAP). This plan has recently been updated (1998-2002) to reflect strategies and plans for industrial pollution management, biodiversity conservation, management of forestry and the coastal zone. An initial policy reform agenda for sustainable development has been prepared which provides a foundation for dialogue -16- with the donor community. Policy priorities include long-term incentives for improved land and water management, fees to cover part of the costs of operation and maintenance of irrigation systems, increased timber prices and stumpage fees, and industrial pollution taxes. Success in achieving these objectives however will depend greatly on (i) effective closer coordination with sectoral policies, especially agriculture; (ii) the clarification and streamlining of responsibilities of existing environmental institutions; and (iii) the build up of an enforcement function at the Central Environmental Authority (CEA) and provincial authorities. E. Improving the Quality of Education and Health 40. As described in the accompanying document (Social Services: A Review of Recent Trends and Issues), Sri Lanka's long standing success in human resource development is eroding. While the country continues to be an outlier among low-income countries, its lead over countries that had similar socio-economic backgrounds in the past has diminished. The education sector has several policy distortions such as constrained access to university education and restrictions on the medium of instruction, non-public financing and private sector participation. As a result, the sector has neither been able to respond adequately to the emerging needs of the society and economy, nor to keep abreast with international efforts at developing innovative education policies. 41. Unlike in education, the State's role in the health sector has not crowded-out private sector participation, and health services as a whole have managed to meet the needs of consumers. Government has consistently encouraged private investors in the sector by providing market-based incentives, regulations which allow public doctors to engage in private practice, and a public hospital system that provides free back-up coverage for catastrophic illnesses. Notwithstanding its overall good performance however, steady increases in per capita income and the aging of the population have raised new challenges. The country's health authorities are still confronted with patterns of diseases typical of low income countries (malnutrition, iron deficiency anemia among pregnant women, and malaria), while at the same time having to face new problems characteristic of more affluent societies (drug resistant tuberculosis, STD/AIDS, diseases associated with an aging population, and socio-health problems such as mental disorders, suicides, alcoholism and drug addiction). Existing financial and managerial systems established over the last decades are no longer adequate to meet these new challenges. Major issues for the sector include the need to: (i) redefine the role of the public and private sectors; (ii) secure sustainable financing for the system and for individual patients; and (iii) address emerging issues such as market failure, absence of quality control and equity concerns in the private health care system. In both the health and education sectors the Government has begun to rethink its strategy to introduce reforms on a system-wide basis. It is clear however that whatever the options taken in reforming the sectors, the changes are likely to be costly and time consuming. III. Medium-term Prospects and Financing 42. The restoration of peace, while being the most uncertain factor in Sri Lanka's future, would be the biggest boost to long-term growth and stability. However, resolution of the conflict alone will not be sufficient to allow the country realize its full potential. Nor is the conflict a reason not to move ahead strongly with economic reforms. Sri Lanka has all the attributes for a great economic success: rich endowment in human resources, geographical location, large availability of foreign assistance, natural resources, etc. But without a forceful reform program, -17- it is unlikely that the country will be able in the near future to join the ranks of middle income countries, a category that is generally recognized to be more consistent with its potential. 43. Assuming continued containment of the fighting and a strong commitment to reforms and their implementation, Sri Lanka's medium-term prospects are favorable. Effective commitment implies strong fiscal adjustment, a strengthened role for the private sector, and increased external competitiveness with the implementation of reforms across a number of sectors simultaneously. A. Medium-term Outlook Under Structural Reforms 44. Table 2 below illustrates the key economic indicators under a reform scenario. In line with the authorities' medium-term objectives, the aim is to reduce inflation, maintain a viable external position, and generate high levels of investment and growth in order to reduce unemployment and poverty. Given a reasonably favorable external environment, a strong reform program would quickly provide the basis for sustained economic growth to 6.0-7.0 percent over the next few years. Manufacturing, spearheaded by the garment sector, is expected to continue to be the engine of growth. Indeed, the Government's recent decision to grant duty-free imports to the textiles industry together with the extension of the BOI-type trade facilitation regime to all exporters as well as the streamlining of the tax system (GST) are likey to provide a strong impetus to production and exports. The Apparel Exporters Association of Sri Lanka recently expressed confidence that despite the short and medium-term difficulties resulting from the East Asian crisis, they will more than double exports (now over US$ 2 billion) in the next four years. The services industry also is expected to grow strongly based on continued expansion of port and telecommunications activities-- both sectors are currently undergoing major restructuring. Barring adverse weather, agricultural reforms would provide impetus to agricultural growth through the promotion of higher value added crops and increased productivity, especially in the plantations sector. Indeed, much of the success in tea exports in 1997 is due to improved management in the sector that has enhanced the quality of local production. 