Ceylon - Current economic position and prospects

D TD I T C r% ILE r Iq Report No. AS" 126a This report was prepared for use within the Bank and its affiliated organizationsi They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION AND PROSPECTS OF CEYLON may IV, Iit) I CURRENCY EQUIVALENTS Currency Unit - Ceylon Rupee US $1 = 4. 76 Rupees 1 T . - - TT- hft 11 1 Zupee R e US . $1 000 1 Million Rupees = US $210, 000 This r was orig ial y p repare in l 1~ atI e 1966 for distribution to the Aid Group for Ceylon by a mission compljrising Mlessrs. ManredL.LU U. i.LoUe_l (Chief of Mission), William S. Humphrey, Raihan Jait:L.L.L, HeL[I . Van Udr Tak ýJU a dL 1. KadVdlsky. It has been brought up-to-date in the light of the findings of a subsequent mission which consisted of Messrs. Manfred G. Blobel (Chief of Mission), Maurice F. Perkins and Sanjaya LalU. DACTO nhAMA OTTRMJFA rT A IM /VfAT/TT T7Q T/lhTO OUIWift". MIa.v vu-uLuv - Av T nrT Tm'rtl A n I n fV^(/ TAT "A flTZ1n^TnMr' 1 . A.. rUL.11UA.LJ lUI DUUL.. D0AHuUUU1W L L4 I!. TH ECHOIfjri OF CELON ~IN 1)9601y - MrUnZO 1U1J1 rrtVXJjZJ0 -5 introduction The Problem of Savings 7 The Problem of investment 13 The Problem of Foreign Exchange 17 The Problem of Economic Management 20 111. DEVELOPMENT PHOGRAM AND PROJECTS 24 - 39 Agriculture 25 Paddy Program 26 Agricultural Program 20 Evaluation 28 Need for Rehabilitation and Consolidation 30 Milk and Dairy Products 32 Plantation Prospects 32 Other Export Crops 33 Projects in Preparation 34 Private Sector Projects 35 Fisheries 35 Manufacturing 36 Other Sectors 39 IV. THE PROSPECTS FOR GROWTH AND THE NEED FOR EXTERNAL ASSISTANCE 4O - 46 Introduction 40 The Outlook for Exchange Earnings 41 Import Programs for 1967-1971 hI External Assistance Required 43 Creditworthiness 45 STATISTICAL APPENDIX BASIC DATA Area: 25,332 square miles Population: (1967) 11,680,000 Rate of Grorth 2.40 p.a. Population Density (per sq. mile): 461 Population Density (per sq. mile of arable land) 1964: 1,140 Gross Nptional Product (1965): Rs. 7,882 million Rate ofGrowth (1965): 2.0 Rate of Growth (1960-1965): 3.0 Real Income Growth (1960-1965): 2.0 CNP per capita: US$ 142 equivalent at official exchange rate Gross Domestic Product at Factor Cost (1965) Rs. 7,404 million of which, in percentage, Agriculture: 41 Manufacturing: 8 Construction: 6 Public Administration: 7 kliscellaneous Services: 38 Percent of GDP at Market Prices 1965 1959-1964 Gross Investment: 12 Gross Savings: 12 13 Balance of Payments Current Account 2 Deficit: 0/ 2 Investment Income Payments: less than 1 less than 1 Government Revenue: 24 22 Resourne Gnn ns V4 of Investment: - 1/ 13 Avernge Annual Change December 31, 1966 1961-1966 (in %) Tot.ql Monov Sunn1v: 6.6 Time and Savings Deposits: 585 14.8 Bnnk Credit to Publie Sentor: 2.083 Bank Credit to Private Sector: 798 9.5 Rate of Chmnge in P-rices:. 1. (Official Cost-of-Living Index) 1965/66 1960/61-1965/66 Government Current Receipts: 1,798 4.9 Government Current Ex-nditure: 1-7)j7 Surplus or Deficit: 51 Total External Assistance to 1/ In 1965 deficit was negligible. (continued) (Basic Data continued) External Public Debt (US$ million) March Average ly67 1yo1-19o> Total Debt Outstanding 210 1 105 Total Annual Debt Service 26 8 (max. 1971) Debt Service Ratio 6.5% 2.0% Balance of Payments (US$ million) 1966 1965 Total Exports 353 402 Total Tmnorts 429 403 Net Invisibles -_5 -2 Net Currpnt Account Balance -81 -3 Increase in Exchange Reserves (-) 26 -19 1966 1965 1954-56 (est.) Commodity Concentration of Exports t -a --w-- 92% 93% 94% Gr'oss Voreign Exch-ange Reserv,-.es 6692 154 Net Foreign Exchange Reserves n.a. 28 131 Average External FioAna 1965 1960-6 (US$ million) (est. Total Disbursements 47 29 20 Grants A 13 10 Loans 39 2/ 16 10 1/ Partly es imated. 2/ Includes disbursements of %,o iri10 ulua- 1- cLA Aid Programs. SUMRARY AND CONCLUSIONS i. Nearly two years have now passed since the present Government took office, and about 20 months have gone by since the World Bank organized the first meeting of governments interested in assisting Ceylon. Nine countries are now represented in the Aid Group for Ceylon, which has held three meetings, in July 1965, May 1966 and April 1967. Altogether, members of the Aid Group have so far offered Ceylon aid of roughly US$140 million. In addition, the IMF has permitted net drawings on its resources to the extent of US$79 million. ii. When the joint effort of Ceylon and Aid Group countries began, the economy had passed through nearly a decade during which most indicators of Government performance pointed downward. This trend has been halted and, in imnortant aspects, reversed. Recourse to bank borrowing. for financing the budget deficit, has been considerably reduced to a level where it no loneer serves as the source of expanding domestic purchasing power far in excess of the growth of resources. Increases in current outlays of the Government have slowed down markedly. and the decision last December to reduce the rice subsidy offers the promise of holding the expansion of current exnenditure to a rate which should nrovide inoreasinp domestic resources for investment. On the revenue side, the effective income tax burden has been redued, and the incidennp of tnyntion has hemin to shift towards indirect taxes, i.e., towards consumption. Import programs have been established nd ad nihePred ton % A±t1 the objetive iu o f maxkirong as muci h excrhnge as p.noss-,ible available for productive uses. iii. Progress has also been made in laying a foundation for accelerated e"o-+Ik grwt WN A 4 Minisr ^i Plainnin and nm ^ Affairs has ben established which, though still suffering from a shortage of personnel, is om p e-V-e _LjC - 4-QJP. - A. 4 ,JI --1,4fl±I ~ I. 4 .,- AUA,t 4- -P 1- --- .LP- .1 4- +4~JC .4 - 1 J .'-d1lI. policies and improving the quality of investment. Agricultural development policy, whch used to center to the detrimnt of growon the onsturuction of large irrigation works and costly settlement schemes, almost exclusively UevoUt U'U a ulujdUy . is b i g r i 1 0,% IAU LAJWCL.L U O 11LW.L 1U Ll1IMU U_LQ VIC-, jJ± IJ.~L W Lk.V ends with respect to both the type of program and the emphasis given to other crops. ±1n Uie L.LL±U 01 P'L)" inu ty, acio _±' L o LJt:;d&14rO VJ ltlZ U, Uut; use of existing investment and new proposals are more carefully screened, with emphasis being placed on the moSt urgent and proumisg U I vetmensU. OumewUaU more scope has been given to private initiative, both domestic and foreign, in the development of manufacturing industries. The policy of maintaining low retail prices for food items is now rapidly being abandoned; rice prices on the free market have risen, with the halving of the ration, and now that import allocations have been cut on other imported foods, prices are being permitted to rise to reflect scarcity values. Price incentives may thus be said to have been largely restored in agriculture. This is reflected in a. reduction in fallow paddy acreage in the current "Yala" season and in the response on the part of fairly large operators who are leasing sizeable tracts of public land now being made available for cultivation of foodcrops on a commercial scale. - ii - iv. All these are important advances which add up to a creditable performance on the part of Government. The fact that large obstacles still stand in the way of accelerating economic growth should not detract from these achievements. One area where further improvements need to be made is the use of public investment resources. There is still the tendency to start too many projects in too many parts of the country. As a result, scarce administrative and technical resources as well as construction capacity tends to be dissipated, leading to long periods of construction before investment begins to yield productive returns. Improvements in these areas form an essential part of the program of action in the future, but their absence so far cannot be regarded as the chief obstacle to faster recovery during the past year. Another area is the future development of private manufacturing. While it has been decided in principle to broaden the scope for private initiative, no effective approach to industrial licensing has yet been agreed upon that will ensure that private industry is removed from the fringe of Ceylon's economic development - the position it occupied in the past - and that it will become more fully integrated into the development effort. v. Shortfalls in aid flows below earlier expectations were largely responsible for improvements in policies not being translated into economic progress as quickly as one might have honed. Resources. which in Ceylon at this stage means primarily foreign exchange, are the means of translating decisions on nolicv and on invetment into rality. Cevnn does not nossess adequate external resources to provide the necessary room for maneuver. Snhst-ntiA trrnrmitment of nii fnt-llino PQ hil million wepre made in 196q and 1966. However, in 1966 only Rs. 132 million of aid goods arrived. More- over, ann godprnf thisQ anmnt. nar-rivedP nlyi towrdslm t.heendlof the yeanr, czo that its impact on supplies and on domestic production in 1966 was small. vi. Delays in the arrival of aid goods not only affected adversely the pac ofIkJ ecnoi ipr vel-1t.h, L/AV -1 -,4 W-;+1 -1 A~- -- -4V* In addition, tea shipments suffered from a strike towards the end of 1966 and U por~J U WL L±U1z;uL.LJJ L-tUUUt-,U y 1c t.L -z(,U L~ L F L I El W of drought. These factors caused export earnings in 1966 to fall Rs. 246 made earlier in the year. As a result, Ceylon had to draw heavily on its reevst maitai the flow.L od.Lf essnt i. aLJ 1 I-P0 r-Lj- J.J.LA Z O-VC- LII11J1J± U J±1~ Rs. 126 million in 1966. vii. The preconditions for reviving the economy from near stagnation i.e. wiu iroJvJrntoit 01 pu U"(.Lt s and uf te mein fur tneir aumiusturatiu, have ou a considerable extent been satisfied, although room exists for further progress. in auiioLn a genera-L Ucouoiuc LramewrU- alnu urautgy fur imp±emn g a program of import substitution has been established and, in many aspects, initiated. Full implementation is, however, dependent upon the availability of sufficient foreign exchange. During the next five years, at least, this will be the major constraint. A lack of foreign exchange means little prospect for accelerating growth. viii. Once again foreign exchange reserves are at uncomfortably low levels and need replenishment. Moreover, the outlook, over the longer run, for an - iii - expansion in export earnings is marginal. Although the volume of exports is likely to rise by 5% a year, export earnings in 1971 will probably only be slightly above the 1965 level because prices are expected to decline further. The position is still less encouraging when increasing net invisible navments are deducted. Altogether. net foreign exchange earnings are projected to increase roughly at a rate of 2.5% a year over the 1966 pvel. but to remnin thronhout thp nPriod 1967-1971 below the amount earned in 1965. ix. In view of the continued limitations on import capacity, a tentative five-year imNort rnoram has h T emn rann uon the hanis of minimum rennire- ments for a 4-5% annual rate of growth. This has dictated sharp reductions in a onies from ahroad of Pn (.ith +he eenp+.inn of the basic onmmoditi es - rice, flour and sugar) and in textiles and other non-food items to a degree avoided, if domestic production undergoes a significant expansion. This means - - - -'~,-j J1.,J ,± #-, i'-_ - ,1A,,i& 11 -J 1 ic,' - - -n1~ -_ made effective and that strong support is required from the private sector. quantities of intermediate and investment goods to achieve capacity operation lor appropriateJ.1) coffod t.AJU i e 5 11-1~ LU .eJ..LOU.i18 YJLC21J dUItA U'. jJ1U.V-LUK- .-l 6. 1 '.-.' ui. X. A Uentative projecton u. veyL unUnce u2 poymue Ceuyln baVuI the five years 1967 through 1971 indicates an aggregate current account deficit of Rs. 2.3) billin (U S8 millon). ili delicli curreZpUncb roughly to 20% of Ceylon's import requirements and equals over h% of GNP over the period as a whole. Taking into account repayment obligations falling due within the period, including US$79 million to the IMF, the gross capital inflow required to support an adequate level of imports amounts to Rs. 3.2 billion (US$680 million). Of this amount Rs. 1.1 billion (US$230 million) is covered by expected disbursements from assistance already committed so that Rs. 2.1 billion remain to be found. Ceylon can probably expect that members of the Aid Group and socialist countries will provide at least Rs. 1.1 billion (US$230 million) in the coming four years. If Ceylon's Government maintains its past record of performance and suitable projects materialize, lending by the Bank group may exceed one-third of the remaining residual of Rs. 1 billion (US$210 million). This would still leave a sizeable gap. Unless it can be filled, Ceylon's economic growth would fall short by a considerable margin of reaching the minimum target of 4-57 a. year. At the moment it is difficult to say i-hother it will be possible to mobilize the ad- ditional funds required. However, Ceylon may be able to make arrangements with the IMF to avoid part or all of such net payments during the period. If this were possible only about Rs. 280 million (US$60 million) would still have to be financed. If donor countries provide somewhat more assistance thanpresent- ly forecast and Ceylon makes judicious use, for appropriate projects promising to relieve th,e balance of payments situation, of suppliers' credits on suitable terms, this may be a manageable situation. - iv - xi. The preceding paragraph indicates that in the five years, 1967-1971, Ceylon will require external financial assistance on a substantial scale in order to finance an adequate level of imports. Almost exclusively such assistance will be in the form of loans. As presently foreseen, external public debt will rise from the current level of about US$200 million to roughly US$600 million. Service payments on present debt are still small, reaching a Deak in 1971 when they will be eauivalent to 6-7% of merchandise exports. But they will rise rapidly as a.result of the prospective increase in debt. Clearly, judged solely in the context of prospective developments in the next five years, Ceylon cannot be regarded as creditworthy for external loans on qnvthiny but. verv tend d terms qni loiT interest rqts. Hoi-.wever. if a longer view is taken the potential for substantial improvement in the 1970's cannnot. he ionorpd. There Pr tmn tlments of Ihsir. strength in Ceylon's economic situation. First, export earnings are fairly large in relation to GNP recond imnntrf rpmirpmpnt. -con+.Pin a qi,7nhb1 sh.rp of goods that could be produced in Ceylon. The wealmess of Ceylon's external position at pesent and over the next.fewrvears derives largely from the inadequacy of export earnings in relation to the present structure of the economy TP urren+ offor+ succeed in re+tnrcri ng the pronomy, Pnort. earnings should become more nearly adequate. Tentative projections indicate +ha+ br 1071 +b -1-r e- nt+ Aafcon ,4- + in +heal hlnc o a m rn+s my rbe reduced to about Rs. 300 million (US$63 million), less than half the peak U~U i ~J± UtJ L1 U LJ Ut- -L U 1,UI , . I JVJ.4. Ut:7 -LL16 UiI , t:- J J jJ ~ L~ . J 4.IPJ.I " V- -IL~ L over the longer run, it will probably not be necessary for all lending over Ulie~ nextA fe years to e on I LD.-k Uypd Ut- Iill b, a.- U1[UUr'll ULIL dVt:-CVt- OLO~ L ZLI~I JUU!-U be considerably less onerous than conventional ones. For purposes of Bank/IDA Lenuig, uhis means hau Ceylon should be regarded as a sofut-blend cowitry, with the larger share of funds from the Bank group coming from IDA. CHAFIER I POLITICAL AND SOCIAL BACKGROUND 1. When Ceylon became independent in February 19i8, after over 300 years of colonial experience under, first, the Portuguese, then the Dutch and finally the British, the prospects for the country were bright. The economy was based on three flourishing export crops - tea, rubber and coconut products - and average incomes were among the highest in the area. The path to independence had been relatively smooth and the country was fortunate to have a good supply of trained local administrators as well as politicians who had gained experience through responsibility given to them in the pre-independence phase. 2. Despite this position, however, the seeds of future difficulties were present even at. this time. From the social noint of view,. the most important was the communal problem. The majority of the population are Sinshalese who form about 70X of the total. The main minority Proun is the Tamils who constitute about 20% of the total and predominate in the nort.h of +.ho island. Anar+.from a fairly i7eable nm r nof Tndian Tamils who came to Ceylon as tea. estate workers in the late nineteenth and early twentieth centuries and who n not, trlin-un fhil ri tirnhin mnCZ of the Ceylon Tamils are descended from the successive migrations from South India in, the earl cetre .D Th Sin5halese are mnyBuditwhile the Tamils are mainly Hindu. Each have their own language. It was only , - n . - i A, n ".n,, -- -n1~m,. ---4 1C- V-nv, .-n A. r4 , - -5. ~ _-_ n- - - E, - c- -, came into the open - the Tamils fearing domination by the Singhalese trative and commercial positions. 3. Economically, the chief potential problem was the country's eiac on mneeajor export crops. 11te (CUU1UL1 wao on1 Ulm production of tea., rubber and coconuts. Production for domestic use was small and resources for is development 11mited. Imports met a Large part of the island's requirements, including food. Thus the possibility of future declines in the prices of Ceylon's export products carried with it the threat of a complete dislocation of economic development. 4. Despite these potential problems, the early years of independence were relatively tranquil. Power passed from the British to the western- oriented elite who carried on the Government in more or less the traditional manner. English remained the language of administration. Economically, high commodity prices during the Korean war boom helped raise incomes within the traditional framework of the economy. In many ways it was as though independence had not taken place. Neither politically nor socially or economically were serious efforts made to adapt the country to its independent status. Society remained strictly divided between the elite and the rest of the population, the economy continued its orientation towards exports. 5. The year 1956 marked a turning point in Ceylon's political situation. In the election of that year, the Singhalese-speaxing Buddhist rural lower middle and lower classes suddenly discovered their political strength, ousted the conservative United National Party (UNP) which had governed the island since independence, and thereby brought about an abrupt transfer of power from the small, affluent, westernized elite to politicians more attuned to their own social background. The 1956 election did not, however, represent a conclusive victory for particular policies and principles. The Government rested on a coalition that comprised diverse and divergent political and economic views and held together only as an uncongenial arrangement of political convenience. It fell apart when the leader of the coalition and Prime Minister, S.W.R.D. Bandaranaike, was assassinated in 1959. 