SRI LANKAN ECONOMIC HISTORY

Sri Lanka began to shift away from a socialist orientation in 1977. Since then, the government has been deregulating, privatizing, and opening the economy to international competition. Twenty five years of civil war has slowed economic growth, diversification and liberalization, and the political group Janatha Vimukthi Peramuna (JVP) uprisings, especially the second in the late 1980s, also caused extensive upheavals.

The Mahinda Rajapakse government halted the privatization process and launched several new companies. Sri Lanka has a relatively high Human Development Index with a high literacy rate (90.1%) which are the result of universal education policies and widespread healthcare. Sri Lanka's Human Development Index and literacy rate are among the highest in the South Asian region, and infant mortality is among the lowest. Sri Lanka has 555 publicly funded hospitals.

Following the quelling of the JVP insurrection, increased privatization, economic reform, and a stress on export-oriented growth helped improve the economic performance, increasing GDP growth to 7% in 1993.

Economic growth has been uneven in the ensuing years as the economy faced a multitude of global and domestic economic and political challenges. Overall, average annual GDP growth was 5.2% over 1991-2000.

In 2001, however, GDP growth was negative 1.4%--the first contraction since independence. The economy was hit by a series of global and domestic economic problems and affected by terrorist attacks in Sri Lanka and the United States.

The crises exposed the fundamental policy failures and structural imbalances in the economy and the need for reforms. The year ended in parliamentary elections in December, which saw the election of a pro-capitalism party to Parliament, while the socialism oriented Sri Lanka Freedom Party retained the Presidency.

The government of Prime Minister Ranil Wickremasinghe of the United National Party has indicated a strong commitment to economic and social sector reforms, deregulation, and private sector development.

In 2002, the economy experienced a gradual recovery. Early signs of a peace dividend were visible throughout the economy—Sri Lanka has been able to reduce defense expenditures and begin to focus on getting its large, public sector debt under control.

In addition, the economy has benefited from lower interest rates, a recovery in domestic demand, increased tourist arrivals, a revival of the stock exchange, and increased foreign direct investment (FDI).

In 2002, economic growth reached 4%, aided by strong service sector growth. The agricultural sector of the economy staged a partial recovery. Total FDI inflows during 2002 were about $246 million.

The largest share of FDI has been in the services sector. Good progress was made under the Stand by Arrangement, which was resumed by the International Monetary Fund (IMF). These measures, together with peaceful conditions in the country, have helped restore investor confidence and created conditions for the government to embark on extensive economic and fiscal reforms and seek donor support for a poverty reduction and growth strategy.

The resumption of the civil-war in 2005 led to a steep increase defense expenditures. The increased violence and lawlessness also prompted some donor countries to cut back on aid to the country.

Sri Lanka has also accumulated a 9.2% deficit and the central bank has not intervened since late 2006 to print more currency.

A sharp rise in world petroleum prices combined with economic fallout from the civil war led to inflation that peaked 20%. However, as the civil war ended in May 2009 the economy started to grow at a higher rate of 8.0% in the year 2010.