45. Increased competitiveness together with lower absorption, resulting from the implementation of conservative demand management policies, would allow exports to continue to grow rapidly. The external current account deficit would thus remain below 4 percent of GDP, a level that can be financed on a sustainable basis with rising private capital inflows (especially direct investment). Foreign direct and portfolio investments, which reached the record level of US$ 430 million in 1997, are expected to fluctuate within the range of $ 200-300 million each year in the next few years. The higher levels of private capital, flowing in particular from a vigorous program of privatization and incentives to private sector involvement in infrastructure, would help counteract a gradual decline in official assistance. Spurred by increased private sector investment, gross domestic investment would rise to about 29 percent of GDP by the year 2000. 46. Sustaining faster growth will require a substantial increase in national savings to fund higher levels of private investment. Based on available indicators, foreign and domestic private savings will not be sufficient to finance fully the needed increase in savings. Consequently, the reform scenario will require a sustained reduction in the overall fiscal deficit through an increase in public saving. In addition, the increase in public savings should be carried out through appropriate budgetary expenditure restructuring in order to provide the impetus for improved competitiveness in the overall economy. Under this scenario, major advances will need to be made in tackling the structural impediments to higher growth, which have been identified as -18- being concentrated in the financial sector, the tariff regime, agricultural sector, labor market and public sector management. Table 2: Key Economic Indicators under a Structural Reform Scenario Prov. Projections Indicator 1995 1996 1997 1998 1999 2000 Output and prices Real GDP Growth rate (percent) 5.5 3.8 6.4 5.8 6.0 6.0 GDP Deflator 8.4 12.2 8.5 7.5 5.5 4.5 Consumer price index\1 7.7 15.9 9.6 8.0 5.5 4.5 Investment and savings (% of GDP) Gross domestic investment 25.7 24.2 24.4 26.3 27.5 28.9 National savings 19.5 19.0 21.4 23.1 24.4 25.1 Govemment budget (% of GDP) Total revenue (excl. grants) 20.4 19.0 18.4 18.4 19.0 19.6 Total expenditure (incl. net-lending) 30.5 28.5 26.3 24.9 24.0 23.6 Overall deficit (-) (excl. grants & privatization proceeds) -10.1 -9.5 -7.9 -6.5 -5.0 -4.0 Money sector (% changes) Broad money 19.2 10.8 14.5 13.6 10.8 10.8 Credittoprivatesector 28.4 7.8 11.4 14.8 12.0 10.0 External sector Current account balance/GDP\2 -5.8 -5.2 -2.8 -2.8 -3.0 -3.2 Gross offic. reserves (in months of imports) 4.8 4.3 4.2 4.3 4.5 4.5 Total External Debt/GDP 72.3 66.7 62.3 60.2 59.1 56.3 Debt Service Ratio (receipts GNFS) 14.5 15.1 13.2 12.1 11.2 10.2 1/ Annual average change in Colombo Consumer Price Index. 2/ Excluding official grants. Sources: Central Bank of Sri Lanka; Department of Census and Statistics, Colombo; and Bank and IMF estimates. 47. With increased productivity and larger supplies of agricultural products, inflation would decelerate to around 4-5 percent by the year 2000. This assumes implementation of restrictive money and credit policies facilitated by the fiscal adjustment. Barring unexpected external shocks, the reform program should improve external balance. Containment of the current account deficit, together with strong export and GDP growth performance, would strengthen external debt indicators and creditworthiness. The overall balance of payments would continue to register small surpluses that would allow Sri Lanka to maintain official reserves at 4-5 months of imports, which is needed to cushion the economy against shocks. B. Financing Requirements 48. Under this scenario, Sri Lanka's external requirements would be around $1.3 billion per annum over the next few years-- about 10 percent higher than the 1995-96 average (Table 3). These external requirements imply financing gaps averaging US$ 200-240 million a year in the next few years, in particular if the growth and reserve targets (4.5 months of imports) are to be achieved. These levels of financing are within the reach of Sri Lanka and consistent with possible assistance from bilateral and multilateral donors and private capital flows, especially if a strong reform program is under implementation. Strong adjustment and some reduction in the intensity of the conflict would restore Sri Lanka's attractiveness to international capital while improvements in utilization of project portfolio would stimulate projected aid disbursements. In -19- light of the Government's success in mobilizing external borrowing in 1997, the reform scenario should facilitate Sri Lanka's access to the international capital market. If a lasting peace settlement is achieved and the Government embarks on a major reconstruction program for the North and East, Sri Lanka's external financing requirements would increase significantly. It is not possible to quantify this scenario at present, especially given the preliminary