6. The Government of the widowed Sirimavo Bandaranaike, which took office in July 1960, after a period of caretaker governments, appeared to begin its term of office under more propitious circumstances that gave rise to hopes that the crises and instability, which had plagued Ceylon in the preceding years, would abate. The Sri Lanka Freedom Party (SLFP) had recovered from near disintegration and won a majority of seats in the House of Representatives. The two largest parties of Ceylon's fragmented Left had nromised sunnort. and leiders of the I)rpe Tnmil minority. ontimistic of a settlement of outstanding communal disputes, had offered expressions of Pooduri11 and3 inconraenment. Ahove n1l- it qnnPqrPd thrt the excesses of the communal riots of 1958 and the shock of the former Prime Minister's assassiton had- czol-p-rr 1.hn q~i nar1P.u ronmin-i+.tr Pniffincipnrvf.1v ton offp-r hope for communal tranquillity. 7. The promise of 1960 did not come true. Tensions and rifts between sluggish growth of the economy, made the hold on political power too tenuous CnP^. strongr 1 "1 r-e1"; ,, -nnWi ,' _-Ph r - -n, - ; +-; -~1 A__ - nne t:YvO, U c. -Pn the emergence of a political atmosphere conducive to a moderate and reasonable approi l 1JU -o thu a coLu ntrL1~yi probAlms, _1JU.1L[LLJr L± U 1t:ILt~0 U_L it,I L ULC Singha.lese-Buddhist majority, were disappointed soon after July 1960 when it becamel ear tha neithe h.IcaI4~ idU it; IiJU L al %J.. L 1Ji1_VCZ '-1L4JArvu AJO V- - -X the SLEP backbenchers lead or encourage such a change. Sensing this mood, UiJU LdL1U1d11UJLAk UVWOrnrnentI chuiose to0 lean L"i.V_, -,I. U11" .; -iI.J~~l peasantry as its strategy for maintaining political power. In the process, e uvernmienu uecamie capuive cf its own Loosely organized and Irequently inexperienced membership in the House of Representatives which, in the absence of positive leadership, took to itself the right to interpret Singhalese- Buddhist aspirations and to translate them into national policy. The result was continued internal division, especially over communal and religious issues, and a serious deterioration in Ceylon's financial position. 8. Government dedication to the interests of the rural, Buddhist, Singhalese-speaking majority also shaped economic and financial policies. Economic discontent had been a strong element in Singhalese political motivations, the more so because development proved difficult and the expansion of economic opportunities slow. Thus the struggle for social recognition became increasingly transformed into one for a larger snare in employment and income. This pressure was most obvious in the Civil Service and public enterprises, in the rapid timetable for lanpuage reform, and in Government efforts to redistribute incomes. Income redistribution, with a consequent marked decline in national savings, since the mid-1950's, took such forms as extremely heavy taxation of the upper and middle-income groups, large direct and indirect jubsidies and restrictions on private economic activity. It also was a. factor in the Government's drive to expand, through expropriation, the scope of economic activity under Government control. 9. In the early 1960's economic dislocation resulting from the acute foreign exchange shortage, poor public investment decisions and planning and falling export prices led to widespread and growing discontent with the Government. The fall of the Bandaranaike Government was largely triggered by two factors. First, the Government had tried to strengthen its parlia- mentary position by taking the country's largest Marxist party into coalition. This alienated the Buddhist leaders who in turn influenced the rural electorate. The second was an attempt to nationalize the press. The op- position, charging that democracy was at stake, was supported by enough members of the Government party to bring down the regime. 10. In the elections of March 196q. the United National Party led by Mr. Dudley Senanayake, in coalition with one of the two Tamil parties was returned to nower. In its vears of onnosition the U.N.P. had learned from its earlier mistakes and had been able to identify itself with the Buddhist and ntinalist qentPimnt.q hich it hni nrPviously nekectd. Tt founi itself faced with a severe economic crisis and turned to a group of western meetings have been held in July 1965, May 1966 and April 1967. In addition, as described later in +hne ronr+ +he vernment sa t atnn imnnoing int.rnal economic management and tailoring subsidy and welfare expenditures to a level the cn0,untr.- could -4fOrd 'TMi 1.,--- ,-144-1 n -1o1, of the subsidized rice ration, which is described in more detail later on. 11. ,hlile trying to revitalize the economy, the Government has also been engaged -in~ a d eeri-e efor to A,n,vr +rm,,. ea n gemn was reached with India on ways to repatriate non-Ceylonese Tamils, mostly workIers on the.LU tea es-e,Wlioe_ con tu.igUk resnc Ln Ce lonad" _long antagonized Singhalese interests. At the same time, compromise solutions -were found to vcariOuS JLOSWeS irr-itatn the- Ceylones _als paricuarl with respect to language and education. So far, these efforts of the oUvernment o eeer a miudle course - tu be responsive to LgUaLee aspirations, yet conscious of the need to allay the fears of the minority by protecting certain basic rights - seem to nave been successful in giving Ceylon a greater measure of communal harmony than it has had in a long time. 12. In general, the Government's efforts to act responsibly in P.onomic and sonial matters have not. hrniaht it q- much unnonninritr as was predicted. In fact, the public response to austerity measures, such as the rpcintinn in +.hp -io- u BRv and to anncl for npulic support for the national food production drive has been encouraging. With only three year o its parliamentary term to rn, the Govrnment+i o nscious however, that it must soon produce results in return for the sacrifices it a _j Q J 11qmo u au L LU _u o ouw be retuAucu d b v o -LP i ,e a eu nacxAve1 t JU vovI* So far, circumstances have worked against it - terms of trade deteriorated sharply 11 -L7uv auu Au nls been sLVW L1 UVILL116o _u 11 ue WiA A uL a Q. A C1 ULIIU.ug decline in the prices of Ceylon's export products, the prospects of the Government being ablue o acueve ecoI11ul impruvUmenu uy ctuving s course of economic and financial reform largely depends on its success in securing foreign aid to supplement the country's own resources. rWAhPfVP TT 9W. Rr'OTP.1AV Mi r~Tf)TT TAT 104A Tmr)rDrqq Aljr) D-DODTt-T,1r Mi3 * Te economy of Cey'lon du-ring thU rsetdcaehslencUrc terized by the stagnation of real incomes per head of population, a severe f0reign exachange Shortage uu a uecline boU in relative UnU abso- lute terms, in private investment. The economy has traditionally been based on export agriculture, particularly tea production and to a lesser extent rubber and coconuts. Falling prices of these commodities have meant that, in the last few years, expanding Ceylonese production has resulted only in fairly constant foreign exchange receipts. The adjust- ment to the new situation where a proportionately greater amount of local demand for goods and services would have to be met by local production created great difficulties in the sensitive political environment of Ceylon. The situation was made worse by the fact that increased govern- ment expenditures were met by expansionary financing which gave rise to heavy consumer demand relative to the fairly low controlled prices at which many key consumer goods were being sold. In order to meet the problem of shortages of items of mass consumption, the roughly constant amount of available foreign exchange was re-distributed between its various uses, with the private sector being particularly restricted in the amounts of machinery and raw materials it could obtain. 14. This difficult problem was further aggravated by the government's policy of income re-distribution. High expenditures for social purposes were supplemented by large subsidies to consumers for the purchase of basic food items. These were met by heavy progressive taxation, high rates of company taxation, and high import and export duties. The effect of this was to re-distribute a fairly constant total real income from investment to consumption. This procedure once started tended to be self- perpetuating. As investment was reduced, income grew more slowly; and, in order to ensure at least constant if not increased per capita con- sumption for a rapidly growing population, it was necessary to re- distribute income away from investment still further. Political pres- sures led also to a vast expansion of the public sector financed not so much by reducing private consumption as by channeling private savings into the financing of government exoenditure. The nadir of the whole situation was reached in early 1965 when the new Government found itself faced with a foreign exchange crisis which could only be managed through destructive cuts in imports of investment goods which did not even permit thp Rdpeniiatp maintpnannp of Pxistinp, nanif.al - Resources and Their Utilization (Current Market prices; Rs. million) 1961 1962 1963 1964 1965 Resources GDP 6748 6909 7050 7537 7781 Imports 1972 2070 2031 2102 2057 Total 8720 8979 9081 9639 9838 Utilization Consumption 5766 5978 6181 6719 6833 Investment 107 1030 999 982 924 Exports 1907 1971 1903 1937 2081 Total 8720 8979 9081 9639 9838 15. It was in this context that a meeting of aid-giving countries was cnonvenA in mid-196K- Tt wqn honnA that an additional inflow of external resources from the Aid Group would permit the Government room for maneuver sufficient to alwfor, ome bri go imrts?-c fo r investment purposes, and contribute, together with appropriate internal -14 n,zn 4 W-1 4- 1, n P 4 - 1 -1 av ,nm - 4 _4 - 4 l W. 1S n4e -1, A , 4- .on with the Government these economic problems and the possible lines along Wal.k.;n Wiue t;,VLuVumY m1agLue ve moveu Lurward. From bonese analyses anu tu"ovuo- sions emerged a pattern of action which rested on joint efforts being mau ey IL UvUr%nment and u te u010orS. V11 Ulltz JCLJ-U U id, UUVeUmen1Vot-i1L, action was called for in four directions: (a) to curtail the growth of monietar±y demandii so as io keep itu .u LJ_1u w-Luli L~lt biuppjLy v.i- LU%.;M.L_J produced and imported goods; (b) to reduce as much as feasible the growth o corisumption expenditure, particularLy on imp1teU gds, so as tU reverse the trend towards a declining investment rate; (c) to raise the volume and improve the pattern and quality of investment and related developmental expenditures so as to accelerate the rate of growth of output and to improve the balance of payments; (d) to adopt import pro- grams which made reasonable use of the exchange resources available as one of the principal means of achieving the objectives listed under (b) and (c). On the part of the donors, what was called for was a level of aid flows which was sufficient, within the framework of agreed import programs, to provide the room for maneuver required for making more exchange resources available for productive purposes pari passu with the changes effected by the Government in the use of resources, because at least for the next few years lack of foreign exchange was considered the principal constraint to achieving more rapid growth. 17. As will be discussed in the following sections, there has been notable progress since mid-19o in most directions where changes were considered essential for overall improvement of the economy. One aspect of developments during the last eighteen months is particularly encouraging. This is the improvement that has taken place in the institutional framework and psychological atmosphere in which economic policy is operating in Ceylon. For the performance of Ceylon's economy, these facets are perhaps even more important than specific actions because, in the long run, they will largely determine the quality of economic policy and condition the response of the economy. Yet progress and problems in this area tend to be overlooked in an appraisal of performance because they are less visible than the results of specific actions. 18. However, so far it has not been possible to translate these general improvements into more rapid economic growth. On the contrary, in 1966 growth slowed down further. Provisional estimates indicate that GNP at constant prices increased by only 1.6%, as compared to the average rate of 3% achieved in the first half of the 1960's. This was caused by a sharp decline of 10% in net output of the export sector, reflecting the effects of a drought on coconuts and of a strike and low prices on tea. These developments in the export sector more than offset the recovery of the domestic sector where output grew by 4.7% in 1966, compared to the rise of 2.7% in 1965. Moreover, real national income suffered an even .reater set-back in 1966. Taking into account the decline in purchasing power abroad of Cevlon's exnorts because of sharply lower export prices and somewhat higher import prices, real national income actually declined by 1.2% in 196. or by 3.nt r nprson. The. Problem of Savina.q in comparison with that of other countries with similar per capita incomes, Ceylon's unsatisfactory record of economic growth and chronic financial A-i ~ ~ ~ ~ o t~,i - r' i ii4,10 ro-1~inds. F i-st n~+ a lr4 v iv i r ia- nr,h.n-i e)ri r)mf-f -in-rn~p has had to be saved and invested in order to achieve a satisfactory rate of the decline of savings in the share of income over the past decade or so is the causes of this deteriorating savings performance were beyond Ceylon's that occurred in real product, as is apparent in the following table: Growth in Real Product and Real Income (R.- millinn) 1960 1961 1962 1963 1964 1965 Real Product 212 174 232 127 289 136 Loss through. declining terms of trade -11 -140 +69 -160 -74 +7 Real Income 201 34 301 - 33 215 1)43 Source: Appendix Table III - 8 - In other words, declines in the terms of trade absorbed over one-fourth of thep growth i-n reanl product-+ duin ntis period,nso that real incone grew by only 2.3% a year while real product rose by 3.1%. Such losses were bound to affect savings, particularly as th,y hit the- incme ofthIpanato sector which is Ceylon's largest potential source of savings. Elsewhere policy discouraged private investment and as import restrictions made it L -CO jr , LALLLJ%UL U% VUVc-L±±IJ 4 1_; tj.C. rUVUD ±IUIIL abroa 'dU C. W. uLuowever, these vui factors were greatly aggiavaudu uy UIU .L-LanluUa policies of the Government. These were directed largely towards re- UdsUrvuiu.I uIeums in favQr of the lower income groups, particularly in the forms of direct subsidies of consumption and the provision of an ex- panding range of services free of charge or below cost. Financing these various programs resulted in taxation being pushed more and more deeply into areas where potential private savings were appropriated and used to finance current Government outlays. In addition, despite more or less stagnating public capital outlays, large deficits, equivalent to nearly 5% of GNP at the peak, remained to be financed by bank credit, thus swell- ing purchasing power, creating additional demand for goods and resulting in pressures on imports. 21. The immediate task, therefore, lay in improved performance of tne public sector, specifically in taking action in three directions: to reauce Mne inflationary deficits in order to contain the increases in total demand in the economy; to raise public savings, primarily by containing the rate of expansion of current outlays and by improving the profitability of public enterprises and corporations; to encourage private savings by selective tax reductions. The following table gives a rough indication of the results so far achieved: 1959/60 - 1963/64 1964/65-1965/66 Revenue Average rate of increase 6% 7f Current Expenditure Average rate of increase 7% 4% Current Surplus Annual average (Rs. mill.) 55 63 Capital Expenditure Annual average (Rs. mill.) 520 606 Cash Deficit Annual average (Rs. mill.) hD 498 Expansionary Deficit Financing Annual average (Rs. mill.) 200 63 Source: Appendix Table VI. 22- Th mot.otceable0 achievement of the petwO year ha bee th sharp reduction in expansionary deficit financing, as compared to the past. .JLe .UU V U J. U .L J.7V..J1) VU U%L..4 VL. IU .Lj L~JSJ ULIV'. P ~ CA~ fomanc in 1154 6. ..; L"A V VLI_O should not cause undue concern. First, the expansionary deficit in 1964/65 was excep"oaI.4 PLLJ. -4U.J 4-1-e4-JLJ ~ UId ja by the poor rice crop. Secondly, in 1965/66 revenue fell short of estimates uecause unexpecteuy expuru Pices Le±± in La t quarter U the L±±caL year and delays in the arrival of aid goods reduced collections from import duties. Tirdly, there are no inuicaUIons of large price increases resu.l- ing from monetary expansion. Taking these factors into consideration, the Government's performance in this area has been good and helped towards bring- ing demand more nearly in line with resources. 1/ See Appendix Table VI. - 9 - 23. Moreover. other elements in the monetary situation strengthened this improvement in the conduct of the Government's financial affairs. Largely because of a strong rise in private time and savings deposits, net private credit increased only marginally. As a result, net domestic credit in September 1966. was oniv 1A% above the level reached two years earlier. In contrast, the rate of expansion was 24% p.a. in the preceding five years. The rate of P-rn.inn ninkpti in in 1966. This reflected the higher deficit resulting from the factors mentioned above and was further increased by the shortfall ehalnw excation in the annumnilation of counternart funds arising out of delays in aid goods. These developments are depicted in the following table: Changes in Factors Affecting Money Supply A - -yn n1 A- n y n f September 30 1960-1964 1965 1966 (est.) Net Credit to Government 189 34 114 Net Cr11edit to Pulic_L Cor-PorationU1 n.a. 13) 26 Net Credit to Private Sector 19 -112 36 oubotal CUU -uIW Exchange Reserves -93 145 -209 Other Items (net) -31 4V 36 Money Supply B2T 3 Source: Appendix Table XII. Expansionary deficit in table on previous page is not identical with net credit to Government because of differences in coverage and leads and lags in recording. 