nature of the work and the magnitude and priorities of reconstruction. Table 3: Sri Lanka - External Financing Requirements (US$ million) Actual Prov. Projections 1996 1997 1998 1999 2000 Current account deficit, excl. official transfers 724 427 425 444 568 Amortization 413 394 375 337 351 Change in gross official reserves\l -126 91 198 336 287 IMF repurchases 45 66 82 92 81 Short-term liabilities of the banking system -54 195 52 57 63 Total Financing Requirement 1,003 1,173 1,133 1,266 1,350 Grants 140 127 125 129 120 Disbursements: 631 596 561 555 538 Government 455 420 406 427 416 Private 176 176 155 128 122 Government, short-tern (net) 0 0 0 0 0 Private short-term 31 52 53 66 87 Foreign direct investment 87 129 145 190 244 Privatization 34 301 145 40 40 Errors and Omissions 80 -30 0 0 0 Financial Gap 0 0 104 285 321 Total Financing 1,003 1,173 1,113 1,266 1,350 1/ A positive number indicates accumulation of reserves. Source: IMF and Bank staff estimates. 49. Risks and uncertainties. Despite the successes of 1997, the economic situation remains precarious. The main internal risk is escalation of the conflict, which would continue to divert considerable resources for defense and hamper policy reform and economic performance. As recently as October 1997, a truck bomb devastated part of the country's business district (killing 18 and wounding 105 persons). In addition, drought conditions remain a constant threat in Sri Lanka, even in 1998. There is also a risk associated with the policy reform itself. Because of its large upfront political costs, fiscal adjustment and public expenditure restructuring may not be carried out in a sustainable manner, especially as Sri Lanka is now entering a critical period of election cycles. In this context, monetary policy may have to be more accommodating, to the detriment of inflation and growth. A deterioration in the policy framework would be damaging to Sri Lanka (this was an important reason for the drying up of foreign capital inflows in 1996). 50. Because of Sri Lanka's dependence on export revenues and reliance on a few product lines, global market conditions affecting the country's export prices and demand will remain critical.'5 Sri Lanka should prepare for the phaseout of the Multifiber Arrangement in 2005 and '5 50 percent of Sri Lanka's exports consists of garments. -20- promote export diversification by reducing tariffs, providing adequate infrastructure, improving labor market flexibility and maintaining a flexible exchange rate. C. Reconstruction and Rehabilitation of the North and East 51. Reconstruction of the North and East would be a daunting task, and would probably require a great deal of resources. This reconstruction process would however be facilitated by the regions' well-known potential. They have traditionally been important suppliers of agricultural commodities such as fruits, vegetables and fish, and industrial products such as cement, paper, and minerals. The strong human resource base of the Jaffna region could also enable a quick restoration of economic activity once peace is reestablished. The Government is currently emphasizing efforts to restore normalcy in the region. Most foreign donor agencies have already started supporting small rehabilitation activities in war-torn areas. The World Bank is funding the repair of small irrigation tanks under the National Irrigation Rehabilitation project and the two IDA-assisted education projects have provided resources for some reconstruction and teacher redeployment in the Northeast. It is not possible at this stage to quantify how the reconstruction would affect the major macroeconomic aggregates. First, the magnitude and phasing of a reconstruction program have to be defined. Second, some institutions would need to be strengthened for the implementation of the reconstruction program. Third, the degree to which the program will be financed would have to be discussed and agreed by donors. Whatever the size and nature of the program, it will need a sound macroeconomic foundation to succeed. -21- Table A.l: Key Economic Indicators, 1987-1997 Indicators 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Prov. PopulationGrowthRate 1.5 1.4 1.3 1.1 1.5 1.0 1.2 1.4 1.4 1.1 1.3 National Income & Expenditure Annual GDP Growth (at 1982 prices) (%/.) 1.5 2.7 2.3 6.2 4.6 4.4 6.9 5.6 5.5 3.8 6.4 GNPPerCapitaUS$ 360 375 367 417 460 497 588 652 710 748 804 Investment/GDP Ratio (%) 23.3 22.8 21.7 22.2 22.9 24.3 25.6 27.0 25.7 24.2 24.4 DomesticSavings/GDPRatio(%) 12.8 12.0 12.2 14.3 12.7 15.0 16.0 15.2 15.3 15.3 17.3 External Trade Indicators Export Volume Index (1985=100) 103.8 101.4 103.0 120.0 125.0 143.9 163.6 183.7 197.9 204.2 227.8 ImportVolumelndex(1985=100) 101.0 95.6 90.0 95.2 107.7 119.0 136.5 153.8 155.0 158.4 175.0 Terms Of Trade (1985=100) 98.7 93.0 91.4 87.4 85.7 89.1 90.9 86.6 85.5 87.6 91.3 Share of Non-traditional Exports 63.6 64.0 66.7 67.7 72.9 81.0 82.0 83.0 82.6 86.6 91.8 C/A Balance (before grants) as % of GDP -8.0 -8.5 -7.1 -5.5 -4.5 -6.4 -5.3 -7.9 -6.3 -5.3 -2.9 Overall BOP Surplus/Deficit US$ Mn. -80.5 -86.2 -75.5 207.3 208.4 189.6 660.9 239.7 51.5 -67.8 162.9 Extemal Debt Service Ratio (%) 27.5 28.6 24.2 17.8 18.5 19.2 15.5 13.7 14.5 15.7 13.7 Exchange Rate (Annual Average) Nominal Average ExchangeRate (Rs/US$) 29.4 31.8 36.0 40.1 41.4 43.8 48.3 49.4 51.3 55.3 58.9 RealEffectiveExchangeRate(1990=100) 105.6 104.8 99.5 100.0 104.8 1045 102.9 98.8 96.6 107.8 115.8 Annual Change in REER -10.5 -0.8 -5.1 0.5 4.8 -0.3 -1.5 -4.0 -2.2 11.6 7.4 Public Finance (% of GDP) GovemmentRevenue (excl. grants) 21.4 18.8 21.4 21.1 20.5 20.2 19.7 19.0 20.4 19.0 18.5 Govt. Current Expenditure 20.1 20.8 22.6 22.3 22.5 21.1 20.5 21.9 23.1 22.8 20.7 Govt. Capital Expenditure & NetLending 12.4 13.7 10.0 8.8 9.8 7.1 7.6 7.1 6.9 5.8 5.6 Budget Deficit 1/ -11.1 -15.7 -11.2 -9.9 -11.9 -8.0 -8.7 -10.5 -10.1 -9.5 -7.9 Money Credit (Annual Increase %) Growth in Broad Money (M2) 14.5 16.6 11.3 20.5 22.1 17.4 23.4 19.7 19.2 10.8 13.8 Growth inDomestic Credit 16.9 28.8 5.1 14.6 10.2 12.7 4.7 15.3 28.8 12.7 10.8 Growth in Public SectorBorrowing 23.5 37.4 5.5 4.2 -3.0 -3.3 -27.2 -4.3 31.2 31.6 -1.4 Growth in Private Sector Credit 12.0 21.7 4.7 24.3 20.5 22.9 20.5 20.8 28.4 8.2 10.9 Velocity (GDP/M2) 3.6 3.5 3.5 3.9 3.4 3.3 3.5 3.4 3.2 3.2 3.3 Prices and Real Wages Annual Change in ConsumerPrice Index (%) 7.7 14.0 11.6 21.5 12.2 11.4 11.7 8.4 7.7 15.9 9.6 Annual Change in GNP Deflator (%) 6.8 11.5 9.9 20.0 10.5 10.0 9.5 9.4 8.4 12.2 8.5 Minimum Wage -WagesBoards(1978=100) 101.8 107.9 112.0 107.6 109.7 112.0 130.1 135.2 140.5 152.2 161.1 GovernmentWage(1978=100) 109.1 125.4 121.9 113.2 113.2 106.0 128.3 139.7 150.4 155.2 172.0 1/ Excluding Grants & Privatization Proceeds. Source: Central Bank of Sri Lanka, Department of Census and Statistics and IMF. -22- Table A.2: Sectoral Composition and Increase in Gross National Product, 1989-1997 (at constant 1982 prices) Rs Million Percent Share of GDP Sector 1989 1990 1991 1992 1993 1994 1995 1996 1997 1989 1990 1991 1992 1993 1994 1995 1996 1997 Prov. Prov. Agriculture, 27,666 30,011 30,570 30,090 31,554 32,593 33,659 32,110 33,105 22.7 23.2 22.6 21.3 20.9 20.5 20.0 18.4 17.8 Forestry & Fishing Agriculture 23,311 25,729 25,941 25,316 26.592 27,596 28.496 27,035 27,846 19.1 19.9 19.2 18.0 17.6 17.3 17.0 15.5 15.0 Tea 2,668 3,004 3,100 2,303 2,985 3.116 3,166 3,327 3,567 2.2 2.3 2.3 1.6 2.0 2.0 1.9 1.9 1.9 Rubber 697 718 655 669 681 688 694 738 695 0.6 0.6 0.5 0.5 0.5 0.4 0.4 0.4 0.4 Coconuts 3,210 3,261 2,827 2,971 2,799 3,376 3,548 3,278 3,377 2.6 2.5 2.1 2.1 1.9 2.1 2 1 1.9 18 Paddy 5,258 6,378 6,002 5,882 6,447 6,750 7,067 5,180 4,735 4.3 4.9 4.4 4.2 4.3 4.2 4.2 3.0 2.6 Other 11,478 12,368 13.357 13,491 13,680 13,666 14,021 14,512 14,584 9.4 9.6 9.9 9.6 9.1 8.6 8.3 8.3 7.9 Forestry 1,985 2,030 2,107 2,149 2,151 2,147 2,173 2,201 2,230 1.6 1.6 1.6 1.5 1.4 1.3 1.3 1.3 1.2 Fishing 2,370 2,252 2,522 2,625 2,811 2,850 2,990 2,873 3.017 1.9 1.7 1.9 1.9 1.9 1.8 1.8 1.6 1.6 Mining & Quarrying 3,576 3,901 3,511 3,300 3,693 3,915 4,048 4,408 4.558 2.9 3.0 2.6 2.3 2.4 2.5 2.4 2.5 2.5 Manufacturing 20,488 22.427 23,949 26,059 28.806 31,418 34,294 36,539 39,943 16.8 17.4 17.7 18.5 19.1 19.7 20.4 21.0 21.5 TreeCropProcessing 3.257 3,530 3,332 2,912 3,157 3,567 3,724 3,761 3,874 2.7 2.7 2.5 2.1 2.1 2.2 2.2 2.2 2.1 FactoryIndustry 15,500 17,085 18,708 21,140 23,529 25,600 28.160 30,216 33,328 12.7 13.2 13.8 15.0 15.6 16.1 16.8 17.3 18.0 Small & Other Industry 1,731 1,812 1,909 2,007 2,120 2,251 2,410 2.562 2,741 1.4 1.4 14 1.4 1.4 1.4 1.4 1.5 1.5 Construction 8,514 8,761 9,033 9,765 10,400 11,024 11,564 11,957 12,603 7.0 6.8 6.7 6.9 6.9 6.9 6.9 6.9 6.8 Services 61,485 64,144 68,141 71,776 76,330 80,319 84,388 89,256 95,236 50.5 49.6 50.4 50.9 50.6 50.4 50.2 51.2 51.3 Electricity, Gas, Water 1,526 1,681 1,800 1.897 2,125 2,335 2,573 2,522 2,723 1.3 1.3 1.3 1.3 1.4 1.5 1.5 1.4 1.5 & Sanitary Services Transport, Storage& 13.883 14,410 15,534 16,606 17,287 17,823 18,803 20,213 21,790 11.4 11.1 11.5 11.8 11.5 11.2 11.2 11.6 11.7 Communication 0.0 Wholesale and Retail 25,588 26,497 28,556 30.074 32,584 34,667 35,906 37,773 40,228 21.0 20.5 21.1 21.3 21.6 21.8 21.4 21.7 21.7 Trade Banking,Insuranceand 6,168 6,556 6,831 7,241 8,023 8,785 9,707 10,687 11,735 5.1 5.1 5.1 5.1 5.3 5.5 5.8 6.1 6.3 Real Estate Ownership of Dwellings 3,650 3,705 3,761 3,795 3,841 3,887 3,938 3.989 4,037 3.0 2.9 2.8 2.7 2.5 2.4 2.3 2.3 2.2 Public Administration 6,140 6,355 6,304 6,449 6,642 6.848 7,218 7,579 7,912 5.0 4.9 4.7 4.6 4.4 4.3 4.3 4.3 4.3 & Defense Other Services 4,530 4,940 5,355 5,714 5,828 5,974 6,243 6,493 6,869 3.7 3.8 4.0 4.1 3.9 3.8 3.7 3.7 3.7 GDP 121,729 129,244 135,204 140,990 150,783 159,269 167,953 174.335 185,493 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Net Factor Income From Abroad -2,855 .2,818 -2,990 -2,916 -2,039 -2,698 -2,093 -3,249 -2,687 -2.3 -2.2 -2.2 -2.1 -1.4 -1.7 -1.2 -1.9 -1.4 GNP 118.874 126,426 132,214 138,074 148,744 156,571 165,860 171,002 182,801 97.7 97.8 97.8 97.9 98.6 98.3 98.8 98.1 98.5 Source: Central Bank of Sri Lanka -23- Table A.3: Sectoral Growth Rates, 1990-1997 (percent) Annual Growth Rate Contribution to Growth of GDP Sector 1990 1991 1992 1993 1994 1995 1996 1997 1990- 1993 1994 1995 1996 1997 1990- Prov. 1997 Prov. 1997 Agriculture, Forestry 8.5 1.9 -1.6 4.9 3.3 3.3 -4.6 3.1 1.4 14.9 12.2 12.3 -24.3 8.9 5.5 and Fishing Agriculture 10.4 0.8 -2.4 5.0 3.8 3.3 -5.1 3.0 1.1 13.0 11.8 10.4 -22.9 7.3 2.9 Tea 12.6 3.2 -25.7 29.6 4.4 1.6 5.1 7.2 2.5 7.0 1.5 0.6 2.5 2.1 0.7 Rubber 3.0 -8.8 2.1 1.8 1.0 0.9 6.3 -5.8 -0.5 0.1 0.1 0.1 0.7 -0.4 0.04 Coconuts 1.6 -13.3 5.1 -5.8 20.6 5.1 -7.6 3.0 0.5 -1.8 6.8 2.0 -4.2 0.9 0.04 Paddy 21.3 -5.9 -2.0 9.6 4.7 4.7 -26.7 -8.6 -4.2 5.8 3.6 3.7 -29.6 -4.0 -2.7 Other 7.8 8.0 1.0 1.4 -0.1 2.6 3.5 0.5 2.4 1.9 -0.2 4.1 7.7 0.7 4.8 Forestry 2.3 3.8 2.0 0.1 -0.2 1.2 1.3 1.3 1.4 0.0 0.0 0.3 0.4 0.3 0.4 Fishing -5.0 12.0 4.1 7.1 1.4 4.9 -3.9 5.0 4.3 1.9 0.5 1.6 -1.8 1.3 1.4 Mining and Quarrying 9.1 -10.0 -6.0 11.9 6.0 3.4 8.9 3.4 2.2 4.0 2.6 1.5 5.6 1.3 1.1 Manufacturing 9.5 6.8 8.8 10.5 9.1 9.2 6.5 9.3 8.6 28.1 30.8 33.1 35.2 30.5 31.3 Tree Crop Processing 8.4 -5.6 -12.6 8.4 13.0 4.4 1.0 3.0 1.3 2.5 4.8 1.8 0.6 1.0 0.5 Factory industry 10.2 9.5 13.0 11.3 8.8 10.0 7.3 10.3 10.0 24.4 24.4 29.5 32.2 27.9 29.1 Small & Other Industry 4.7 5.4 5.1 5.6 6.2 7.1 6.3 7.0 6.1 1.2 1.5 1.8 2.4 1.6 1.7 Construction 2.9 3.1 8.1 6.5 6.0 4.9 3.4 5.4 5.3 6.5 7.4 6.2 6.2 5.8 7.1 Services 4.3 6.2 5.3 6.3 5.2 5.1 5.8 6.7 5.8 46.5 47.0 46.9 76.3 53.6 55.7 