2h. It is encouraging to note that the improvement in the Government's financial position was not brought about largely by further increases in revenue along the pattern of the past, i.e., by the Government appropri- ating an ever increasing share in the national product, particularly through pushing further and further into potential private savings. In fact, the improvement was achieved mainly through containing the expansion or current outlays. In this respect, the results obtained in 1965/66 are all the more gratifying since they were achieved in the face of a large increase in food subsidies which, reflecting the better rice harvest and higher world market prices for rice, accounted for roughly 60% of the total increase in current outlays. Looked at another way, it is, of course, disappointing that this increase in the food subsidy once again spoiled what would otherwise have been an excellent performance in containing current expenditures. In the light of this experience, the Government's decision, taken in December 1966, to halve the rice ration, although to provide it free is all the more welcome. Given the political background surrounding the food subsidy, this was clearly a most important decision and should help the Government improve unon the record of the past two years in keeping current expenditures in check and, by reducing foreign exchange expenditure on consumer goods. to channel more resources into investment. - 10 - 25. Progress in the performance of Government corporations and enterprises has been mixed. The position with respect to industrial corporations is discussed in greater detail in the following chapter. !,.hat needs to be noted here is that, altogether, industrial corporations in 1965 increased their profit by about 25% over 1964. and that a further increase is likely in 1966. However, despite this improvement, the net return on capital emploved was only 3.3% in 1965. Moreover, these figures give too favorable a picture, because they reflect in part the inclusion of new trading activities. nart of which ere pnreviouslv carried out by the private sector. This is not to detract from the fact that, as noted in the npxt chantpr_ much rPqter effort is nnrbeing made than in th nnst to improve the operations of these corporations and that the Government has nde1rta,kePn to esabis nmre -realistic pricing policies,_ all of wThich q1hni1r1 begin to make itself felt in 1967. 26. In contrast, little has been done so far to improve the position of the Government enterprise A n+alO excen+t n i e + tfelephone services in Colombo. Here, upon completion of an improvement program, rates Kere raase by U 0. hol also b oe ht~"" of Colombo were improved to such an extent that substantial demarrage sur- VVIA-.~. JLII JLCU UJt:t:iI IJ1ZV~LWLQ J .L'1pVJt;U, vir -LL. L± %U-U L ~L_L W ,I_, Ulic; I V.1 Cargo Corporation blemished this achievement by hiring a large number of ,ULLUU4CLL LIVV-Atz; 1.0 WIuLL IW.Li L urtliL aud d - tuo i~ ts ver-s ta,±± L. 1, P-UkULIJ dlU result either in higher losses or an increase in rates which already are exuessLveLy high. Noting was une to reduce the large Urai on te uUgeUt of the railways, while the Ceylon Transport Board, which runs Ceylon's bus Sy-tem, experienced a large reduction of its current surplus In 19o5/6o, as improvements in service were not accompanied by any fare increase, and may run at a loss in 1966/7. 27. There are also some significant changes underway on the income side of Government finances which should be noted. Probably the most importan among them is the siift in the incidence of taxation towards indirect taxes, i.e., taxes falling on consumption. These have the combined effect of reducing the effective income tax burden - lower nominal rates and the introduction of a savings relief scheme - and additional indirect taxes. These measures reduced the share of total revenue from income and similar taxes from an average of 18.5% in 1959/60 - 1963/64 to 16% in 1965/66, while the contribution from indirect taxes rose from 55.6 to 59%. This shift would have been even more pronounced, had not the wide response to the amnesty for tax evaders contributed roughly Rs. 35 million, or 12%, to collections from income tax. Moreover, its effects should gain further momentum as private investment, which is encouraged by various tax incentives, expands - which it should as more exchange becomes available. It should also be noted in this context that the Government has set up a Tax Commission to investigate the adequacy of the present tax system, particularly with a view to determining what changes seem necessary to encourage private saving and investment. The recommendations of the Commission are expected shortly. - 11 - 28. In this connection, a further comment needs to be made about the amnesty. An amnesty was first offered in 1964/65. It met with some success, but was generally regarded as unsatisfactory in relation to the large amount of illicit wealth believed to have been accumulated over the years from undeclared incomes. Therefore, the amnesty was repeated in 1965/66 and, since it was reinforced by strengthening the investigative branch of the tax collecting agency, produced declarations totaling some Rs. 120 million. The most important benefit from this successful measure is not so much in the revenue collected but rather in clearing the business atmosphere and in giving large amounts of previously "hot" money access to lpgitimatp trinsactions. To innn-cintp thp nipnificance of this stpn. it should be noted that under the regulations pertaining to investment in annrovn fields, whero annrovl carries t+h it. nhtant. tax hnPfits. un- declared incomes are virtually barred from economically useful investment Pnrl are, thrfoeHrivepn intn uinrocmtve fields- sucnh asq reaoetae It is expected, therefore, that the amnesty will make an important contribu- tion towards channeling doMeStic- fundsz inn a-ras wheare thyAII help expndnr Ceylon's productive base. 29. To sum up, it seems that in the areas of saving and general whole, creditable. It is as yet difficult to ascertain the impact of of demand, particularly for consumer goods, no doubt has been contained, UnUUeraUe pressure Un ex-1nge reoUurces reans. Huwever, tsD is to be expected in a situation where the other line of attack on the general problem oi disequlilbrium - I.e., increases In Imports - was delayed in making itself felt. Moreover, the shortage of foreign exchange was particularly acute with. respect to investment and is likely to have been such as to frustrate efforts to translate a higher level of savings into increased investment in 1yoo. Tis is certainly true of private industrial investment which has a high foreign exchange component and for which very inadequate exchange resources were available. It is less true with respect to investment in other fields, particularly domestic agriculture. There, some increase in investment has probably occurred, particularly on land leased for commercial use. The question is whether even more investment could have been channeled into areas with a smaller exchange content. In the short span of one or two years, this is improbable. But it is important for the future to ensure a proper composition of investment which reflects the relative scarcity of exchange and prevents this scarcity from imposing a lower ceiling on investment than could otherwise be achieved. This is most likely to be achieved by allowing domestic prices of goods in scarce supply to rise. To find a solution to this problem, will, in the future, be at least equally important as continuing the effort to raise the level of domestic savings. 30. In the narrower field of savings, the budget for 1966/67, in the form in which it was originally passed, threatened to set back the effort of raising public savings and reducing deficit financing through bank credit. - 12 - However, this danger has been averted by the decision last December to reduce the subsidy on rice. This cut was effected by reducing the weekly ration from 4 lbs. a. person at the price of Rs. 0.50 to a free weekly ration of 2 lbs. The immediate reaction was a sharp rise in the price of unrationed rice. This, having previously been around Rs. 0.40-0.50 a pound, reached a peak of Rs. 0.75. In the meantime, it has declined somewhat, but it is still considerably above the level equivalent to the Government's purchase price of Rs. 12 per bushel of paddy under the price support scheme. It is still too early to estimate where the price will ultimately settle because rice from the new crop, believed to be a record, has begun only recently to enter the market. Therefore. it is difficult to Dredict with much precision what the ultimate consequences of the change in subsidy policy will be on the total consumtion of rice. the imoort bill for cereals and the Govern- ment's financial position. 31. However, the possible impact can be illustrated by making two extreme. and unlikelv assumntions about consumer reactions. If consumer demand for rice were highly elastic with respect to price, total consumption -rinu1r he qhqrnly einumbniln'. Ehn nrina in I-he nonn mnrknof. wniAlei fllEk to the support level, and the Government could probably meet the bulk of its requi remen ts for the ratiJ o f.-rom domn,- es i -e hm mL Tn 4-hic nnc!n_ n amounts of foreign exchange would be saved by substituting wheat for rice, ku+ +he o i -" n"me+Io +n+ql o-nhc4,4r 1,411 e lA emi nhrra n+ n+ Rs. 300 million as rice, bought domestically at nearly twice the world "1CL- s V P4 1. - .- , 4 U_ L A.V LLU i A4UL "LL~ ' " - S L. .L , WLI UALK; %.4 UIJZ- consumer demand is assumed to be highly inelastic, total consumption of rice VV'JU LU It-WIIL4 1 A r,1Ju1L.Y kVA112 IUdil U, i, - L] k, C- i _L 1 UIM; i U. [t.11m1r1t--U WVLL-LU 11.51LCUdL11 generally above the support level, and the requirements for the ration wqould- 'have to bCe n1metu _la1reLY from11 imp1O * UI L thscase:, nou s ign-ificant reduction in rice imports would occur, but the Government's total net subsidy paymentus wou be reauced frOm RS. jU millon to, pernaps, R. 70 million. 32. It is improbable that consumer reactions will correspond to either of these extreme assumptions. However, demand is more Likely to be rather inelastic than elastic. Therefore, one should expect only small exchange savings from reduced imports of rice, out a substantial reduction in the Government's subsidy bill. How large this reduction will be is impossible to estimate, but it should prove sufficient to turn the prospect of lower public savings into one of considerable improvement. Over the next five years, this improvement could free substantial resources for investment. There is, however, one problem which complicates the situation: This relates to the availability of exchange for the import of investment goods in amounts adequate to support an overall level of investment consistent with domestic savings. As pointed out in the next chapter, exchange resources now in prospect make it appear unlikely that imports of investment goods can be - 13 - raised sufficiently. To some extent, the impact on total realizable investment of this prospective shortfall could be mitigated by directing more investment into areas with a smaller exchange content. However, these possibilities are limited. 33. In conclusion, the Government's performance in the important area of raising the level of savings has so far been creditable. However, essential problems remain to be solved. The financial situation of Govern- ment enterprises has to be improved. Moreover, it seems urgent to undertake a thorough review of all present expenditure programs with a view to eliminating or reducing outlays on those which do not serve economic or social ends of high priority. Only then will it be possible to adhere in a meanineful way to the Government's intention to limit the expansion of current outlays to 4% a year. Across-the-board limitations on outlays may be unqvoidable as a short-term nalliative. but in the longer run they till starve essential programs, for instance in education, of necessary funds. The Problem of Investment 34. The objectives in the field of investment are to increase the amon+ ofP cani+a1 eendi+ur and +o raise i+s nradnictity +7. A- h-P..Tpaoon these two aims the latter seems more urgent. The reason is that achievement a level of investment that would clearly be beyond Ceylon's managerial and to be set as the target, about one-fifth of GNP would have to be invested. I.L%J .. - iive~ 4 s tmen wnt iii Li. VU YUG L LU ~ 4 Via. Leve- LJ. .LU11 JAIA kUi' VIZJU V / capital expenditures would have to be increased by 16.4% annually. Such rapid advance would 10e far beyond CJeylon'D sUapacityL, quitefZ a1.part from11 theU fact that it would create an unmanageable deficit in the balance of payments. 35. Thus, while everything possible should be done to raise the amount of investment, primary emphasis needs to be placed on improving its quality. To this end, action along three fronts was believed to be highly desirable: first, to reconsider the demarcation of activilies between tne puuc and private sectors, which has evolved over time, with a view to increasing the scope for private investment; second, to subject proposed capital out- lays in the public sector to more thorough economic analysis before any spending commitments are undertaken, and third, to ensure speedy completion of projects. Combined with these suggestions is the recommendation that investments should generally be concentrated in fields where productive results are likely to be obtained quickly and promise to relieve pressures on the balance of payments as a result .of import substitution or increased exports. 36. The period of nearly two years that has elapsed since the Bank began its discussions with the Government on issues of economic policy is obviously too short for results of improved performance to show in terms of an acceleration of growth attributable to better investment planning and - 14 - execution. This would have been so even if there had been no delays. As it was, there were delays: delays as a result of Government indecision, as in the cases of policy towards private foreign investment and of the scope of domestic private investment in industry; delays in translating decisions into actual investments which were principally related to the slow pace at which aid materialized and for which it would be unfair to hold the Government responsible. Nevertheless, a sufficient number of decisions on investment policy have now been taken to permit an evaluation of Government performance. Cn the subject of private foreign investment, the Government issued a White Paper in February, 1966. This unequivocally welcomes such investment and offers generous tax incentives for "anoroved" investments - i.e., those falling into fields considered to be of high priority - t.orp.thr with asUrqnc of pounlitv of trLqtmPnt. with lorn I investors and guarantees of transferability of profits and capital. In the manntimp nnnlinnt.ion- for f'orPirrn invqtmPn+. involvin l?. P1 million of foreign capital, have been approved. Further applications are pending. AlI-r)a +-'Pho r +.h azn n-- ~v , lnnrroc rYn-u '7! nneq i + ip ben-n- eq +11n+- +.]I.= c- h i . of bringing in foreign capital. and expertise will be pursued to the fullest. 37. As regards domestic private investment in industry, it appears that - l rA eal. Of iv ,nernal -xnpns4 +-; 1-4bn +-~ I-~ -;-,,nm 4. 4n, n mnrfl liberal and rational policy. All the issues are not yet resolved, particularly wher -bot the pulcand private sector~s opr 4- one 1 fild T as urgent of these is to establish clear guidelines for the pricing policies and expanson panus of Government orpora tons so that private entrepreneurs know more clearly the framework in which they will operate. It also seems urgent for the Government to establish a more rat*onal policy for the level of domestic prices in general because it appears quite certain that, particularly with respect to the supply of essential goods, the Government's present policy of holding prices constant will prove to be incompatible with growth of domestic production. Essential problems remain to be resolved, too, with respect to the criteria to be applied in approving new private investment in industry. Early in 1966, the Minister of industries established a sensible set of priorities. This was to serve as the basis for selecting proposals, from among some 3,000 applications for new industrial investment. These priorities were set aside later in the year when it was decided that, in the light of the country's foreign excnange situation, only industrial ventures requiring little or no foreign exchange for imports of raw materials would be approved, with the exception of te:ftile plants. While this was an understandable move in the situation then prevailing, if adhered to it would threaten once again to relegate private industry to the fringe of development. This is now recognized by the authorities which have indicated their intention to correct the situation as soon as they can feel reasonably assured that they will be able to make more exchange available to private industry. How much can be done in this direction will depend largely on the amount of external financial assistance. - 15 - 38. At the same time, improvements have taken place in the administration of policies with respect to private industry. Firstly, steps are being taken to ensure more flexibility in the allocation of exchange to existing industries for the import of raw materials and spares. Previously, such allocations were made in accordance with the share in the market of individual enterprises, with the consequence that the structure of production was more or less frozen and that the more efficient entrepreneurs had little chance of expanding their output. Secondly, an industrial programming unit has been set up which has been charged with the function of analyzing the industrial potential and preparing a program designed to mobilize private industrial investment for the task of accelerating economic growth in Ceylon. Thirdly, an Industrial Development Board has been established which, being bound less by the rules and procedures governing the activities of a Government. department, could help a great deal in speeding the process of decision-making on private industrial matters. Fourthly. establishment of a Small Industrial Service Unit is underway which should give entrepreneurs better access to technicn] and mannAerial assistance than was available in the nast. 39. Further nn the niet of nrivqte invet.ment the Government decided last year to lease public lands to private commercial enterprises for the cultI +i vatiorn o-f sunbqidirimr fntrAq+.iiff.q andl commrcial c-rops. asq we I n f'nr livestock. Given the emotionally charged atmosphere surrounding the disposal of puh I J Inl Ao +an n o n+ lWndl -S ean+S +h1,i swas a ranv 11cn decision which should help carry forward the much needed switch in domestic n-v.-; -P- - -P~,., -. r .r vr .r 4-1-. +1,- v, _.AA-r Qr_ f.,, Pn_ qC fCiflOO rcc, been leased under this program. As yet, only a. small part of the land is cleadI-~ and unduer prodJuct on U± LU 4.. 2. 