Electricity, Gas, Water& 10.2 7.1 5.4 12.0 9.9 10.2 -2.0 8.0 7.1 2.3 2.5 2.7 -0.8 1.8 1.9 Sanitary Services Transport, Storage& 3.8 7.8 6.9 4.1 3.1 5.5 7.5 7.8 6.1 7.0 6.3 11.3 22.1 14.1 12.9 Communication Wholesale and Retail Trade 3.6 7.8 5.3 8.3 6.4 3.6 5.2 6.5 6.1 25.6 24.5 14.3 29.3 22.0 25.0 Banking, Insurance and 6.3 4.2 6.0 10.8 9.5 10.5 10.1 9.8 8.7 8.0 9.0 10.6 15.4 9.4 9.2 Real Estate Ownership of Dwellings 1.5 1.5 0.9 1.2 1.2 1.3 1.3 1.2 1.2 0.5 0.5 0.6 0.8 0.4 0.6 Public Administration & 3.5 -0.8 2.3 3.0 3.1 5.4 5.0 4.4 3.2 2.0 2.4 4.3 5.7 3.0 2.7 Defense OtherServices 9.1 8.4 6.7 2.0 2.5 4.5 4.0 5.8 4.8 1.2 1.7 3.1 3.9 3.4 3.4 GDP 6.2 4.6 4.4 6.9 5.6 5.5 3.8 6.4 5.3 100.0 100.0 100.0 100.0 100.0 100.0 GNP 6.4 4.6 4.4 7.6 5.4 5.9 3.1 6.9 5.4 Source: Central Bank of Sri Lanka -24- Table A.4: Macroeconomic Balances, 1987-1997 (as percent of GDP at current market prices) Item 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Prov. Prov. Foreign Savings 8.0 8.5 7.1 5.5 7.6 6.1 5.3 7.9 6.2 5.2 3.0 Private Sector GrossDomesticInvestment 10.9 9.1 11.7 13.4 13.1 17.2 18.0 19.9 18.8 19.2 18.8 (o/w Change in Stocks) 0.1 0.3 0.2 0.3 0.3 0.2 0.3 0.4 0.1 0.2 0.2 Private (National) Savings 14.0 12.2 13.5 15.6 13.2 18.8 21.0 22.0 22.7 22.7 22.8 Investment minus Savings -3.1 -3.1 -1.8 -2.2 -0.1 -1.6 -3.0 -2.1 -3.9 -3.5 -4.0 Central Government Capital Expenditure 12.4 13.7 10.0 8.8 9.8 7.1 7.6 7.1 6.9 5.0 5.6 (including net lending) Current Savings 1.3 2.0 1.2 1.2 2.0 0.9 0.8 2.9 3.2 3.7 1.4 Investment minus Savings 11.1 11.7 8.8 7.6 7.8 6.2 8.4 10.0 10.1 8.7 7.0 Total Gross Domestic Investment 23.3 22.8 21.7 22.2 22.9 24.3 25.6 27.0 25.7 24.2 24.4 Domestic Savings 12.8 12.0 12.2 14.3 12.8 15.0 16.0 15.2 15.3 15.3 17.3 National Savings 15.3 14.2 14.7 16.8 15.2 17.9 20.2 19.1 19.5 19.0 21.4 Memorandum Item Share of Gross Domestic Invest. 34.4 37.3 32.7 24.8 33.2 25.1 20.7 29.3 24.1 21.5 12.3 Financed by Foreign Savings Source: Central Bank of Sri Lanka -25- Table A.5: Balance of Payments, 1987-1997 (USS million) Item 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Proy. Trade Balance -679.4 -763.5 -667.0 -702.7 -993.3 -1042.2 -11 52.3 -1558.4 -1514.2 -1343.8 -1212.8 Exports (fo.b.) 1,393.8 1,476.0 1,560.4 1,975.9 2,039.9 2,457.6 2,857.3 3,200.6 3,797.S 4095.0 4638.8 Imports (c.i.f 2,073.2 2,239.5 2,227.4 2,678.6 3,033.2 3,499.8 4,009.6 4,759.0 5,312.1 5438.8 5851.6 Serices, net -156.6 -153.0 -157.7 -97.2 -88.8 -33.2 39.1 11.6 13.8 -95.0 -5.5 Receipts 397.3 410.5 403.1 534.1 602.5 689.1 747.0 897.5 1,043.3 942.2 1099.2 Paytnents 553.9 563.5 560.7 631.3 691.3 722.4 710.7 886.2 1,029.7 1037.3 1104.6 Of which interest payments 194.1 216.3 201.0 233.5 213.2 213.2 203.9 236.2 277.3 302.0 294.8 Goods and Services. net -836.0 -916.5 -824.7 -799.8 -1082.1 -1075.4 -1113.2 -1546.81 -1500.4 -1438.8 -1218.3 Private Transfers, niet 313.2 319.4 330.6 366.3 401.3 461.5 560.8 626.5 679.6 714.3 791.8 Receipts 350.7 357.0 357.9 402.4 442.1 547.7 633.4 714.3 797.9 S40.6 930.7 Payments 37.5 37.6 27.3 36.1 40.8 86.2 72.6 87.8 118.3 126.3 138.9 CurrentAccountbefore Grants -522.8 -597.1 -494.1 433.6 -680.8 -613.9 -552.4 -920.3 -820.8 -724.5 426.6 Official Transfers, net 179.9 207.1 188.1 176.1 203.3 183.4 160.6 167.3 173.7 140.0 127.1 CurrentAccountafterGrants -343.0 390.0 -306.0 -257.0 -477.5 430.3 -391.8 -752.8 -647.1 -584.5 -299.5 Non-Monetary Capital, net 302.6 259.5 300.5 489.4 648.5 539.3 904.5 789.6 709.6 370.0 682.5 Direct Investnent, net 58.0 43.1 0.0 0.0 95.2 103.9 147.3 158.2 15.6 86.5 128.7 Portfolio Investment, net 0.0 0.0 28.2 58.2 0.0 15.2 67.0 28.6 -2.3 6.7 13.1 Private Long-term, net 7.8 44.0 -44.2 43.2 -24.6 53.9 181.9 258.9 104.5 53.5 378.7 Inflows 80.2 51.1 19.1 32.4 85.1 186.6 209.6 288.2 234.2 209.5 476.9 Outflows 72.5 95.1 63.3 75.6 109.7 132.7 27.6 29.3 129.7 156.0 98.2 Short-tenn, net 38.8 16.1 92.9 64.5 48.0 135.2 197.0 90.1 148.8 24.3 38.6 Government Long-term, net 198.0 244.3 223.6 409.9 498.8 262.0 311.2 253.8 442.9 199.0 123.4 Inflows 343.0 408.6 385.5 536.6 634.0 439.3 512.0 404.0 677.8 456.2 419.8 Outflows 144.9 164.3 161.9 126.7 135.2 177.3 200.8 150.2 234.8 257.2 296.3 Goverment Short-teem, net 0.0 0.0 0.0 0.0 31.1 -31.0 0.0 0.0 0.0 0.0 0.0 Eors and Omission 40.1 44.3 -70.0 -25.1 37.4 84.4 63.5 138.3 -39.4 80.1 -20.6 Overall Balance -80.5 -86.2 -75.5 207.3 208.4 193.1 376.3 175.1 23.1 -134.4 362.5 Memorandum Items: Gross Total Reserves$mill. 600.7 575.9 584.1 856.7 1,156.0 1,439.9 2,123.8 2,607.8 2,569.9 2,440.1 2,821.8 Gross Official Reseres S mill. 299.5 277.4 291.5 435.0 718.4 936.4 1614.2 2020.6 2062.1 1937.4 2028.9 Months of Imports: For Gross Total Reserves 3.5 3.1 3.2 3.8 4.6 4.9 6.4 6.6 5.8 5.4 5.8 For Gross Official Reserves 1.7 1.5 1.6 1.9 2.8 3.2 4.8 5.1 4.7 4.3 4.2 Export/GDP 20.9 21.2 22.3 24.6 22.7 25.3 27.8 27.5 29.1 29.4 30.7 Imports/GDP 31.0 32.1 31.9 33.3 33.7 36.1 39.0 40.9 40.8 39.1 38.8 Trade Balance/GDP -10.2 -10.9 -9.5 -8.7 -11.0 -10.7 -11.2 13.4 10.7 10.7 10.7 C/A Balance before grants/GDP -8.0 -8.5 -7.1 -5.5 -7.6 -6.3 -5.3 -7.9 -6.4 -5.2 -2.8 C/A Balance after grants/GDP -5.1 -5.6 \4.4 -3.2 -5.3 4.4 -3.8 -6.5 -5.0 4.2 -2.0 Debt Service Ratio(l) 27.5 28.7 24.2 17.8 18.5 19.2 12.8 12.1 13.3 15.1 13.2 (1) Total amortization and interest payments a % exports of goods & services Source: Central Bank of Sri Lanka -26- Table A.6: Merchandise Exports, 1987-1997 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Prov. Total Exports (USS Mn.) 1,397.0 1,475.0 1,558.0 1,913.0 1,987.0 2,460.6 2,864.0 3,209.6 3,802.9 4,095.0 4,639.0 Agriculture 592.0 632.0 612.0 721.0 641.5 604.7 656.0 702.0 828.0 961.2 1,060.4 Tca(US$Mn) 361.5 386.5 379.2 495.0 431.9 339.8 413.0 423.7 480.3 615.5 719.1 Price, $/per kg. 1.8 1.8 1.9 2.3 2.0 1.9 1.9 1.8 2.0 2.5 2.7 Volume,Mnkgs. 201.1 219.8 204.2 216.0 212.4 181.7 218.4 229.6 241.0 244.1 268.5 Rubber (US$ Mn.) 99.4 116.5 86.4 76.8 63.9 68.0 64.2 72.4 111.4 104.4 79.1 Price,$/perkg. 0.9 1.2 1.0 0.9 0.8 0.9 0.9 1.1 1.6 1.5 1.3 Volume, Mn kgs. 106.0 99.3 86.0 86.8 76.4 78.6 69.6 69.0 68.0 72.1 61.5 CoconutUS$Mn. 48.2 28.1 53.3 46.0 42.7 60.9 37.7 49.7 69.0 80.5 82.4 Price, $/per nut 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 Volume, Mn nuts 538.0 234.1 571.0 507.7 366.9 411.7 292.7 436.5 579.0 474.6 505.1 Other cocnt. prdts. US$ Mn. 24.3 20.2 26.0 23.5 20.5 23.4 19.8 25.9 34.0 29.3 35.2 Otheragri.prdtsUSSMn. 58.2 80.5 66.8 80.0 82.4 113.1 120.8 128.8 134.0 131.5 144.6 Price, S/per kg. 1.5 1.4 2.2 1.4 1.6 2.0 1.9 1.3 1.4 2.4 2.5 Volume,Mnkgs. 39.7 56.0 30.8 57.3 52.6 56.0 64.8 101.6 92.5 54.6 58.0 Indust. Products US$Mn. 679 713 790 1036 1226 1750 2081 2400 2867 2989 3422 Garments US $ Mn. 437.7 448.2 489.5 628.0 804.1 1213.9 1412.0 1552.3 1788.1 1.901.7 2,274.1 Price, $/per piece 2.4 2.4 2.4 2.5 2.8 3.1 3.1 2.9 3.1 5.9 6.3 Volume, Mn pieces 185.2 185.6 206.9 247.1 286.2 394.2 457.6 529.5 593.0 324.7* 360.4* Petroleum Products US$Mn. 87.9 71.2 62.3 99.1 79.5 63.3 78.9 80.2 84.8 103.9 97.0 Price, $/perMt. ton 136.9 103.7 106.8 156.6 152 154.3 132.0 131.0 138.0 157.2 180.3 Volume,'000 Mt. ton 642.4 687.0 583.6 632.5 523.2 410.2 597.9 611.8 616.0 660.9 538.1 Processed diamonds US $Mn. 39.6 51.2 90.3 91.9 67.9 107.1 141.9 146.2 163.0 156.3 125.0 Otherindust.prdts.US$Mn. 113.7 142.1 148.1 217.0 275.0 365.6 448.0 586.0 768.1 844.5 939.8 Gems US$Mn. 49.1 65.1 61.2 73.1 57.1 56.6 70.1 79.3 77.4 86.3 83.4 Price, $/per carat 9.1 4.2 3.6 3.6 4.2 4.9 4.6 5.2 5.7 5.4 5.2 Volume, 000 carats 5,411 15,627 17,052 20,167 13,427 11,411 15,262 15,454 13,410 16,125 16,055 Other exports US S Mn. 76.0 65.5 95.9 82.0 62.7 49.5 56.3 28.4 31.0 41.3 59.4 Trad. Exports US $ Mn. 509.2 531.1 519.0 617.8 538.5 468.7 515.0 545.8 660.7 800.4 880.6 NonTrad.ExportsUS$Mn. 887.8 943.9 1,039.04 1,295.2 1,448.5 1,991.9 2,349.0 2,663.8 3,142.2 3,294.6 3.758.4 Share ofNon-trad. Exp.% 63.6 64.0 66.7 67.7 72.9 81.0 82.0 83.0 82.6 86.6 91.8 Ofwhich garments 49.3 47.5 47.1 48.5 55.5 60.9 60.1 58.3 56.9 57.7 60.5 Value Indices ~1987=100): Total Exports 100.0 105.6 111.5 136.9 142.2 176.1 205.0 229.7 272.2 293.1 332.1 Traditional Exports 100.0 104.3 101.9 121.3 105.8 92.0 101.1 107.2 129.8 157.2 172.9 Non-traditional Exports 100.0 106.3 117.0 145.9 163.2 224.4 264.6 300.0 353.9 371.1 423.3 Note: * Volume of garments in Mn. Kg. Source: Central Bank of Sri Lanka -27- Table A.7: Merchandise Imports, 1987-1997 1987 19S8 1989 1990 1991 1992 1993 1994 1995 1996 1997 Prov. Total Imports (US$ Mn.) 2,055.9 2,233.0 2,226.2 2,689.1 3,061.2 3,503.3 4,008.3 4,768.7 5,306.0 5,438.6 5851.5 Consumer Goods: 469.3 548.2 719.3 804.5 861.9 838.4 891.6 930.9 981.5 1,234.3 1222.4 Rice Value US $ Mn. 23.3 5(.9 94.2 43.9 38.5 65.1 49.4 13.3 2.4 91.1 73.1 Volume ('000 M.T.) 102.0 189.0 311.9 172.0 133.0 237.0 208.8 58.4 9.0 341.0 306.1 Unit Value (US$/M.T.) 228.4 300.9 302.0 255.1 289.1 274.6 236.7 227.0 251.0 267.1 238.7 Wheat Value UJS $ Mn. 65.4 88.0 137.7 94.7 79.8 103.8 116.2 117.9 198.0 204.4 138.6 Volume ('000 M.T.) 578.0 612.0 726.0 576.0 669.6 709.0 771.3 865.0 1,057.0 913.0 789 Unit Value (US$/M.T.) 113.1 143.9 189.8 164.4 119.2 146.4 150.7 136.3 187.1 223.8 175.6 Sugar Value US $Mn. 81.1 92.1 120.1 129.2 124.2 113.0 117.5 180.1 170.0 145.0 183.7 Volume ('000 M.T.) N.A N.A 319.0 305.3 358.4 370.0 393.5 491.7 418.0 381.2 545.2 Unit Value (US$/M.T.) N.A N.A 376.3 423.2 346.6 305.4 298.5 365.9 407.5 380.3 336.9 OtherFood 83.6 84.1 150.3 216.9 242.2 241.6 250.6 173.3 150.7 251.3 289.0 OtherConsumerGoods 215.7 227.2 217.0 319.8 377.3 314.9 358.0 446.8 460.0 433.0 441.6 Intermediate Goods: 1,175.7 1,267.9 1,118.6 1,297.1 1,473.6 1,780.4 2,032.0 2,425.7 2,897.3 2,767.1 3084.2 Crude Petroleum Value US $ Mn. 313.0 307.1 165.0 309.5 233.7 174.8 234.2 230.8 241.0 303.8 262.9 Volume (Mn.BBLs) 13.0 14.0 9.4 13.2 12.0 9.6 13.2 14.2 14.0 15.1 13.5 Unit Value(US$/M.T.) 24.1 21.9 17.6 23.5 19.4 18.2 17.2 16.3 17.7 20.2 19.4 Refined Petroleum 70.1 24.2 68.4 49.3 77.7 143.3 74.9 65.4 139.2 175.3 276.3 Fertilizer Value US $ Mn. 44.1 77.8 48.7 73.8 58.7 55.4 64.4 62.6 85.9 75.7 53.6 Volume ('000 M.T.) 373.7 555.9 355.0 504.7 358.6 339.5 464.5 427.0 452.0 360.6 332.5 Unit Value(US$/M.T.) 118.1 140.0 137.1 146.2 163.7 158.9 138.6 186.5 192.0 209.8 161.3 Textiles 274.6 276.5 276.8 335.8 498.2 765.4 861.6 1031.4 1157.4 1,167.8 1386.3 Other Intermediate Goods 473.8 582.3 559.7 528.7 605.2 642.9 797.8 644.3 748.6 857.0 955.6 Investment Goods: 385.0 379.7 333.4 584.4 720.2 850.8 1047.5 1366.9 1187.4 1,203.5 1324.9 Machinery and Equipment 225.6 221.5 174.1 246.7 287.2 390.1 463.0 559.4 502.3 649.3 742.3 Transport Equipment 48.1 44.2 50.4 113.3 183.9 179.9 313.0 453.9 303.4 178.5 208.1 Building Materials 24.1 32.7 27.5 158.8 165.3 181.0 193.2 240.5 272.0 263.1 271.4 Unclassified 25.9 37.2 55.0 3.1 5.5 33.7 36.3 45.3 239.8 233.8 220 As % of Total Imports: Consumer Goods 22.8 24.5 32.3 29.9 28.2 23.9 22.2 19.5 18.5 22.7 20.9 Food 12.3 14.4 22.6 18.0 15.8 14.9 13.3 10.2 9.8 12.7 11.7 Intermediate Goods 57.2 56.8 50.2 48.2 48.1 50.8 50.7 50.9 54.6 50.9 52.7 Petroleum 18.6 14.8 10.5 13.3 10.2 9.1 7.7 6.2 7.2 8.8 9.2 Textile 13.4 12.4 12.4 12.5 16.3 21.8 21.5 21.6 21.8 21.5 23.7 Other Intermediate Goods 25.2 29.6 27.3 22.4 21.7 19.9 21.5 23.0 25.6 20.6 19.8 Investment Goods 18.7 17.0 15.0 21.7 23.5 24.3 26.1 28.7 22.4 22.1 22.6 Source: Central Bank of Sri Lanka. -28- Table A.8: Summary of Central Government Fiscal Operations, 1988-1998 (Rs billion) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Prov. Budget Total Revenue and Grants 48.3 60.4 74.7 84.0 94.1 106.4 119.1 145.3 154.0 172.4 197.4 Total Revenue 41.7 54.0 68.0 76.2 85.8 98.3 110.0 136.3 146.3 164.9 188.4 Tax 35.9 47.5 61.2 68.2 76.4 85.9 99.4 118.5 130.2 144.0 164.0 Non-tax 5.8 6.5 6.8 8.0 9.4 12.5 10.6 17.7 16.1 20.9 24.4 Grants 6.6 6.4 6.7 7.9 8.3 8.0 8.3 9.0 7.7 7.5 9.0 TotalExp.