4- 4A - A ~ ^_- _4- 4.1--4 -' -ln4J7 -,4- -P---LU this acreage will begin to make itself felt. 4O. In the public sector some of the major projects of the last few yer r at last nearing the- sute ofL Produing rturns' on1 the: invesuUt'ent. The tire factory near Colombo and the steel plant went into production in early 1967, the new cement kiln at Kankebaiturai will nearly doubLe production and will enable the modernization of the old kiln to take place. increases are expected also in pLywoUU, pulp aU paper adU texUles when the newest projects get off the ground. Not much in the way of expanded output was seen in .1700 anu inueed, given the uelays o past years, the sceptic might well be inclined to take a cautious attitude towards productive results in 1967. However, there are good reasons to believe that the outlook is now more encouraging. Management is more experienced and competent than in the earlier stages, and the existence of the inistry or Planning and Economic Affairs should at least ensure that some of the political pressures and administrative delays which have occurred in the past are analyzed more objectively and that relative returns from alternative uses of resources are analyzed in a manner which allows a clear choice to be made. This raises the whole question of the quality of public investment. There has been little drive in the past to ensure the efficiency of this kind of investment. Government departments and corporations have tended to regard - 16 - money for capital investment and even foreign exchange as virtually a free good. Each has tended to go its own way without very much co-ordination or pressure to secure adequate performance. 41. This problem still exists in a disturbing degree, although here again there are indications that improvements are in prospect. Above all, a Department of Plan Implementation has recently been established in the Ministry of Planning and Economic Affairs. This has the task of watching progress of public sector projects under construction and, particularly with respect to industrial corporations, adherence to production schedules. Such a task has never before been in the hands of any one department in the Government, and the results of the previously existing diffusion of resoonsibility are too well known to reauire repetition. The new department will, of course, not be able to produce miracles overnight. However, if it concentrates on key nroiects. rnther than tries to cover a wide ranoe. its influence should become noticeable in 1967. Moreover, to ensure such concentration of nffort. the imnort nroprnm for 1967 imnlies snecific production targets for several new as well as expanded industrial corpora- t.ions.- - if tlheseo are, notf T. tberin is thpe thireat. of shrqgsrising, in the local market which should create strong pressures on the corporation Act -n"n A "n" 4-z+ni]L 'Al ,. kn 11 i.TTZ - in +.hb r V+. e-bnn+1m As 5(.L -AL -i. VV k-'4 V- J'.l'JS -V3 b-i.. . . - .S - i-'. .. - t Ehat needs to be said in the present context is that, overall, experience so far justi4fies A----' 4'- ha -;nves n h fu - -,;I gee I lyr be of better quality than in the past. In agriculture, which remains the most important sector, wthr hias beenj a siftL -LI emphasisX1.L aAY from1 the% -Llrge irrigation schemes of the past with their exclusive concentration on paddy, in favor of subsULary foodstuffs, oter comuercial crops an, o ome exten livestock. There are also indications of changes to come in the field of land development unich, by concentratIng efforts on better utilIzation of existing water resources, would further reinforce the shift away from large investments in new irrigation facilities which predominated in the past and which, because of their long gestation periods and low returns, were one of the main causes of the generalLy smaLL production returns obtained fra invest- ment in Ceylon. In other fields, too, increasing emphasis is being placed on obtaining better productive returns from investment than in tne past. 43. In public industry, the proposals that are being pursued in earnest, on the whole, seen economically justified. And after some delay, decisions on a number of industrial projects, whose establishment is urgent - such as the petroleum refinery, an additional unit for the cement plant, a new plant for the manufacture of plywood - either have been or are about to be made. Of course, there are other projects where progress has been much less satisfactory and where decisions have been made without due regard to prospective economic returns and/or managerial capacity, e.g.,certain parts of the fisheries development program and the KKS port development project. - 17 - The Problem of Foreign Exchange 44. For nearly a decade now, Ceylon has suffered from insufficient exchange receipts to cover its imports. In the 1950's this problem was almost entirely caused by excessive imports reflecting the rapid expansion of domestic purchasing power by means of large fiscal deficits financed through bank credit. During the early 1960's increasingly tight import restrictions were used to bring external payments more nearly into line with receipts as reserves were beainning to run low. However, at the same time the situation was further aggravated by deteriorating terms of trade which more or less prevented Cevlon from translating increasing exOort volumes into higher earnings. These developments came to a climax in mid-196 when. desnite comnression of imnorts to a level where little. if any, economic growth seemed possible, liquid reserves were virtually non-eistnt. At that timp the Aid Groun for Cevon came into existence. The aim was to raise, through aid, Ceylon's import capacity to a level which wnld, in +.he short run, Prmit rpv1n tn imnort the int.rrnediqte goods required for full utilization of existing industrial capacity capable of producing escsential gOOd-I prcrjiic1-t imrted,+ r as qel asO ton.- rebu)id1 its.- run-down capital stock and to begin expanding the country's productive base. it a130 Sought, by means of anuliprtporm.gae oresrctn consumer imports in favor of intermediate and capital goods to the fullest maco<hlto eva+ + mnur +1-+ +he bh n--PJ+s n-P Jm -+ subs+i+nfion womuld Oo towards accelerating growth and, eventually, to reduce the need for aid infl ws il Ult U C U i- 2 %.L U - .L%jli U U LVJU1 1 0, VV-~ Oj -1L a higher level of imports, and by Ceylon, which would agree to import programs designedJ toA- re -strtuI'Cture andU u_ltimateuLY to redUucez imPortsO, inl order to uiLd__ a viable economy capable of sustaining growth at an adequate rate. 45. At two meetings, in July 1965 and May 1966, donors agreed to make available commodity aid totaling about Rs. 429 million. Ceylon, for IUs part, has on the whole adhered to the import programs agreed upon with the Bank, and deviations in the direction of increased imports of finished consumer goods, including foodstuffs, have been minor. 46. As for 1966, the original import program drawn up by the Foreign Exchange Budget Committee envisaged issue of import licenses for a Total of Rs. 2,679 million. This was reduced to Rs. 2,375 million after discussions with the Bank. Even this lower figure assumed that aid would finance Rs. 85 million of commodity imports. In the revision, it was found necessary once again to cut allocations to private industry to an extent which was certain to prevent firms from operating at full capacity and to hinder the expansion of domestic production, thus delaying the time when import substitution would make itself felt. 47. In substance, Ceylon carried out the agreed revised import program. Actual arrivals of goods, however, were well below the program. Present indications are that the short-fall was as much as Rs. 250 million. Never- theless, imports exceeded those of 1965 by Rs. 145 million and, if the reduced - 15 - imports of foodstuffs are taken into account, the total increase in import capacity available for other goods would be about Rs. 290 million. Most of this increase went into items which contribute to production. Imports by private industry and Government industrial corporations of raw materials, spares and machinery are estimated to be over Rs. 100 million higher than the totally inadequate level of 196$. Imports of fertilizer, agricultural machinery and commercial vehicles, all of which ranked high in the order of priorities, were probably substantially larger. As against these, there were also some less satisfactory increases. Textile imports, up by Rs. 10 million, is one example, although it has to be considered that such imports in 1965 were Rs. 60 million less than in 1964. Imports by Government departments were probably also higher than in 1965, although it seems that the increase of nearly Rs. 45 million is in part statistical, reflecting the fact that license control over such imports became much more effective in 1966. Altogether Ceylon's performance in improving the structure of imports must be considered to bo 2o0. 48. But, the effectiveness of the 1966 import program was not as favor- able as the aggregate import figure and the comments on structurpl nhnnges might suggest. Firstly, 1966 imports did not generate the impetus to local industrial nroduction that was expctRa. Secondly. Pnhqantial shortfli. of export earnings below earlier expectations led to a situation where execution of thp program caused env1on' Pyrhan v anp pn trp fqll to a very low level. 49. The main reason for the first defect lies in delays in the flow of aU goods behnud original expectationS. The amount allocated for private industry imports in the revised program for 1966 was Rs. 325 million. Nearly na.R uuaLe u i o amount was to be provaded under commodity aid programs. In the event, less aid was available and only Rs. 33 million were allocated to private industry. Of this amount, only Rs. 12 million arrived in 1900. The difficulties caused by these cuts and delays were compounded by the slow issue of licenses against Ceylon's own exchange earnings, caused by the heavy administrative burden of making small allocations to a large number of importers, which was necessary because total available exchange for industrial imports was much below requirements and had to be rationed. The experience in lq00 with industrial imports puts in question the wisdom of tying aid to imports by private industry. 50. The serious fall in Ceylon's exchange reserves in 1966 occurred for two main reasons. First, export earnings were Rs. 150 million less than was assumed when the import budget was drawn up. Second, the arrival of commodity aid was delayed for various reasons. As a result, reserves - 19 - fell by Rs. 126 million and additional drawings of Rs. 75 million were obtained from the IYT. The detailed picture is shown in the table below: Balance of Payments - 1966 (Rs. million) Original Forecast Present Estimate Exports 1830 1,680 Imports -2275 2,043 Trade Balance - 445 - 363 Net Invisibles - 65 - 23 Current Deficit - 510 - 386 Financed by: Grants and Long-term Loans (net) 117 67 Commodity Aid 485 1591 Short-term Loans (excl. IMF) - hO - 15 IMF (net) - 2 75 RsPrv,s (incrPn - - 126 Other (incl. errors and omissions) - 14 - 26 51. Export earnings in 1966 from both tea and coconut products were I_s . expected-in1~r~ -L -- prices were e.ece toavrge -. 2.48 per lb. f.o.b. Colombo over the year. From January to May, this level was more ~ ~ T ori" less -an e - nJneJl,Ad August, price ^-o 4-- around Rs. 2.25 per lb. and continued more or less at this level for the rest of the year. T+ is A-;-PP-;cul4-, to A4-4P 4----- 4-1,4-. - AA-- fall. It is partly due to a reduction of stocks by British importers, purchases by some Middle-Eastern buyers. Moreover, the volume of tea exports Altogether, earnings from tea fell short of the estimate by Rs. 138 million. Lk(J1.CU11U U Y V U1.LVJI1'jJ LV 1. v (td..l V jJ± L.LY .Lo-J 01ju1, L 1.24 ~4~ul±Lginal es .11:t 1 because drought reduced production. This, taken with an unexpected fall in the price of coconut oil due prly o the recuru svya bean ol outpu U the United States, means that export earnings from coconut products are believed to be Rs. .33 millon less than originally expected and Rs. 75 million less than earnings in 1965. Rubber prices also were lower over the year as a whole than -mas expected, although there was some recovery from the low September prices. This recovery was due to the announcement that the United States would limit sales from its stockpile. The volume of rubber exports probably exceeded the original forecast, so the total export earnings from 1/ Includes as. 27 million representing goods shipped in 19oo at did not arrive in Ceylon before the end of the year. - 20 - rubber may be Rs. 18 million more than forecast and Rs. 7 million more than in 1965. The Rs. 1630 million export earnings in 1966 is Rs. 150 million less than was assumed when drawing up the import program for 1966 and compares with Rs. 1,916 million in 1965. 52. The other element in Ceylon's loss of reserves in 1966 was the delay in the arrival of aid. Here the situation is rather complicated. The final import program assumed commodity aid arrivals in 1966 of Rs. 485 million - including Rs. 255 million to be obtained following the meeting of the Aid Group in May. Indications received from the various donors showed that the total would probably be Rs. 50 million less - i.e., Rs. 435 million. It now looks as though Rs. 132 million of this arrived in 1966. Moreover, allocations for imports were not cut back sufficiently to allow for such a shortfall and a marked decline in reserves was the result. 53. It may thus be concluded that Ceylon's tight exchange position in 1966 has been largely due to external factors. However, it is apparent that the situation was not watched sufficiently closely during the year. In particular, the issue of licenses against Ceylon's own exchange earnings was not cut back soon enough. Moreover, 1965 licenses still outstanding at the end of the year were not. as the 1966 imnort nmrnram assumed, fullv charged against 1966 allocations so that considerably more licenses were issued against Ceylon's exchanap than mns intenniei. Thp rvernment is aware of this problem and plans to tighten control and to keep a close watch on the current .ituaton. Thi.q PcnlH nnlp n+ie +e t faken in time if in the future, export earnings or aid receipts fall short. Fortunately, in 1966 thip Pii~czhir n~f -rese-res ndir shrmLines of credit was suficent to absorb the shortfalls, but in the process liquid reserves were once again reduced to a dangerously low level. T"he Prol o I,1 f E conom i c Management4 ~jll Ij 14j UVJVUIIJ1Ient Ca-1-1t to) -LU~ U 1d_~ ULUU I)b U01 btU tools required to effect the kind of basic changes in economic policy cons drd esssen t ial for the i-roemn of1, ' rn' Th civi. I - particularly in the higher echelons, was demoralized; it had been downgraded to carrying out, instutos but no4- longe took par in the prcs of __ _ decision-making. What planning machinery had existed, had disintegrated n year fu negect. The whole Government machinery had never been accustomed to working under conditions where shortage of funds, whether local or foreign, was considered a problem. Moreover, when funds had to be rationed, there was little question that Government requirements commanded higher priority. 1n ue private sector, apathy and distrust of the Govern- ment were widespread. 55. In these areas, significant improvements have taken place. A Mnistry of Planning and Economic Affairs was created under the Prime Minister; and, as its staff is being built up, it is widening the influence of economic considerations in decision-making. The recent establishment in the Ministry - 21 of a. Department of Plan Implementation, already mentioned earlier, is an important step in the right direction because it provides a much-needed complement to the responsibilities which the Ministry has been given in formulating the capital budget. Moreover, the Ministry seems to have been able to establish good working relations with the operating ministries, and thus to avoid most of the difficulties which newly established planning agencies tend to encounter and which cripple their effectiveness. This was achieved by making the permanent secretaries of the operating ministries an integral part of the planning machinery. Committees of permanent secretaries prepared the first drafts of sectoral investment programs. The permanent secretaries of the major spending ministries form, under the chairmanship of the Permanent Secretary of the Ministry of Planning, the Foreign Exchange Budget Committee. As foreign exchange is the scarcest good in the economy, this committee wields considerable influence throughout the economy and has, on the whole, done a good job in cutting through some of the rigidities that existed in the past. However, the secretariat of the committee needs more staff so that it can cope with the administration of a complex system of import licensing and thoroughly examine all requests for exchange in the light of overall priorities. 56. Part1v as n result of the increasing influence of the Dlannine staff on spending decisions and its growing collaboration with the staffs of the nonratina ministries, the atmonher.and Pffectiveness of onerations in the Government departments has improved. This situation was further enhanced hv a number of indiious annointments to new nositions. innluding Government Agents who are important in setting the pace and quality of most Go,veTArrnment+ operationsr in mrpn -q c r.n c1r)mhn_ WnTrowrr mm-bh rpmnin.q to be done in building up the planning machinery, in particular the assist the permanent secretaries in preparing and co-ordinating investment for instance, in the large number of applications for new industrial invest- m n , an the interest Sh0,',r, r& iinln.w --U +, nk-, -1; 1-1 ir 'A . 4 - vr-L 1I e e , ni ,1 1 c 1 W-4 A khat seems important now is, above all, to translate industrial applications int plns in apera-15 on - 4- , 4ii available exchange resources. It would also seem essential that in actions IL~ I,II u~LaLJ V t:LI VUI,Y DilaI. :± ta U_ V.L U11z' J.. V a t_- Z):L; LUUi - e .. , the transfer of certain trading functions to public corporations, and the ioue anu enorcemenU of prce conrui regulaUion - Iouvenmenu soulu tae more account than it has in the past of possible adverse effects on the comnence and goodwill of the private sector as a whole. >o. In all these areas mentioned above, the current situation is no doubt a good deal better than it was at the time when the present Government took office. At the same time, given the magnitude of the task at the beginning, it would be surprising if no problems remained. Indeed, there are - 22 - many. Perhaps the most immediate problem concerns the inadequacy of the flow of current, reasonably reliable information on which to base decisions necessary for the day-to-day management of the economy. Corrective action is particularly urgent with respect to information related to the management of the country's exchange resources. Almost equally urgent seems to be the need to strengthen Treasury control over the day-to-day conduct of the Government's financial affairs. Especially in Ceylon, where the Government's share in the economy is so large, it does not seem consistent with effective management of the economy if, as is now the case, the Treasury neither knows until long after the event what expenditures have been, particularly on capital account. nor has any means of controlling outlays after the estimates have been approved and general warrants issued. 59. There is also need for greater concentration of effort in the whole field of Government investment. This imnlies -reater nhvsical concentration on a smaller number of projects that can be carried out without undue delay, rather than the nqst nqttrn of maximizing +hp numhr of nrnirts unidpr construction at any one time. It also implies that the cost of delays are more clRnrly rpcoaniz.- ThpnrnnPess of didringr on the. awrdc of' conntrts. for projects whose economic justification is clearly established still consumes far too much time, and in soime anstnncs these! delays haveir cost- the economy, in terms of losses of exchange savings through import substitu- tio , ub+.~ni '1 n,,,.+. T,- o ter-; - q -. -n A4 s ,- 4-n of e-PPor lc l to unreasonably long construction periods with the result that the benefits of the project are realizedA much lae tha they- should. -1, 1 -ML.±± Ula0Ot: Cut- pr bl m WJ± ~ iAJt U £Ek-L.L U.~Lt-11U CtLUU1 U.LWJII cLiuLJU 0itJ.LU rank high on the agenda for the immediate future. In addition, there are problems whose solution wl-l ru.Lur more Ute but to wil consi Uerule attention will have to be devoted. Among them, two stand out because they seriously affect UV ecouly. in many ways Ceylou sUil is an econUmy helu in suspension. It is permeated with the accumulated effects of largely political solutions to the chronic problem of scarciTy. For many years, the large resources at the disposal of the Government have been looked upon not as a potential fund for development, but rather a.s a source for dispensing welfare. As a result, subsidies abound, redundant staff are a, feature of almost every Government department and corporation, investment decisions were motivated more by considerations of welfare and income distribution than by concern for the generation of income and economically useful employment. No doubt, improvements have taken place. But it is also true that substantial further changes in attitude have to be achieved before it can be said with confidence that development is the overriding considera- tion in the use of Government resources. 61. It now becomes increasingly important to consider ways and means of giving freer play to those forces from which a market economy draws its dynamism. The release of the price system from its distortions through - 23 - price controls, rationing and government sales of imported goods at low prices is important as a means of encouraging domestic production and funneling resources into the production of commodities most urgently needed. The motives that led to the introduction of such controls are understandable as a way of insulating the low-income consumer with a. relatively constant money income from scarcities. Nonetheless, they do not fit in well with Ceylon's paramount and serious economic problem of augmenting local production and the amount of resources devoted to investment. One sianificant imorovement over the past few months has been the decision to permit price adjustments on agricultural products to rtflpct relntive scrcitips. Tht cut in tht rice ration and reductions or elimination of imports of spices and vegetables have in effect made a creditable beginning in nroviding incentivP to incrased dmptAc mitnut through the resultant increase in prices. Thus, apart from the policy of sel I nga imrted flou+. r atpii n.nirce c ns-idrabyIn-t below. the- p-ric nonf comparableI amounts of rice on the free market, it may be concluded that in agriculture to increased production that they were in the past. 62. The same situation, hovever, does not hold in manufacturing where Q~ ~.Ld.. L - iL.L .L'.d1 U -. LUIc i i U.L± - A.L iU JLU ' IcI..JjU c .LdULV.y JAW prices. The most important example is the case of imported textiles which are sold on the ratiOn1 at unde- -L-upe a yad.Asloa match this bargain either in terms of price or quality, this policy in effect represents a shu ft in demand away from locally produced goods whic would be corrected if the imports were sold at higher prices reflecting their better quality. ertain purchasing policies in some Government agencies nave similar effects, either through the exercise of their near monopoly position, as large buyers, in keeping down prices to local producers or through the purchase of imported products. Examples are in paper products and drugs. Such practices have either reduced profit incentives or restricted domestic production of some commodities which could be produced locally, although not always in quality and price competitive with imported commodities. Further tightening of import controls on Government agencies now in process may have the effect of eliminating these practices. 63. In any event, granted that significant steps have been taken, there remains considerable scope for making better use of the price system in en- couraging increased domestic production for supplying the internal market as well as in stimulating non-traditional exports. This is particularly so because there is only a limited staff of adequate competence available for detailed central planning. In fact, it is difficult to see how investments, especially in the private industrial sector, could be allocated efficiently purely by administrative controls, without considerable help from a more realistic price level and structure. 64. The topics touched upon in the last few paragraphs are obviously of such wide ramifications, and corrective action reauires such careful prep- aration to be successful, that major improvements will not be possible im- mediately. They are mentioned here rather with the intention of startino preparation for future action on an aspect of the economy which will acquire incrnasing imnortnnce as the devtlonmPnt nhase anins momPntnm- CHAPTER IT DEVELOPMENT PROGRAMS AND PROJECTS 65. At the time the budget for 1966/67 was presented, the Govern- ment also published "The Development Programme, 1966/67." In a way, this was an integral part of this budget because it is mainly concerned with the capital budget for the current year and contains descriptions and analysea of individual projects and programs to be undertaken. But it also sets out a tentative framework for development of Ceylon's economy in the period through 1971. Although the comments on the 1966/67 capital budget are by themselves an interesting demonstration of the growing influence of the Ministry of Planning on major spending proposals in the public sector, it is the five-year framework which will be dis- cuased here, 66. Tn brief. it.s basic target is an average rate of growth of 5.2% p.a. This is derived from tentative projections of growth possi- bilities - 4*<4 fnr aonriltre (3 for exnort agriculture. 6% for domestic agriculture), 9% for machinery, mining, and construction; and 4.50 for services. For public sector investment estimfates it draws on the work done by the various planning committees of permanent secre- taries which were established last year, but no attempt is made to set sectoral investment targets. Total investment of Rs. 8.6 billion for theV fie. ea perio Va deie by assumin -. incVemental capital out- put rate of 3.25:1, and compared with actual investment of roughly savings rate should be 20%, but much higher for the public sector where in current outlays are limited to 4%. 67.. Altogether, these targets make sense and should prove to be a useful frame of reference against which to prepare prgurms and evaluate individual projects and other spending proposals. One might argue that,. on the basis of past performance, it will be difficult to raise invest- ment outlays by 11-12% a year as implied and that the clital:output ratio assumes a much greater productive return than achieved in the past. But in a way, this would be beside the point because all these comments are explicitly made in the document itself. in fact, almost its whole nar- rative consists of an analysis of the improvements that will have to be effected if the targets set by the framework are to be realized. That this has been done, is perhaps the most encouraging feature of this plan, because it sets it apart from previous efforts of this kind which lacked a clear statement of the implications for policy. 68. Since this framework was published, summary statements of policy implications have been sent to all the ministries concerned. A schedule for follow-up discussions leading to policy proposals, is now being worked out. Hopefully, the major decisions required will be made in the next few months. 69. No doubt, in preparing for these decisions and carrying them out, a lot of work still needs to be done. In this context, one comment seems pertinent. Personnel with the knowledge and competence required for this kind of work is very limited in Ceylon. The situation may ease somewhat if and when the team of advisers arrives for whom a request has been submitted to the UNDP, but it will remain the basic problem. To use this available manpower with greatest effectiveness will require a clear view of priority needs and strict concentration on the most important issues and programs. Otherwise, the resulting diffusion of effort will be very costly indeed in terms of chances of improvement in performance lost. However, even more important than effective technical preparation is the political will to change the emphasis of the Government's concern from distribution of present resources to growth of income and productive employment and to make the decisions necessary to realize the economy's potential for growth. 70. The following sections of this chapter discuss development programs and Droblems in the sectors that are central to an early effort to accelerate growth, i.e., agriculture, fisheries and manufacturing. Brief comments on the status of nrenaration in the other sectors are also made. Aorimitufirp. 71pir Ceylon's topogrniraphy-orai nfall cl-e-Iiat an+ ndi otheinr greogpraphicali features have naturally led her to rely substantially on agriculture for its rising population. Agricultural production in the Island has been tradi- tomnally cnntrated on export crops anA fPooA crs T In 10). +ho +hro main export crops of tea, rubber and coconut accounted for 2.36 million acres ~ jOAIUj 4 .L. .. L ) 41L_L.L_LWJ4 ctuluo'0 i1 J.._L .LU ous. Uk~, LJJJ.A ~ ~~ . . U 'JV U'JILI claimed only a little over 400.,000 acres, Of the 1.25 million acres of land - ~AA.r '71A nllln,n t^-. rO an.r~, rei At rA^"a+ n nnn eASAt04 J 3J ~ ~ O'.J 0 ~ J %W0..0JU I/L I.flA'..A ----.Al *~ W A5.' other land uses, 1.05 miilion acres are known to be under grasslands and 7.2 -1 SS-~P4_A _r 4 Jc. uver lue years, Ceyon bas es -u'-neu quite a gou recuru ±1u increasing local production of rice. This achievement was overshadowed in L)FU/6U anu _Loue/ by two poor crops caused by a succession of floous au drought, but the 1966/67 crop is expected to set a new record. By com- parison wLth paaay, oaer essential 100o crops were neglectoe. The major portion of domestic consumption of these foodstuffs LlIL specLiLd±±Y UiI_±L_Lb, jJULbUb, VIiLVIZj, JJVUL.LAJc U.IU UV.J±Il - 26 - nas truaLUnlly ULt vyI upL Uv.e, atO Wa0, UVOP.Le Usle dUVueIsLd mu .11 local production of paddy, still nearly half of the rice consumed in the country. Tis growing Uependence on fOod imports was manageable as long as export agriculture was able to translate its increasing output into higher earnings, but with declining prices in the world markets for its major export products this is no longer the case, and the prospects are that Ceylon will probably have to manage with a small increase in export income in the near future. 73. From this background stems the new strategy of agricultural develop- ment stressed by the Government in their Agricultural Development Proposals (1966-70) and the Irrigation Program (1966-70). This strategy emphasizes the need for serious efforts at import substitution in the non-export agricultural sector through: (a) further expansion of the irrigated area and land devel- opment; (b) increasing output on existing paddy land through intensive culti- vation and bringing under cultivation 100,000 acres of assweddumized land; / (c) diversification of agricultural production through development of subsidiary food crops (e.g., chillies, onions and vegetables), industrial cash crops (e.g., cotton and sugarcane) and milk and dairy products; (d) maintenance and, if possible, some expansion of export earnings through consolidation and im- provement of the plantation export crops (tea, rubber and coconut). Paddy Program 7h. The Ceylonese Government has an irrigation program for five years (1966-70) intended to improve irrigation for existing paddy lands and also to extend irrigation facilities to new lands for the cultivation of paddy, sub- sidiary food crops. sugarcane, cotton and other crops. Paddy production is expected to be increased by 20 million bushels by 1970 which is roughly 40% hizher than the present level. About 50% of the increase in paddy output is expected from existing irrigated lands, with a rise in the average yield (anoroximatelv from O bushels to q0 bushels) resulting mainly from an in- creased use of fertilizer and high yield seeds, especially of the H4 variety. Higher outnut is exnected also from minor imorovements in irrigation facilities over most of the area already irrigated, and by ensuring cultivation of 100.000 atrps of land commandpd hv existing irrigation works. but not cultivated by farmers for other reasons, such as shortage of capital, lack of buffaloes AnH~/n- 'r'+,v fnrv nmlachi na qMl n-crnh1 Pm.q_ frnmnnt.inn of' hlirinaq or sheer indifference of owners and/or farmers. Furthermore, nearly 100,000 acres of nemT land are proposeda +n ho napA for. irriatafl nuii+Avati~±Aon fromn new jrri- gation schemes (excluding the multipurpose schemes) for the five-year period and _J n a h _n rr,- A l1i nnr o~ n Trn n1 ho i iiri I , n 3n . ni, s 1cxt-heinmesn. Such land is to be used for settling 7,000 to 8,000 farmer families every year. 'This4 r,r,--- nr,+c n ,,1 ^r 9 1a, p 4 4"M+v.4 nI4 .j A,a ncr+ a nt4 ++I=,... ment over the estimated performance during 1965. 75. The irrigation program, (1965-70), based on gravity sources, is coiposu of (a) utipurpose projecUts U \v majo1 WULAO, t; 1UU.LUJ1 WUQ, 1/ Land prepared for paddy cultivation. - 27 - (d) village works, and (e) minor worksl/of the two large multipurpose projects. Agricultural development of Gal Oya is well advanced and and construction of Uda Walawe is scheduled for completion next year. Exe- cution, along with programs of agricultural development, is proceeding under the control and supervision of the River Valley Development Board. A little over 79,000 additional acres are planned to be irrigated under multipurpose projects. Under major works ten continuing schemes are intended to irrigate about 68,400 acres of new land and to improve 3,900 acres of old land. Six new schemes have been proposed, irrigating 29,000 acres of new land and im- proving irrigation on 24,000 acres of old land. In addition to the major works, medium scale works numbering 111 are to irrigate a little over 41,000 acres (including nearly 19,000 acres of high land). At the village level, village works are expected to provide irrigation to 13,500 acres of new land and improve irrigation on 36,500 acres of existing land. A large number of minor works is to improve further most of the irrigated acreage. Moreover, lift irrigation schemes are designed to irrigate 25,000 acres of high land which is particularly suitable for subsidiary food crops, and a drainage and reclamation program is planned to reclaim 19,000 acres from marshes in the southwest. 76. Annart frnm thA naoe nrram_ te Mahanwei Gannma miAtiurnsp srhmme encompassing large areas in the dry zone and likely to affect most of the pro- c *,d new major works nrunrtVc has hoon under investigtion by TTDP Perts. Their comprehensive feasibility report is expected by March, 1967, or possibly - m ewTh at l at e r. T h i-as shoud m ak ,r,e i t p oss JIle t o beegin. detailed1 pr oJect preparation in well-defined phases. According to the interim report of May, ~~~n abut80,00ace (5200 acre ofP neilndA ndA o.A acre ofP oldI land) can be irrigated under the project. The supplementary interim report .'J S "-L.Y I _L WXA ULN t L .L)I%, L Vp%.i U %W U V IILUJ _L/W 1 L.O F s.L construction work for the project as follows: (i) Construction of a diversion weir and tunnel near Palgotta to U-Lvert 1,000~ cuses of unrgulad flow OL U[Ie rICILIUWI=_.L CIC through the Sudu Ganga to the Amban Ganga; (ii) Construction of Moragahakanda reservoir; I/ Multipurpose schemes, irrespective of cost magnitude, are under the River valley Development Board. Major works include all worxs costing s a million and above, providing irrigation to 2,000 acres and above. Medium works include all works costing over As 150,000 but less than As 4 million. Village Works are works costing more than Rs. 10,000 but less than Rs. 150,000 Minor works are small works costing less than Rs. 10,000 under the control of the Department of-Agrarian Services. - 28 - (iii) Construction of diversion weir and canal in the Amban Ganga unstream of the reservoir and to KAndalama Tank: and iv) Construction of noner stations at Polnt.+. and Mrrnhaknnei for a total installed capacity of about 35 MW. Agricultural Program 77. Development of irrigation has been programmed in relation to the The Agricultural Development Proposals themselves translate these objectives UC2LI F6tU±UO JVJL- L11U.L V.LUULLC1. JL_UUUk;L,0* ZLVJaLe I' U O then L i s c in vestment program for five years which, however, does not yet consist of pre- cisely Ueuf pruject andu allocations by sub-sectors. But Tis na6 been done for the first year in the 1966/67 budget which aims at making a start in aPP.LYing1r thib neUW s5trategy as follows. ka) Paddy, AoUT 2u,000 acres of new land will be developed, and 05,000 tons of fertilizers, compared to 60,000 tons in 1963/64 and 45,000 tons in 6u/6>, will be distributed towards the targets of increased paddy production. (b) Subsidiary Crops. $,00 acres of highland in the dry zone will be used for increased production of chillies, potatoes and other subsidiary crops. (c) Cash Crops. Extension in the plantations of sugarcane will be organized in the Gal Oya and Kantalai regions. Cotton research will be under- taken to facilitate large-scale cotton cultivation under the continuing colo- nization projects, especially Uda Walawe. Research in sugarcane has already been given priority by the River Valley Development Board so that new sugar- cane plantations may be organized in the Uda Walawe irrigation areas. (d) Forestry. 21,000 acres of forest regeneration has been planned by the Forest Department for the year. (e) Milk. Cattle farms have been planned to be extended very substan- tially and private capitalists have been offered Crown land for development into cattle or buffalo farms so that milk supply can increase to feed the condensary under construction near Pollonaruwa. Evaluation 78. An essential part of the strategy for increased agricultural pro- duction and diversification in Ceylon should consist of a more efficient. use of existing resources of land and irrigation water. Land in the Dry Zone and irrigation water in general do not seem to have been narpfully +.ied as scarce resources. Consolidation of the past expansion in irrigation facili- ties and land develooment anears a ton nriorit.