&NetLending 76.5 82.2 99.8 119.5 117.0 141.7 170.8 200.5 213.9 212.4 247.1 Current 46.1 56.9 71.8 83.8 89.6 102.3 127.1 157.1 175.1 184.7 187.1 Capital 22.9 20.8 19.5 25.3 24.9 33.7 30.4 41.7 37.6 44.2 57.5 Net lending 1/ 7.5 4.5 8.5 10.5 2.4 5.7 13.3 1.7 1.1 -16.5 2.7 Current Account Sur/Def(-) -4.4 -2.9 -3.8 -7.6 -3.9 -2.3 -17.1 -20.8 -28.8 -19.8 1.3 Deficit (w/o grants & w/priv.) -34.8 -28.2 -31.9 -43.3 -31.2 -43.3 -60.7 -64.2 -67.6 -47.5 -58.7 Deficit (after grants & w/priv. -28.2 -21.8 -25.2 -35.5 -22.9 -35.3 -52.5 -55.2 -59.9 -40.0 -49.7 Financing 28.2 21.8 25.1 35.5 22.9 35.3 52.5 54.7 60.0 39.9 49.6 Foreign Borrowings 7.1 5.9 11.6 19.3 7.4 9.9 11.8 21.2 10.2 9.7 16.4 Disbursements 12.3 11.7 16.6 26.0 15.3 16.8 19.4 29.6 ... ... ... Amortizations -5.2 -5.7 -4.9 -6.6 -8.0 -7.0 -7.6 -8.5 ... ... ... Net Domestic 21.1 12.4 17.0 16.1 15.6 25.4 40.7 33.5 49.8 30.2 33.2 Bank financing 10.2 -3.3 0.4 -0.9 -2.3 -6.1 1.2 7.1 13.1 -2.2 0.0 Nonbank financing 10.9 15.7 16.6 17.0 17.9 31.5 39.5 26.4 36.7 32.4 33.2 Arrears 0.0 3.5 -3.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 As a Percentage of GDP Total Revenue and Grants 21.8 24.0 23.2 22.6 22.1 23.1 20.4 21.8 20.0 19.4 19.3 Total Revenue 18.8 21.4 21.1 20.4 20.2 19.7 19.0 20.4 19.0 18.5 18.4 Tax 16.2 18.9 19.0 18.3 18.0 17.2 17.2 17.7 17.0 16.2 16.0 Non-tax 2.6 2.6 2.1 2.1 2.2 2.5 1.8 2.7 2.1 2.3 2.4 Grants 3.0 2.5 2.1 2.1 1.9 1.6 1.4 1.3 1.0 0.8 0.9 Total Exp. & Net Lending i/ 34.5 32.6 31.0 32.1 27.5 27.9 29.5 30.0 27.8 23.9 24.2 Current 20.8 22.6 22.3 22.5 21.1 20.5 22.0 23.5 22.8 20.7 18.2 Capital & Net Lending i 13.7 10.0 8.7 9.6 6.4 7.7 7.6 6.5 5.0 3.1 5.9 Current Account Sur/Def(-) -2.0 -1.2 -1.2 -2.0 -0.9 0.8 -2.9 -3.1 -3.7 -2.2 0.1 Deficit (before grants & w/pri -15.7 -11.2 -9.9 -11.6 -7.3 -8.7 -10.5 -9.6 -8.8 -5.3 -6.5 Deficit (after grants & w/priv -12.7 -8.6 -7.8 -9.5 -5.4 -7.1 -9.1 -8.3 -7.8 -4.5 -4.9 Financing 12.7 8.6 7.8 9.5 5.4 7.1 9.1 8.2 7.8 4.5 4.9 Foreign Borrowings 3.2 2.4 3.6 5.2 1.7 2.0 2.1 3.2 1.4 1.1 1.6 Disbursements 5.6 4.6 5.2 6.5 3.6 3.4 3.4 4.4 ... ... ... Amortizations 2.3 2.3 1.5 1.3 -1.9 -1.4 -1.3 -1.3 ... ... ... Net Domestic u/ 9.5 6.3 4.2 4.3 3.7 5.1 7.0 5.0 6.5 3.4 3.3 Bank financing 4.6 -0.2 0.1 0.0 -0.5 -1.2 0.2 1.1 1.7 -0.2 0.0 Nonbank financing v/ 4.9 6.5 4.1 4.3 4.2 6.3 6.8 4.0 5.4 3.6 3.3 1/ Includes privatization proceeds Source: Central Bank of Sri Lanka, Treasury, Ministry of Finance, IMF and staff estimates. -29- Table A.9: Government Revenue (economic classification), 1988-1998 (as a percentage of GDP) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Prov. Budget A. Tax Revenue 16.2 18.9 19.0 18.3 18.0 17.2 17.2 17.8 16.9 16.2 16.0 1. Income Tax 2.1 2.0 2.3 2.6 2.6 2.5 2.6 2.6 2.7 2.3 2.3 Personal 0.7 0.9 0.9 1.0 1.0 1.0 1.0 1.1 1.0 0.9 0.8 Corporate 1.4 1.2 1.4 1.7 1.6 1.5 1.7 1.5 1.7 1.4 1.4 2. Stamp duty & Property Trans: 0.8 1.1 1.0 1.0 0.8 0.7 0.8 0.8 0.7 0.9 0.8 3. Tax onTBsheld by CBSL 0.0 0.9 0.8 0.8 0.5 0.2 0.1 0.2 0.2 0.1 0.0 4. Taxes on Goods and Services 7.7 8.3 8.9 8.6 9.0 9.6 9.8 10.7 10.0 9.8 9.8 4.a Turnover taxes 5.6 5.8 6.3 5.8 5.7 5.9 5.6 5.5 4.9 4.9 4.6 4.b Excise 2.0 2.3 2.5 2.8 2.4 2.3 2.5 2.9 2.9 2.9 3.1 Liquor 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.9 0.8 0.7 0.8 Tobacco 1.2 1.5 1.7 1.8 1.3 1.4 1.4 1.4 1.7 1.7 1.6 4.c Licence Fees 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.2 4.d Defense levy /I N.A N.A N.A N.A 0.9 1.3 1.7 2.2 2.1 1.9 2.0 5. Taxes on External Trade 5.6 6.5 6.0 5.3 5.1 4.2 3.9 3.6 3.3 3.0 3.0 5.a Imports 4.8 5.9 5.2 5.0 4.9 4.2 3.9 3.6 3.3 3.0 3.0 5.b Exports 0.8 0.6 0.8 0.3 0.2 0.0 0.0 0.0 0.0 0.0 0.0 B. Non Tax Revenue 2.6 2.6 2.1 2.2 2.2 2.5 1.8 2.7 2.1 2.3 2.4 7. Property Income 1.8 1.7 1.3 1.6 1.5 1.6 1.3 2.0 1.3 1.6 1.5 8. Fees and Charges 0.2 0.2 0.3 0.2 0.3 0.3 0.2 0.3 0.4 0.3 0.3 9. Other 0.6 0.6 0.5 0.3 0.5 0.6 0.3 0.4 0.4 0.5 0.6 C. Total Revenue 18.8 21.4 21.1 20.5 20.2 19.7 19.0 20.5 19.0 18.5 18.4 I/ Defense levy introduced in 1992. Source: Central Bank of Sri Lanka. -30- Table A.10: Government Expenditure (economic classification), 1988-1998 (as a percentage of GDP) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Prov. Budget Current Expenditure 20.8 22.6 22.3 22.5 21.1 20.5 22.0 23.1 22.8 20.7 18.2 Salaries and Wages l/ 4.5 5.7 4.9 4.8 4.9 3.3 3.2 3.4 3.3 3.1 3.1 Other Goods& Services 1/ 4.8 4.4 4.5 4.8 4.5 1.6 1.7 1.5 1.3 1.3 1.3 Interest Payments 5.7 5.7 6.4 5.9 6.1 6.0 6.6 5.7 6.4 6.2 5.6 Foreign 1.3 1.3 1.1 1.1 1.1 1.0 1.0 0.9 0.9 0.8 0.7 Domestic 4.4 4.4 5.3 4.8 5.0 5.0 5.6 4.8 5.5 5.5 4.7 Subsidies and Transfers 5.8 6.8 6.5 6.9 5.6 5.4 5.9 6.1 6.0 5.1 4.4 Public Corporations 0.7 0.9 0.8 0.5 0.3 0.3 0.5 1.2 1.1 0.3 0.2 Public Institutions 0.6 0.7 0.6 0.4 0.3 0.4 0.3 0.3 0.3 0.3 0.5 Other levels of government 0.4 0.4 0.4 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.1 Households 2/ 4.0 4.8 4.6 5.4 4.5 4.5 4.9 4.4 4.2 4.3 3.5 Pensions 1.9 1.9 1.4 2.4 1.9 2.1 2.3 2.2 2.0 2.0 1.8 Capital Expenditure 10.3 8.2 6.1 6.8 5.9 6.7 5.3 6.2 4.9 5.0 5.6 Acq. of fixed assets 5.4 5.2 3.7 3.8 3.0 3.9 2.9 3.4 2.7 2.9 3.4 Capital transfers 4.9 3.0 2.3 3.0 2.9 2.8 2.4 2.9 2.2 2.1 2.2 Public Corporations 1.6 0.6 0.4 0.8 1.1 0.9 0.7 1.1 0.8 0.7 0.6 Public Institutions 2.2 2.1 1.6 1.9 1.6 1.7 1.5 1.6 1.2 1.2 1.4 Other levels of government 0.2 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.1 0.2 0.2 Lending minus Repayments 3/ 3.4 1.8 2.6 2.8 0.6 0.9 1.8 0.7 0.1 -1.9 0.3 olw Privatisation Proceeds 0.0 0.0 0.0 0.2 0.7 0.2 0.5 0.4 0.6 2.5 0.8 Defense Expenditure N.A N.A N.A 4.2 4.3 4.1 4.7 6.4 5.7 5.1 4.1 Total Expenditure and Net Lending 34.5 32.6 31.0 32.3 28.2 28.1 29.0 30.0 27.8 23.8 24.1 1/ Excludes defense. 