- This will aso rini"a - concentrated application of other inputs such as fertilizer, improved seed, insecticides and technical know-how through .ona1iIntin of senverl xtnsc servicos now existant and a'concentration of extension efforts in areas and on nro-arams iT,hr ountl. :Ynci n J c pT-crn,mr_A (a) Land. Land settlement policy has been neither consistent nor based on scientifc nvestigation. Large colonization schemes along tne traditional pattern are not in line with the desirable new direction of agri- cultural development. The present policy is to allot two acres of low land and one acre of high land to each colonist irrespective of quality of land and crop pattern. This compares with five acres of low land and three acres of high land in the past. The high-land acreage outside the command of irrigation canal is nearly always neglected, while low land is almost invariably assigned to paddy production without any significant rotation of crops. Some studies have, however, been started recently at various levels to lay the foundations of a sound land policy. Although the standards at which housing is provided to colonists have recently been reduced, a general review is called for of the heavily subsidized terms at which land, water and other facilities are pro- vided to settlers. Moreover, it would seem that higher productive returns could be obtained from investment if more stress were laid on expansion and improvement of irrigated land in existing villages than on development and settlement in the Dry Zone. (b) Irrigation Water. Great efforts have been made, and large amounts of money spent, in the last decade to increase the acreage under irrigation, and 17,300 additional acres were, on the average, brought annually under irrigation. However, the results obtained in terms of increased output have not been commensurate, largely for the following reasons: first, far too many projects and programs were under construction at any one time so that completion took unduly long. Secondly. headworks and major canals were usually completed far in advance of land development so that achievement of productive returns from investment was further delayed. Thirdly, generally no concerted effort was made to insure that cultivation practices on the major schemes were superior to those traditionally emploved. Fourthly. a tremendous wastage of water was permitted. Nearly all the irrigation water is annlitd hv mansn nf rnvuit.v in a nnmnlinat.pA qvqt.m nf t.nkq rAn1.q qni natural flows characterized by high evaporation, percolation and other losses which Aa oftepn aggrvate byP lak "fnroe mintnnce. The-re is a treP- mendous wastage of irrigation water because of structural defects in con- system generally, and because of the traditional practice of deliberate excessive use of T-ater for paddy%t7 (partly as a mean ofwe-otrol). The Department of Irrigation has lowered the irrigation requirements for paddy duingic Mah'a a Yala ss from- e -A I acr ft P+ to . -a A acre ft. respectively. Even the reduced depth of 10 acre ft. for two crops can be is that total irrigation requirements of two crops under conditions of limited -aJ 4 v,1 --n.L.1 A -^+4 ey,a--A 7 -_ -P. A. waens of thispob" em is _ ron- A ~.. 011S.T.i A'-- &CUUV I LUT~J J. U.LA U.L -L. &L WJ4 W L1 and efforts at better control of water use have been made in selected areas, kc) Padd Yield. Land development, supply of irrigation water and use of other inputs, especially fertilizer, have tended to increase yields of paddy during recent years. This trend of increase in land use, production and acre yield are shown below: - 30 - Area Planted (1,000 acres) Maha 934 1,014 8.6 Yala 1o 385 06.3 Total Area Planted 1,472 1,5oo 7.7 Net Area Harvested 1,196 1,305 9.1 Production (million bushels) 43.2 50.5 16.9 Yield per Acre (bushel) Maha 35.9 38.6 7.5 Yala 36.5 38.9 6.6 But, better use of fertilizers, improved seeds, pest and weed control along with adequate agricultural extension services would probably have increased yields much more impressively. The potential has been demonstrated in some areas. Moreover, in terms of value of output, much greater returns could have been obtained if water had not been reserved exclusively for paddy. Need for Rehabilitation and Consolidation 79. There is a need for an immediate rehabilitation and consolidation pro- 2ram for irrieation to ensure the most efficient use of existing facilities in the old and continuing schemes before new major schemes are considered for execution. The main elements of such a proaram would consist of: (a) improve- ment of irrigation structures and designs such as earth bunds on the uphill side of main irrigation canals: snillwavs. svnhons. overflow wiTsq etc. with measurement structures required for controlled distribution; and individual irrigntion wate.r tunnnt-! (h) inst,Ilation of annronriAtp watepr measurement structures wherever these do not exist or do not work properly; (c) intro- duction of effpntivp methods of control over timing and ouantity in the dis- tribution of irrigation water at the field level, based on more accurate knowndae of rIA+.SM nnivement. of varions crop; (r) nrnvi.qion of Pti.pnsion servicesto facilitate effective use and management of irrigation water by favwrmer ithou -l"~Idul- 1-1ii asa gen~. '- L3 ^yens ,7n - evn nf foo-JI +.JDC2 +n~ n."n-Tritio other inputs (e.g., fertilizer, high yield seeds, pest control and weed con- W80.LStrategica_lly QULV% ese'lected ara ar ev as demonstrati;on centers for the surrounding region for future irrigation rehabilitation under the program. ThLe -MAr/T1Qnn misio of Sepemer 1966, has 4- selcte six4 -r c ara to be4-1 developed over five years with 15,000 acres for the first year, rising to ...UU acres forl Ute J.LA yt',Z.. LHI. ULI L'L.LUI-LU JUi WL"ULLI ULVZj IJvj t:;U areas are located, 27 per cent and 50 per cent of the assweddumized irrigable Land are not cultivated during maha ana Yala respectively. Part or all of the lands located within or near the command areas of the existing irrigation schemes (both low and high lands) can be developed under gravity or lift irrigation from existing water resources, provided wastage for paddy cultiva- tion is reduced and complementary measures are adopted to provide capital and other inputs to farmers (including measures of consolidation of holdings). - 31 - 81. Starting with irrigation rehabilitation, the program has essentially to be of the nature of a "package" program to deal with all problems of efficient use of water and land on a set crop pattern based on scientific study and management. The basic elements of the package would be improvement of the water distribution system, control on timing and depth of water supply, combined with the timely supply of improved seeds, fertilizers, agro-chemicals, farm machinery and implements, timely supply of short-term credit, improved plant protection services, better marketing facilities through cooperatives and, above all, a proper system of farm planning of land utilization, crop production, cropping pattern and rotation, etc., under the guidance of well- trained extension workers. Highly promising results from such concentrated "package" activity have been obtained already in one isolated experiment made in the Anuradhapura district under the supervision cf the Government Agent. The FAO/IBRD mission has broadly indicated the nature and extent of construction work and organization involved in the rehabilitation and "package" program. In the opinion of the present mission, this program should receive the highest priority under existing conditions, mainly because of: (a) the relatively low capital investments required; (b) the potential increase in per acre yields in crops, especially Daddy, in existing land commanded by the irrigation system; (c) the large scope for expansion of irrigation with existing water resources, sufficient for the period during which the economic feasibility and phasing of the Mahaweli Ganga Scheme is firmed up: and (d) the scope for cron diversification with low lift irriation for high lands and more rotation of crops on low lands. 82. Clearly, adoption of such a program could radically transform domestic agriculture in Cevlon. Carryina it out will make heavy demands on the competence of the Government's agricultural personnel, and no doubt there will h difficult.ies in overcoming the nnnnition nf the farmer who has never been accustomed to a strict water regime. But against these difficultis +n hh to be st the f +ac + +tt r1adi+inal agriclurnal develoPnment policy in Ceylon has not proved as effective and efficient as it needs to be,if with limitn rpoirnp frr invest.ment, eornomic grnth is ton erte. The same is true with respect to employment because investment per additional man employed has proved to be so high that Ceylon would have to spenod toally unrealistic amounts if irrigation and land development according to the past n Vr ___ . +r.rv, AP-- _m,-, +-nr, ?-a-,r..r +?n s nmall ~Vfl nr + Inn annual additions to the labor force. 83. In fact, the possibility of adopting a new approach along the lines and it forms the major theme of the agricultural sectionin the Development IrogramLI, L7UUUI V I I L.L l11"n VIL U L L 1".L LL . U.~LL~JiJ~.tJ L d.LyL.LLi, out such a program are fairly well advanced. Initial reaction on the miniteeral level has veen encouraging. Wat L neeueu now s a Uelr political decision, and its importance cannot be overemphasized because its outcome will be a major factor in any evaluation of the Government's performance. Once the decision to go ahead has been made, details of the -32 - programs, including its cost, can be worked out by the departments and agencies concerned. If some technical assistance is made available, it should be possible to prepare, within a relatively short period, a program for consideration by external lending institutions. Milk and Dairy Products 8h. An important element of the strategy for import substitution consists of the development of animal husbandry for substantially increasing the production of milk, dairy products and meat. According to a survey made in 1963, per capita consumption of milk in Ceylon was only 2 oz. per day compared to over 20 oz. per day in developed countries. Even so, Ceylon imported milk products valued at Rs. 77 million in 1965. There is thus an urgent need for the development of milk production, both to save foreign exchange and to improve nutritional standards. Scope for such development exists in various regions of Ceylon: a) hill country zone which is suitable for temperate breeds of cattle and for dairy farming with high-yielding dairy cows of European breeds; b) natural grasslands of the Dry Zone; c) coconut plantation areas providing 1.1 million acres of land with good prospects for dairy farming under coconut. The Cevlonese Government has been pursuing a program of livestock development, e.g., establishment of nucleus herds of Euronean breeds in the hill country zone. ungrading indigenous buffaloes with a. herd of Murrah buffaloes, introduction of drought resistant grass in some areas in the Dry Zone. undertaking breeding nroarams. nrovision of artificial insemination service and veterinary extension service, etc. Milk nronnri at onvernmnt. livestock farms (-flnf nints a rav) qr normaen available to the National Milk Board for sale a.s liquid milk. A condensed milk facory is under constrction at 1olonnawa and _a pi_ydrvine plant is being set up at Ambawela for processing the available milk supply in the ar a CZiir%-n i cz r%1nnnnr +^~ 1-kc h'k~ -Tr Jmr%n-~, t hiiffnIn~earz- mrA1c pplcn is planned +o be h h im n Un and t in a phased program for the government farms as well as for distribution plantation crops - rubber, coconut and tea,- with subsidy schemes for replan~i ngJ.% 3~ an re aJ_.Ld U C%_LL1 VICL.j r . LIT,- V-.4 Idle "VJULItI y 0 .LU1U_-L8i1 AC-l~ earnings vitally depends on such programs, because all its export crops face Ute prospect of further UecleZse in prices. Ceylon can hUpe oU retaL its share of the world market only if she maintains and improves the quality of lier prouut and keeps ner cuos of producuion competiive. iluouuu uWe possibilities that exist in these directions will justify for the near future a couuderaue 1LU'eabe over the past level in the use of resources for investment and current inputs such as fertilizer. As for the longer run, however, detailed studies wall be required in order to obtain a clearer picture of the amount of investment in the traditional export crops that would be justified by prospective returns in relation to those obtainable elsewhere. Such studies should, therefore, be encouraged and assisted. In the field of import substitution, attention needs to be given to sugar cultivation which was begun several years ago and in which considerable investments have been made, so far with very meager results. There is no obvious technical reason - 33 - why Ceylon should not be able to produce sugar cane at reasonable cost if administration and operation were put into experienced hands. A joint ven- ture with an experienced foreign sugar company may be the way out of the protracted difficulties. In any case, before more is invested, this project should be re-examined thoroughly and possible alternative uses of the land be considered. 86. It also seems necessary to review the effects of taxation policy on the objectives of maintaining the export of rubber, coconut and tea. In re- spect of tea in particular, a committee set up by the Government found in 1961 that no expansion was feasible because of (i) the Government's land policy against allotment to private capitalists or companies, and (ii) the ever in- creasing burden of direct and indirect taxes. The report shows the declining scope for reinvestment in the context of rising taxes as follows: In Percentages of Gross Surplus Reserves for Develop- Taxes Dividend ment & Other Purposes 1951-56 74.5 17.0 8.5 1957-59 83.0 13.1 3.9 1960 88.3 9.4 2.3 There were, of course, also other factors behind the low level of investment; .hPrhn1o r.q nf 1nrnlocallv-owned comnanies demanded that an increasing nrtion of earnings be paid out; uncertainty over nationalization made foreign r-mpania-z relct no inest; Theare asn- alsor then lack of' vhnp r then, some reduction in the tax burden has taken place. Yet proper rationali- zatin of taxation and other nolicien in relation tonital invem+.ens. in plantation industries has yet to come. It is hoped that recommendations of then Tax r.myrmicainvi T.lith is nowj prepai itsn+ +.h 1.-i +r)wa t further improvement. 87. The tea industry has been especially suffering from lack of adequate relcm nof old mnrchineoyr and expa%nsion of' capaci+ty,Th rrnnrnn hase lately announced a new scheme of subsidized credit for the purchase of machine"r for tea TT",I- Unehis scheme, half the int-rst n" crdit for such purchases will be paid by the Government and this, because of the interest to the tea industry. This seems to have created a new interest in I.4V 0 U11LUJ,A VO .Ll V110 WU L A441.AtAO VUL * Q Ll~U 41VVV 00 UJ.U A.0 LJ.";.L VW VWV0 JUOU.L. J.0.. by maintaining competitiveness of Ceylon tea in foreign markets, through a '.iUIt~J~ ~JJU±k L,J. 88. The trauItional pattern of Ceylonis exports, it is veieveu, can be strengthened by a systematic development of other export crops. If soil and climate conditions are satisfactory, oil palm would be a highly aesiraole substitute for rubber. Its return per acre and per man-hour of labor is as high or higher than rubber and should be less susceptible to declining ex- port prices. In productivity it is also far superior to coconut but is not a - 3L6 - feasible crop on coconut land. However, it is not a peasant crop, except under a rigid organization. Other opportunities for export diversification may exist for cocoa, spices, cashew nuts and fruits. A careful study of these and other possibiliti ; ahould be undertakcn urgontly. Projects in Preparation 89. Except for some projects in industry and power, Ceylon has not been accustomed to preparing projects to the standards of foreign lending institutions. Moreover, as is only too well known, the preparation of projects undertaken with Ceylon's own resources left much to be desired, particularly with respect to the establishment of an economic justification. Hence, it is not surprising that the projects in preparation for the agricultural sector should suffer from initial difficulties of consistency, cohesion and integration into a well-knit program of development. However, quite a number of projects ultimately aiming at increased agricultural and livestock production and primarily intended to effect import substitution in food, are in different stages of preparation. 90. Amonast major irrigation projects, feasibility studies have been, or are being prepared for several of them but, for reasons explained above, the mission recommends aeainst the execution of any of these projects before undertaking the major task of irrigation rehabilitation combined with a nackaye nrogram of intensive Paricultural onerations. The comorehensive feasibility report on the Mahaweli Ganga Basin, which is expected early in 1967. will Pn:b;l the Governmnt to rPvIzw the whole svstem of irripation in a long range perspective and to establish proper priorities for further nroipnt fornulntion nrd PYP-nvAni_on Mnnbwhil- thp rAhnhilitqtion nroaram is likely to provide enough irrigation support for the desired expansion in naricuiltura"l yUieldi nd acreage. 01. T in T)y n+ ny% ' ^- T- _+ ^ ni-s +.1o I pp n+lipe y rnior-+_Q iin -un".r ia stages: (1) low lift irrigation for high-land cultivation, (2) drainage and VrclaamM, 0-5 ofii % 1Mni-a51ns-.4 ,x .rc4 -.5 allorg the,r. and.. Sothws coaSal belt, nrA (1a' ayn, water irrigation for citrus farming in the Dry Zone. Of these, the first _ .. L11 e .LC"L. dau cj V t U OULt U.1. V jJ5CtLCULUIJJ V4J.LJII I ~ t-"S U L V 51j of project areas and the techniques to be applied. A good deal of '44 ~5.J1.L.55 J . 0, L±JVOWUV ., 1 J 5A5 _LIJ L.J L.L.L U. .. L .LeVQUW.J V U5. _I55~J4... S" the farmers the techniques and benefits of this innovation. Similarly, the UI5~. -LULdt.Le ~ crop pC-:L--UL CL A LM L IJd.LCUi.I J LIIU .L0LJ.LI% JJV0PU;,U0. UIJLA5.ZJ Ull drainage and reclamation project are yet to be determined, so that no uuu ±g economic benefits iU iow PbjveU. VLUJu waer uDU is still under investigation and experimentation in Puttalam. Of these three prUJects, low lift irrigation deserves the earli5eu conujuerabuoIJ. Outrs need further investigation and preparation. The FAO/IBRD mission of July 19(6'; has worked out tentative estimates of the low lift irrigation project. 92. In agriculture proper, again, several projects are in different stages of preparation.. Some of them are virtually programs of equipment imports. To this latter group or projects belong modernization or machinery in the tea factories, and mechanization of paddy production with tractors ar other implements. The Government agencies concerned have considered the organizational aspects of these two projects and have worked out a preliminarr justification. This mission attaches great importance to these two projects. - 35 - 93. Amongst other projects, there are two proposals for storage, one fnr fPrti1i7Arq and nothAr fnr nadv and rice- Both theRe nronoqals Are in a state of inadequate examination and planning. The required capacity of am fr?