2/ Includes wheat subsidy. 3/ Includes privatization proceeds. Source: Central Bank of Sri Lanka. -31- Table A.11: Monetary Developments, 1987-1997 (Rs. billion) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Prov. Monetary Survey Net Foreign Assets 3.2 0.3 -1.6 3.4 12.2 20.9 48.1 64.5 66.5 61.9 89.3 Monetary Authorities 0.6 -2.1 -3.4 -1.6 9.8 18.7 53.0 65.9 74.3 73.8 89.9 Commercial Banks 2.7 2.3 1.8 5.0 2.4 2.2 -4.9 -1.4 -7.8 -11.9 -0.6 Net Domestic Assets 54.7 67.3 76.8 87.1 98.4 108.9 112.0 127.2 162.0 191.3 199.0 Domestic Credit 74.8 96.3 101.2 116.0 127.8 144.0 150.7 173.8 223.8 252.3 272.7 Public Sector 33.8 46.4 49.0 51.0 49.5 47.8 34.8 33.3 43.7 57.5 56.7 Government (net) 26.4 35.6 35.1 35.4 35.4 33.0 27.0 28.1 35.2 47.6 46.4 Public Corporations 7.4 10.8 13.9 15.6 14.1 14.8 7.8 5.2 8.5 9.9 10.3 Private Sector 41.0 49.9 52.3 65.0 78.3 96.2 115.9 140.5 180.1 194.8 216.0 Other Items (net) -20.1 -29.0 -24.4 -28.9 -29.4 -35.1 -38.7 -46.6 -61.8 -61.0 -73.8 Monetary Liabilities 57.9 67.5 75.2 90.5 110.6 129.8 160.1 191.7 228.5 253.2 288.3 Money 24.9 32.2 35.1 39.6 46.6 50.5 59.3 70.5 75.2 78.2 85.9 Currency 13.5 18.5 19.7 22.1 24.9 27.3 32.1 38.9 42.2 42.6 45.7 Demand Deposits 11.4 13.7 15.4 17.5 21.7 22.8 27.2 31.6 33.0 35.6 40.2 Quasi-money 33.0 35.4 40.1 50.9 64.0 79.7 100.8 121.2 153.3 175.0 202.4 Monetary Authorities NetForeign Assets 0.6 -2.1 -3.4 -1.6 9.8 18.7 53.0 65.9 74.3 73.8 89.9 Net Domestic Assets 18.7 27.6 26.8 33.2 30.2 26.1 3.5 2.2 4.3 11.7 20.3 Reserve Money 19.3 25.6 26.8 31.6 40.1 44.9 56.5 68.1 78.6 85.5 83.7 (percentage change of end-of-year values) Total Domestic Credit 16.9 28.8 5.1 14.6 10.2 12.7 4.7 15.3 28.8 12.7 8.1 Creditto Public sector 23.5 37.4 5.5 4.2 -3.0 -3.3 -27.2 -4.3 31.2 31.6 -1.4 Govemment(net) 16.8 34.8 -1.4 0.7 0.1 -6.6 -18.4 4.3 25.1 35.2 -2.5 Public Enterprises 55.4 46.4 28.5 12.8 -10.0 4.7 -47.3 -33.6 65.2 16.5 4.0 Credit to Private Sector 12.0 21.7 4.7 24.3 20.5 22.9 20.5 21.2 28.1 8.2 10.9 Broad Money (M2) 14.5 16.6 11.3 20.5 22.1 17.4 23.3 19.7 19.2 10.8 14.5 NarrowMoney 18.3 29.1 9.1 12.8 17.7 7.4 18.6 18.7 6.7 4.0 9.8 Currency 16.6 37.0 6.3 12.6 12.4 9.8 17.8 21.2 8.5 0.9 7.3 Demand Deposits 20.3 19.9 13.0 13.2 24.4 4.7 19.5 15.9 4.6 7.9 12.9 Quasi-money 11.8 7.1 13.3 26.9 25.7 24.6 26.4 20.2 26.5 14.2 15.7 Monetary Authorities Net Foreign Assets -10.5 -450.0 61.9 -52.9 -712.5 90.8 183.4 24.3 12.7 -0.7 21.8 Net Domestic Assets 14.1 47.7 9.4 23.9 -9.0 -13.6 -86.6 -37.1 95.4 172.1 73.5 Reserve Money 6.9 32.6 4.8 17.9 26.9 12.0 25.8 20.5 15.4 8.8 -2.1 Money Multiplier for M2 3.0 2.6 2.8 2.9 2.8 2.9 2.8 2.8 2.9 3.0 3.4 Velocity 3.6 3.5 3.5 3.9 3.4 3.3 3.1 3.0 3.2 3.2 3.3 Source: Central Bank of Sri Lanka -32- Table A.12: Colombo Consumer Price Index (CCPI), 1975-1997 (1952=100) Period All Food Clothing Fuel & Rent Misce- Annual Items Light laneous Increase % 1975 198.3 204.3 208.2 237.1 109.8 191.9 6.7 1976 200.7 202.1 211.7 265.2 109.8 203.8 1.2 1977 203.2 203.3 223.8 257.5 109.8 208.4 1.2 1978 227.8 237.5 226.2 262.1 109.8 224.8 12.1 1979 252.3 263.3 231.2 328.5 109.8 252.4 10.8 1980 318.2 339.7 239.9 563.9 109.8 293.8 26.1 1981 375.4 399.6 257.8 767.9 109.8 345.7 18.0 1982 416.1 450.4 273.8 816.4 109.8 377.1 10.8 1983 474.2 506.3 291.1 1,087.6 109.8 433.7 14.0 1984 553.1 598.0 307.5 1,282.7 109.8 496.9 16.6 1985 561.2 598.4 324.2 1,332.1 109.8 524.4 1.5 1986 606.0 641.4 374.5 1,347.6 109.8 599.7 8.0 1987 652.8 697.0 400.9 1,358.7 109.8 650.7 7.7 1988 744.1 802.0 419.8 1,535.1 109.8 742.6 14.0 1989 830.2 884.6 490.0 1,718.9 109.8 860.2 11.6 1990 1,008.6 1,090.9 610.2 1,934.2 109.8 1,021.0 21.5 1991 1,131.5 1,220.3 678.4 2,252.2 109.8 1,146.0 12.2 1992 1,260.4 1,366.0 723.6 2,334.3 109.8 1,318.7 11.4 1993 1,408.4 1,519.4 782.7 2,730.0 109.8 1,490.4 11.7 1994 1,527.4 1,654.1 795.7 3,131.6 109.8 1,578.7 8.4 1995 1,644.6 1,768.1 803.9 3,322.4 109.8 1,800.6 7.7 1996 1,906.7 2,107.6 821.8 3,591.6 109.8 1,994.7 15.9 1997 2,089.1 2,337.0 844.1 3,752.8 109.8 2,157.9 9.6 1997 Increase (%) 9.6 l0.9 2.7 4.5 0 8.2 1997 January 2,043 2,284 834 3,696 110 2,101 February 2,031 2,264 834 3,696 110 2,112 March 2,010 2,225 841 3,696 110 2,129 April 2,016 2,229 841 3,696 110 2,152 May 2,047 2,278 843 3,696 110 2,150 June 2.058 2,296 843 3,696 110 2,145 July 2,102 2,359 843 3,696 110 2.167 August 2,106 2,361 850 3,696 110 2,181 September 2,109 2,353 850 3,852 110 2,187 October 2,113 2.356 852 3,871 110 2,193 November 2,181 2,463 852 3,871 110 2,192 December 2,253 2,576 846 3,871 110 2,186 Note: Annual figures shown are average of monthly figures. Source: Department of Census & Statistics and Central Bank of Sri Lanka -33- Table A.13: Selected Real Sector Indicators, 1989-1997 1996 1997 1989 1990 1991 1992 1993 1994 1995 Prov. Prov. 1. GDP at factor cost (1982 prices) Rs. Bn. 121.7 129.2 135.2 141.0 150.8 159.3 168.0 174.3 184.8 Tea Production (Mn. Kgs.) 207.0 233.0 240.7 178.9 231.9 242.2 245.9 258.4 276.9 Rubber Production (Mn. Kgs.) 111.0 113.0 104.0 106.0 104.0 105.0 106.0 112.4 105.8 Coconut Production (Mn. Nuts) 2,484.0 2,532.0 2,184.0 2,296.0 2,151.0 2,622.0 2,755.0 2,546.0 2,631 Paddy Production ('000 M.T.) 2,063.0 2,538.0 2,389.0 2,340.0 2,570.0 2,684.0 2,810.0 2,061.0 2,239 Industrial Output Growth (real terms) % 6.0 14.0 10.0 12.0 14.0 9.0 9.2 6.5 ... Public Sector Major Industrial Output Index (1977=100) 88.0 100.0 91.9 73.3 87.9 83.8 78.0 86.2 72.2 No. of Tourist Arrivals ('000) 185.0 298.0 318.0 394.0 392.0 408.0 403.1 302.3 366.2 Electricity Generation GWh 2,858.0 3,150.0 3,377.0 3,540.0 3,979.0 4,364.0 4,786.0 4,375.0 2502 a 2. Population Growth % 1.3 1.1 1.5 1.0 1.2 1.4 1.4 1.1 1.3 Unemployment Rate % n.a. 16.3 13.8 13.3 13.8 12.1 12.7 11.6 10.4