- nrirdlr nei rip iQ ctAll inARt.rminat from the noint of view of the process of turnover from the grower up to government stores and from the import point up to Fo^od StoresA~~ -n+* va-riou.S leuels- For fertilizer storage, the Government has been following a phased program of .&A UCL4A6 0V'J Clvy - M U JL MI m11 - 6m &jo~v~O ~'~'~ LJ village level. The additional capacity and location of storage required distribution system is, however, still to be determined. 94. In the field 3f livestck and dairy products there are three pr3jects. Tamanaauwa pasture development, temperate pastures, anU oUUt farming in coconut plantations. The two pasture development projects, with imported buffaloes and cattle, are based on preliminary examination of the technical aspects by the Department vf Animal Husbandry, but some important issues such as: source of supply of buffaloes and cattle; their suitability for pastures, whether highland pastures, villu pastures or temperate pastures; demarcation and maintenance of demarcation for private lease holders, disease control, marketing problem for milk, meat and dairy products, etc. as well as willingness of private entrepreneurs to undertake dairy farming in the Tamankaduwa and temperate pasture areas envisaged by the two projects, still need to be carefully examined. Private Sector Projects 95. It is heartening that in pursuance of the new strategy of agri- cultural diversification the Government has decided to provide land under lease to private companies or individuals for growing subsidiary food crops and developing cattle farms. Large-scale cultivation of chillies and onions with sprinkler irrigation amd mechanization, now being tried under such private initiative, is, in many ways, a pioneering effort. Prospects for success seem g-Dod if the difficulties caused by the shortage of farm labor and harvesting equipment can be overcome. The private cattle farms in Tamankaduwa are yet to be developed; progress on them will depend largely on finalizing solutions for the technical problems of the quality of high- land grass for cattle nutrition, access to the low land villu grass, demar- cation and fencing 4f blocks of individual cattle farms. etc. Private cattle farming in coconut plantations is also being tried by some enterprising individuals. One adverse factor in these efforts seems to be the operation of price control on meat. All policies impinging on private agricultural develonmAnt (including liveptok) need a careful renxamination by the Government so that progress can be accelerated. Fisheries 96. Further development of Ceylon'sfishing industry offers considerable income and employment. Furthermore, such increases in output would largely be of a kind ale to replace presenU impUrts so UaU they would nelp relieve the severe shortage of foreign exchange. Shortly before the present Govern- ment came tu puwer, the newly established Ceylon Fisheries Corporation had - 36 - completed a development program for the fishing industry which envisaged investment of Rs. 1,500 million over a ten-year period. Further review of the feasibility of such a program in recent months led to considerable reduction in planned investment and a shift in emphasis during the early phases to fishing on the continental shelf while investment in deep-sea fish- ing was reduced substantially. 97. In the view of a Bank mission, which went to Ceylon in September 1966, to define and appraise a possible project for Bank/IDA financing, these changes were in the right direction, but did not go far enough to obtain the maximum return from investments. It recommended that, until more experience has been gained in deep-sea fishing with the tuna boats and trawlers now on order and various obstacles to profitable operation discussed below have been overcome, the Corporations should place exclusive emphasis on coastal fishing and related port and shore facilities. Roughly estimated, the project as now defined would cost about Rs. 50 million and yield 20,000 tons of additional fish catch compared to a total output in 1965 of 95,000 tons. A project of this size is still considered quite ambitious, particularly in view of the fact that management would. without the benefit of years of gradual growth, have to operate a fleet of a size considerably larger than that handled by most fishinE comoanies elsewhere in the world. 98. In comnprinon to the vipldq obtninable from the investment outlined above, large investments by the Corporation in deep-sea fishing do not seem iustified qt this Rtnp. Tn fnnt. nPIPuntionq. show the nronective rate of return to be zero, largely because crews' wages payable by a government corp- oration for extended qtpv. at Re are higher and more time and money need to be spent on maintenance than in other countries in the area, including Japan and China- and hecmae ntche nor yenr arP likply tn ha elov. Tn addition, management capacity would already be extended to the limit by sponsibilities would threaten a repetition of the traditional problem in Ceylo of i-fiin opraio of invos+Mn . T+ +.)~s in+ nn+T fV s ~~-- ential for developing a modern fishing industry, initially in coastal waters and later in, the deep sea, f a exced t1he caact of th i,,eie oro. tion and that much quicker progress in exploiting the potential could be made Corporation's operations could have a valuable demonstration effect and en- CoUr,rn J n rn +- -Pj"es -c,b~e ,.4 +1, -'v., m -7nn4-, T+ 4 also likely that the investigation of various potential sites for new or -L .tj r u Ou."I L LI a~ I D orsJL W.L.L.L i-tau VJ jJJ.LVJU%.oUo w1li U LU J--q- V %,- the present lack of adequate facilities. Manufacturing 99. Industrial output in Ceylon has more than doubled since 1959, albeit on a small base. However, the patern of Ln±s UeveLopme&n!- has not been entirely satisfactory. The dynamic force behind the growth of industry in the private sector has been the import restrictions which have been imposed with increasing severity since 1959. Since imports of less essential consumer goods were restricted first, and since approval for the establishment of local industries was granted freely during the early part of the period, there was agrowth of industries producing low-priority items. nyothe industries, such as biscuit and jam manufacture, were based on imported raw materials. Uater in the period, faced with a further loss of reserves, the Government stopped approving applications for new investment in the private sector and cut substantially the allocations for spares and raw materials. Thus by 1966, most private sector industries, whether in high or low-priority sectors, were operating substantially below capacity. aUo. Another feature of the period was the growth of public sector industry. The Government decided that certain industries should be the exclusive responsibility of the State. These included cement, ceramics, paper, mineral sands, plywoods, steel,tires and tubes, fertilizer and petroleum. In other industries such as textiles, private and public sector production continued side by side. However, much the larger share of allocations for further investment and for raw materials went to the public side of the industry. The output of many of the public industrial corporationk has increased impressively during the period. However, there have been a number of problems associated with the planning of investment, organization and pricing policies. 101. One or two of the industries, such as steel and tires and tubes are difficult to justify at all in a country with a market as small as Ceylon's. nv, the planning of some 0f the corporations, which are casually justified, has been somewhat unsatisfactory. For example, the cement corporation built a clinker grinding plant at Galle when the economics of the operation showed clearly that the place for the plant would be next door to thc cement plant producing the clinker at Kankesanturai. In addition, the public corporations have been under political pressure to hire more employees than the:. need and to charge less than economic prices for their products. Further, they have been given insufficient autonomy and have had to refer too many decisions on detail to the Ministry of Industries. 102. To some extent, many of the problems of the industrial corporations during these years have been teething troubles. As their staff grows in experience, much of the detailed planning will improve. Further, the Government is actively trying to improve the efficiency of the corporations and in particular is reviewing their pricing policy in order that in the future all corporations should make a profit. 103. There is considerable potential for a continued rapid increase in industrial output in the future. In March 1966, the Government published a White Paper on Private Foreign Investment. This stated that the Government welcomed private foreign investment on terms and conditions advantageous both to the country and to the overseas investor and added that non-discriminatory treatment of foreign investors constituted an important plank of official policy. Considerable tax incentives are now offered to the foreign investors in new undertakings and the moratorium on remittances of dividends, interests and profits does not apply to approved investments. The 11inistry of Industries has now approved applications for foreign investment in local industry amounting to Rs. 23 million. These include batterie. Plasware and frozen sea foods. - 38 - 10L. 1hile these moves to attract. fornirn investment are certainly encouraging, achievement of quicker private industrial development will large1v he a tnsk for lorn en.trPnrPnAnrs to takln. ThPrA thR first priority is to make full use of existing capacity in essential industries wT,hich has hppn fornn to lie nqri-v irilr bannsa n nonih Prhane las available to permit the necessary imports of raw materials and spares. 'Ffr)-_ . r) tn rvr%-Ti A mor z Innv.+ r-~ cn -Pn - + ,.,i +In n-n I r I mi tedl ziire rq. but it appears likely now that this problem will be largely overcome this year and next. The eff-cts should make themSelveS frelt in SignUificant increases in output. Apart from balancing investments which in some ~~ JJ~~L -,Y U± J.J V V O, I Up'J IUL j -J JJIWL I" S.JC U J LO .- L LI bJ.- the efficiency of existing investment, the scope appears to be large for ±~~~~~~~~~~~V~~' LLVL[)LU* i ~ ~ ± U ILUL.± *Ui LL ±IjU U ~U "_ U . L U I L I IL-1 rll- consumer goods, especially textiles, and the increase in rural incomes resulting from the drive U LLurea.e dumestLU agricultural output will raio demand for a wide range of manufactured goods. Equally important, the effort to rase JVN UtilU wa Upen up niew Upporvu11-L mub _Ln cuLidig anduun Ur[uu- tion materials and light engineering goods, particularly those required in agriculTure. As mentioned before, over 3,u0 applications for new andustrial ventures have been submitted to the Ministry of Industries. The main problem now is to find enough exchange to be able to make a start in approving new investments. 105. The output of the public corporations is also likely to increase. Both the steel and tire corporations have just begun production. The contract for an oil refinery was awarded to ENI in October 1966. This will have an output of 1.5 million tons of petroleum products and almost entirely satisfy Ceylon requirements. Loan agreements have just been signed with the Federal Republic of Germany for financing the construction of a paperboard plant and a cast iron foundry. The possibility of obtaining financing for a second cement plant at Puttalam is being explored. Consultants have been appointed to draw up designs and specifications for a fertilizer plant and a second plywood factory. 106. If planning in public sector industry improves and changes in pricing policy are made, there is no reason why the performance of the industrial corporations in the future should not be good. There is nothing inherently wrong with most of the public corporations which, with improvement, will contribute greatly to economic development. However, it seems un- desirable that the private sector be deliberately excluded from certain fields where it might have a contribution to make. The White Paper suggested that the Government would consider proposals for private foreign participation in areas at present reserved for public sector industry. If private local participation could also be considered, it might well lead to healthy competi- tion between the public and private sector in certain fields, with benefits to all concerned. This tvpe of competition already exists in textile manufacture and might well be extended to other sectors. - 39 - 107. Op+nut.n mannfnaturing, minin and cnntrniioJn is noTT envisqged to rise by 10% a year in the period 1966-1971. If public sector industry i mn-vrrvrac! m +h inIo vrairz - n m nfi nna _nT bovc- ann if riirnn a te allocations of foreign exchange can be given to private sector industry, + ~ eln,1A ~ h ~ ~ - , -n~4h ~ +Ivi cz ra n~ o,rf CYOA1 L\J l)J~ k'111al. Lun W-L 'll] tAit ~t UL LO U U UJVt, _LLI uAJ1i L V L 4 the immediate impact on income, employment and the balance of payments 01 IiVL L es - et i n t- 1] Iie~ re m 211LnJig S eC t - fi tle -O OPy LD UiUI I J-tz -LdI', L4. v_JY IILLiIJ± In power, the Government decided recently, following the recommendations of 'rTynl, n ~ __1'- - __ r _ _- r 4-1.- IfII anu rAU experts, to develop Naskeiya Uya otages ii and iii, raUter one the Samanala Tbwa project which offered a lower return. The Canadian Govern- ment nhas agreed to finance the foreign exchange cost of the feasibility and engineering studies which are a matter of urgency. Among projects in trans- portation, one is for the purchase of buses by the Ceylon Transport Board. This seems justified, provided improvement and expansion of the bus fleet is linked to an increase in fares to a level where they reflect real cost. The railway is now reviewing bids received for the supply of diesel locomotives, involving Rs. 53 million. This investment also seems justified, although its potential effects on the cost of transport and the railway's financial position will not be fully felt in the absence of the measures to correct other ills, including low fares and over-staffing. As regards roads, the main emphasis of expenditures should be on maintenance and improvements of existing roads. The Government has accepted the recommenda- tion of a Bank mission that consultants should be employed to prepare a highway master plan and study highway maintenance and organizational aspects of the PWD. Possibilities of obtaining external financing for such studies are now being explored. In education, plans for a reform of general education and the promotion of vocational education are nearing completion. Proposals, which are now being reviewed within the Government, point generally in the right direction of linking education more closely to the development needs of the country, but seem to lack the concentration of emphasis required for achieving adequate results within the limited resources available for education. CHAPTER IV THE PROSPECTS FOR GROWTH AND THE NEED FOR EAT=NAL ASSISTANCE introduction 109. The general conclusion to be drawn from the preceding review of the Government's performance is that creditable progress has been achieved in improving policies and their administration and in establishing a general framework for the economy conducive to accelerating growth. These improve- ments are necessary preconditions for overcoming the state of near-stagnation in which the economy has been for some time. But they are not sufficient. Foreign exchange is now and will be for some time to come the major constraint. Rough calculations indicate that the exchange gap exceeds by far the short- fall of potential domestic savings below investment. Thus, the availability of exchange will largely determine how much growth can actually be achieved. Therefore, an assessment of Ceylon's prospects for growth cannot be separated from the exchange outlook. 110. The Government's development strategy aims at surmounting the shortage of exchange as the dominant constraint on growth by placing highest priority on import substitution. As Ceylon still has basically an economy specializing on production for export and dependent on imports for supplying finished goods - imports account for nearly 40% of the total supply of goods - there is considerable room -for import substitution. Tentative calculations suggest that Ceylon would be capable of reducing imports from a. level equivalent to 2560 of GNP in 1965 to about 20% in 1971. Such a reduction would mean import savings in the order of Rs. 500 million in 1971. This would be sufficient to reduce the size of the current account deficit in the balance of Davments by about one-third below the estimqted 1967 level. Perhans most importantly, it holds the promise that by 1971 equilibrium will have been restored in the demand for domestic and foreign resources. i .P. thit the present disequilibrium situation, where exchange is the dominant constraint and additi +n l domestqi scvzngs 11 nrrnmnlish littl in rqi si no investment, will have been more or less eliminated. 111. However, achievement of such an improvement will require substantial nt .inflows of nnital frnnm qhrrnd during the next few years. Tf these are not forthcoming, and gains in import substitution and increases in export for imports of intermediate and investment goods, there is little prospect of accelerating growth11 to a rate in. excessa of +Inat nP' populati%. Indeed,l provisional projections of Ceylon's import requirements associated with an assistance and IMF drawings under agreements presently in force or in prospectU, suggest Ul tLC .JV Y L Q _L.WIJ U V4Y~.. IJJ I.L _ .ll U.LVA L' U - scribed so severely that all chances of improving the rate of economic growth crrll e strangley, unLeSs external assistanCe is rised cbtov.e e levl currently in prospect. - 41 - ne uubLUUK 1 fr Exchange Eariungs 112. Several factors lead to this conclusion. In the short run, reserves are once again at an uncomfortably low level. Instead of being a source of supplementary exchange resources available for financing imports, as happened in 1966 to the extent of Rs. 126 million, reserves should be rebuilt to provide a minimum cushion against future contingencies. Over the longer run, Ceylon's exchange earnings are the major determinant of import capacity. They consist of export earnings less net payments for services. Physical production for export is expected to expand annually by 4.9%. However, prices of all major export commodities are likely to decline during the period. Rubber and coconut products are primarily affected, as their prices are expected to fall considerably in response to increasing competition from substitutes. Tea prices are estimated to fall about 3-4% below the 1966 level, as demand grows rather more slowly than supply, particu- larly in respect of lower-quality teas. As a result of these price declines, it is now estimated that over the period 1967-1971 Ceylon will earn roughly Rs. 1,000 million less in exchange than it would have earned if prices remained at the 1965 level. Altogether, earnings are forecast to increase to Rs. 2,008 million in 1971. This represents a sizeable rise in comparison to actual earnings of Rs. 1,680 million in 1966, but only a marginal one in relation to the 1965 level of Rs. 1,910 million.17 113. Moreover, the outlook becomes less encouraging when net payments for services are deducted. These payments are expected to rise from Rs. 23 million in 1966 to Rs. 133 in 1971. for largely the followino reasons: it has been assumed that the moratorium on remittances of dividends and profits will be lifted from 1968 onwards and that the nccumulated backlog will be released over 10 years; interest payments go up substantially as a result of external horrouing: nrivat rPnittqnreq i.ll inrPq- cnsidriblv ns the agreement for the repatriation of Indians is being carried out. Net exchange below the 1965 level of Rs. 1,902 million. However, compared to 1966 projected net earings? -n,riilrl Jn ,n c -r iill -r 1 -r P7T 911 mrill n n"? r 9 1 01 n mn" Tmrtr Programsrn. for 196,7-1971 I1). Tn r der to- hl p relrlonl -t-nav~rl fi ac n -oble tentative import programs have now been drawn up for the five-year period, requirements associated with achievement of an annual rate of growth of 4-5 )/ 11hey are high1l.y tenuttive,, and1 the- L.LLA1:: beLV low r-LV rough orders of magnitude, intended to illustrate trends, rather than to 41 U.L L U%.J.0U IIIasil uuu--o %AU0 J11UU.L_LY_LJAr U.LUDV0 L 10 U1 O '.04JU... that the Government will continue to follow policies designed to continue 1/ ror details of projection see Tables AXVI an AVII. - 42 - strong emphasis in investments and programs on import substitution witn efforts to keep overall consumption in check and with import programs aiming at re-structuring imports in favor of intermediate and investment goods at the fastest possible pace. There is no doubt that much is expected of the Government if this assumption is to be realized. But unless it is, it will be impossible to achieve the twin goals that seem appropriate to Ceylon's present situation: acceleration of growth and reduction in the current account deficit of the balance of payments. Actual 1966 and Tentative Import Programs 1967-71 (Rs. million) 1966 1967 1968 1969 1970 1971 Consumer Goods 1,085 1,022 961 876 829 799 Intermediate Goods 575 676 794 817 863 828 Investment Goods 370 438 579 547 525 550 Total 2,050 2,136 2,334 2,240 2,217 2,177 115. Rigid controls on consumer goods supplies are thus expected to characterize the Cevlon domestic market throughout the next five years. Moreover, unless the various new projects which will come into production durinP the nPriodi nPrform adequately. prices are likely to rise considerably because the reduced import programs are based on the assumption that these nrniiert.q Tall nrnHnr. q vnlime of ronsimer. goors in line vith estnblished targets. Given this prerequisite in the food sector, however, the level of imnn+ should allonw for a daily Nor cpita availability of 2 100 calories i.e., a level some 10% above that of India. This would mean a maintenance of existing levels of Per, caPita supyfrcefo rq ndisuanr- Th1Js isq not true of other foodstuffs such as vegetables, curry spices and meat and --sr ~ ~ ~ ~ ~ n iAi'I i,l~~mn +In +l ,e ir,v' n -znr-+r)Y- r%1i+Qi rln 1f-- t-i nllv sponsored schemes reacts positively to price incentives. 116. Similar conditions are necessary for increases in domestic production of 17.4 yards per person but imports are scheduled to be reduced sharply from~I1~L R .s . .116 l-11"41 JI-on Lin 176 4.J UWJ ILO. L4-. UiLLL.J" A~J. ±1./J as' U -I-IlLeStiCJi Outiput is expected to increase at a rate of 17.6% annually. Substantial increases in output are also expecUed from public inustres. paper uPuuJtLUJtLU, metal products, ceramics, plywood, cement, lubricants, petroleum products and, in 1971, fertilizers. In addition, the private sector has suwn initiative in supplying a growing number of commodities for which supply has been squeezed by import restrictions. This trend is expected to cun"nut provided adequate intermediate and investment goods are made available to existing and new firms. These items include, besides a variety of food products, beverages, tobacco, footwear, toilet preparations and rubber and metal products. - 143 - 117. Import availabilities of intermediate and investment goods would mo LA.ely prove auequate under the tentative import programs for the whole five years, 1967-71, to provide for a growth of 4-5% per annum in the lauer years. During the first two years, 1967 and 1968, it may be possible to achieve a higher growth rate for gross domestic product in view of the bunching of new projects nearing completion, existing undercapacity and the first attempts to achieve a more adequate supply of raw materials. Such a possibility, however, must be weighed against the background of near stagna- tion for several years. By sectors growth over the five years in agricultural, fisheries and livestock production should approximate 4.9% per annum and in manufacture, 10%. External Assistance Required 118. Estimates of the balance of payments through 1971, given in the table below, show the external financing implications of the import programs, given the relatively slow growth in export earnings at an annual rate of 3.6%. Balance of Payments (Rs. million) 1967 1968 1969 1970 1971 Current Account Exports 1,723 1,816 1,882 1,954 2,008 Imports 2,136 2.334 2.2L0 2.217 2.177 Trade Balance -1413 - 518 -3T8 -'263 -'T Invisibles - 61 - 12h - 13h - 13h - 133 Current Balance - 474 - -9 - 397 - 302 Capital Account Recai nt,; Private Investment 10 15 20 20 25 R)istinr T,ann nnf Crrit h7A 161 1 2A IMF - Stand-by 30 - - - TMPF CompeYnsatr Pi n.Qnpci 93 a q - Suppliers' Credits 65 84 34 - - Aid Group - First and Second Program 263 - - - - ..ew-. Lon and Grnt 71 30L 30 30W, 301w4 Aid Group and Socialist Countries 71 305 305 30 304 Total 563 481 450 343 329 Repayments .-I 0 L..M U Y J IMF - Compensatory Financing - - - 93 - Su-ppliers'-- ecit o 23 314 31 29e Project Loans 41 42 41 46 55 Aiu-Uroup - First and Second Program 2e 7 24 23 23 New Official Aid - 1 3 14 39 Short-term Liabilities knet) 6 1 1b 10 - Total 9q 200 261 217 116 Net Capital Inflow 468 281 189 96 183 Unfinanced Gap 6 361 303 301 119 119. 14hen the exchange budget for 1967 was drawn up, a gap of Rs.182 mil- lion emerged after allowing for receipts from project loans, grants and suppliers' credits already negotiated and after taking into account the spill- over of Rs.263 million from the first and second aid programs of the Aid Group. It is expected that this gap will be filled in part by new aid from members of the Aid Group. However, the major part of the additional financing required will once again come from the IMF which agreed in March to provide US$19.5 million under its compensatory financing arrangements. Together with the drawings rights carried over into 1967 under last year's stand-by agreement, the IMF will make available Rs. 105 million net. 120. However, recourse to the IMF and other sources of relatively short-term financing entails a. heavy burden of repayment. Under present arrangements, Ceylon must repurchase Rs. 375 million, or US$79 million, from the Fund in the three years 1968-1970. For this reason and on the assumption that Ceylon contracts no new suppliers' credits, the table above shows that net capital inflow declines rapidly between 1967 and 1970, although estimated receipts of new official aid remain roughly constant. 121. The main source of external finance from 1968 onwards is new official aid. The estimate shown in the table above assumes that members of the Aid Group will commit, for each of the years 1967-1971, about US$50 million and that these commitments would be disbursed in such a manner, that the un- disbursed amount carried over into the following year would decline, becoming zero at the end of 1971. The estimate also includes Rs. 25 million in disbursements from new loans by Socialist countries under existing frame US$230 million) emerges for the five-year period 1967-1971. Unless ways c an be fou.nd to close +_h_Js gap, Celns n+ -r r nre estimated and shown in the table below, would in fact never reach the level compt.-LkJ le wdt.11a thrL! .atesj.j 4 of gr w-t-h. ca ua tedLO U ,bove aau/s.., V C declin m-Oree.. .CL..IC£±.J rapidly than savings from import substitution can be realized. In the in t_ie U LJ -U-eWdl t=,PV.1U.Ui, Ud1JJ.LUd_L t'%JVU0 qr Ul _Ctd _ U c t Ulitz I OC UU,_L item in the table, i.e. the shortfall in import capacity below estimated things remain the same. This is, of course, an artificial assumption. If imports of investment goods wereless _thbwan assumein para. YIL- L-, less0 inter mediate goods would be required. At the same time, domestic production of import substitutes would not reach the targets assumed, so that imports of consumer goods liould have to be higher. Imports and Import Capacity (Rs. million) 1966 1967 1968 1969 1970 1971 Import Capacity 2,030 2,130 1,973 1,937 1,926 2,058 T.Ls Tymnr+. of Cns. GnA 1,Ac1,099 961 87A A2 70 Imports of Interm.Goods 575 676 794 817 863 828 Residual for Capital Goods 37U 132 218 2144 234 11 123 In essepnne it is djfficuilt tosenowCynns -cnmyr -anrec and maintain an adequate rate of growth, say 4-5% a year, within the limits of impor cct asr no w a,ssumed. There wvruldA probably still - be an initialJ spurt in 1967-1968, but thereafter the rate of growth would rapidly decline. S. ~ ~ - N. CXUA'1 U.LLL UWIU V,IIJ 0LI ui _L7 £ UVJ - C) .L U ~1 1 U t-u L .L a LL back to a level barely adequate to maintain per capita incomes, as gross investment de ce beulow the inadequate amounto 1966. Obviously, import capacity as presently determined cannot be regarded as a satisfactory basis for CeyLons econoie aevelopmenu. mne crucial question, with respect to Ceylon's prospects for economic growth, is whether ways can be found to 11nance the remaining gap of is. 1,Uu million. The bank Group itself may be able to make a sizeable contribution, possibly in the order of one-third of the remaining gap, although it is of course difricult to judge now whether projects presently under preparation will prove to be suitable for Bank/IDA finance and be ready on time. As for the residual, part of the solution may lie in easing Ceylon's repayment burden in the years immediately ahead. If it were possible to extend the period of repayment of the IMF drawings and if all assistance from the Aid Group were on long terms, the gap could be reduced to about Rs. 325 million, or US$70 million. Thether this remaining gap could then be closed by additional assistance is going to be discussed among the members of the Aid Group. Creditworthiness 124. The preceding review of Ceylon's prospects over the next five years shows that the years immediately ahead will be dominated by a continuing struggle to mobilize the exchange resources required to accelerate economic growth to a more satisfactory rate. Liquid reserves are uncomfortably low. Prospects are for net exchange earnings to rise by only 2.5% a year from the low 1966 level, but to remain below 1965 earnings throughout the period. Import requirements will be high, because sizeable investments will be necessary to realize the country's potential for import substitution, while savings in imports will only begin to make themselves felt gradually. Financing these imports will. therefore. entail substantial additions to external public debt. This, although relatively small now at about US$210 millionl/(ronhlv .nivtnt tn one half of nnnunl mPrrhqnHisP Pynorts)_ may rise to US$600 million by 1971. Service payments on present debt are still small. reachinga nqk of nbout US1.06 million in 1971 eauiva;ent to 6-7% of merchandise exports. But this will rise rapidly as a result of the nrosnentive incrpa. in cipht. Tn nridition. C.vion naz thp TMF TS7) million. Including repayments of these drawings, debt service in the next few years .i 11 h hian r nnr- " niiql-t im i nen rn e7v%-+ iinl oco ^fPQn+ kir nrlAli +i nn l assistance or rolled over. by US$44 million. This difference represents an estimate of suppliers' reports,"UrZ dl , WlL dl thLCe .S.hiLJc Uer mU e11 L.te balry reports, and loans by France and the U.S. uhich were made after February, ,L7 (,~ .- - 46 - 125. Clearly, judged solely in the context of prospective developments in the next five years, Ceylon cannot be regarded as creditworthy for external loans on anything but very extended terms and low interest rates. however, if a longer vaew is taken, the potentiaL for substantiaL improvemenu in the 1970's cannot be ignored. There are two elements of basic strength in Ceylon's economic situation. First, export earnings, being equivalent to nearly one quarter of GNP, are fairly large. Second, import requirements contain a very sizeable share of goods that could be produced competitively in Ceylon, including in particular a wide variety of foodstuffs. The weakness of Ceylon's external position at present and over the next few years derives largely from the inadequacy of export earnings in relation to the present structure of the economy. If current efforts succeed in re- structuring the economy by emphasizing growth of domestic production as a substitute for imports, export earnings should become more nearly adequate to finance the requirements of imports for productive purposes. Of course, Ceylon will then still require external financial assistance. But the potential exists for reducing this dependence significantly. The projections presented earlier suggest that by 1971 the current account deficit in the balance of payments might have been reduced to about Rs. 300 million, indicatinf the need for a net capital inflow roughly equivalent to 16-17% of gross invest- ment and perhaps 310 of GNP. 126. This would probably be a manageable situation. It holds out the promise of better prospects for growth and of an easier external financial position in the 1970's. But it is still only a promise. During its first two years in office the present Government has demonstrated its willingness to take politically difficult decisions in the interest of furthering economic development. Improvements in the general framework of economic and financial nolicies are encouraging. However, these accomplishments should not detract attention from the great difficulties that lie ahead - the path to sustainedi growth is narrow and the chances for set-hacks are many. More specifically with respect to the question what terms of external financing -nmili he nnronint +.r o v.n r-n nrid3rn.ionn q om rPlevnt+. Firqt. Ceylon will have to add substantially to its external debt in the next few years. Second., "hile I+ sms +ht +he nOt capital infIow nnTiMed in the 1970's will be much less than in the years immediately ahead, Ceylon will have to cnn+ine horrowning hrand n+ only the amounts rired + cover its current account deficit in the balance of payments, but also in effect torfi-nn nvr n 1 1 Aiin. The~ Ige the latt~.-~ -re -" shorter the terms on which Ceylon is able to borrow, the larger the margin byicll-) gros 'Mi% r- v',mrng hase to exceme A +1- m ,-rm-r%-+ Act?,' 4 + 0--ci Anr.. ing the size of additions to external debt in prospect over the next few years, the t rms o whic VILL deUU LQ J ~.,L.L.. L-, V4L.L- -LX.r,:- _C.J UUC LII I - I I whether reduced dependence on net inflows in the 1970's can be translated into smal-ler gross boUrr"owiJLn g. ifu average term11s Over te net_L i- C;L0C2 - ldu easier than those of conventional lending, Ceylon may be able in the 1970's LA reLy largely ori convenuional loans and privaue capiuai to cover is nees. -c t. In trese circumtbances, it seems appropriate lur exuernai ien- -g to Ceylon over the next few years to be on terms less onerous than conventional ones. Prospects for improvement over the longer run suggest that not all lending need be on IDA-type terms. For purposes of Bank/IDA lending this means that Ceylon should be regarded as a soft-blend country, with the larger share of funds coming from IDA. ZPArPTZPTrAT APP7%MTY I:I- UC* Extern l Ie'IKULM- andI cj.L6 1II J_Lt JJ -LU T A Undisbursed as of December 31, 1966 with Major Reported Additions tianuary I - r eburuay 28, lIY'U( I.I ZnLmUL.LfeLdUUU tU1Uracua_L eVICve ray[ILmens11 on iexternia riua- anu Long-Term Public Debt Outstanding Including Undisbursed as of December 31, 1966 with Major Reported Additions January 1,- February 28, 1967 III. Gross National Product at Constant (1959) Factor Cost Prices IV. Production of Principal Crops V. Value of Industrial Production VI. Summary of Government Accounts VII. Government Revenue VIII. Current Expenditure IX. Capital Expenditure X. The Food Subsidy XI. Government Enterprises XII. Analysis of Factors Affecting Money Supply XIII. Consolidated Assets and Liabilities of Commercial Banks XIV. Cost of livine Index XV. Balance of Payments XVI. Comoosition of Exorts XVII. Actual and Proiected Exoorts XVIII. International Reserves PRELIMINARY TABLE I EYTERNA MEDTUN- AND LONG-TERM 1/ PUBTC, DRBT OUTSTANDTG TINCLIT.NG UNDISBURSED AS OF DECEMBER 31,1966 WITH MAJOR REPORTED ADDITIONS JANUARY 1 - FEBRUARY OA 1967 Debt Repayable in Foreign Currency Debt outstanding Major reported Item December 31, 1966 additions Net of Including January 1 - unisb.ursed undisbursed Ferur 28,dL 1967 Publicly-issued bonds 3/ 9,§8 9,884 - Suppliers' credits 1,381 1,58 IBRD loans 29,193 31,022 U.S. Government loans - AID - 7,500 Loans from Western governments 42,467 73,145 4,396 Canada 4,021 11,70 - France 612 612 - Germany 15,072 27,600 - India 787 2,667 - Japan 7,771 10,000 - United Kingdom 12,348 19,446 4,396 Yugoslavia 1,056 1,056 - Loans from "Eastern" countries 29,768 43,089 China 95518 12,hOl - E. Germany 151 151 - U.S.S.R. 19,573 30,011 - Poland h/ 526 526 - 1/ Debt with an original or extended maturity of one year or more. 2/ Does not include the undisbursed portions of the following lines of credits: a. $ 7,490,000 from France b. $41,849,000 from E. Germany c. $14,314,000 from Yugoslavia 3/ Net of accumulated sinking funds of $7,616,000. Ey Excludes $7.280.000. unallocated portion of frame agreement. Statistical Services Division Economics Department April 20, 1967 PRELIMINARY TABLE II ESTIMATED CONTRACTUAL SERVICE PAYMENTS ON EXTERNAL MEDIUM- AND LONG-TERM PUBLIC DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF DECEMBER 31, 1966 WITH MAJOR REPORTED ADDTTTONS JANUARY 1. - FEBRUARY 28. 1967 1/ Deot Repayable in Foreign Currency 'in thousands of U.S. dollar equivalents) Grand Total Debt Outstanding (Beginning of Period) Including Payments during Period Year Undisbursed Amortization Interest Total 1967 123,640 6,654 4,180 l0,834 1968 121,382 8,052 4,148 12,600 1969 112,930 8,903 3,880 12,783 1970 104,027 8,585 3,522 12,107 1971 95,442 7,966 3,302 11,268 1972 87,476 6,896 3,092 9,988 1973 80,580 7,507 2,894 10,401 1974 73,073 7,317 2,633 9,950 1975 65,756 12,639 2,090 lh,729 1976 53,117 6,502 1,540 8,042 1977 46,615 6,310 1,279 7,589 1978 60,305 4,868 1,042 5,910 1979 35.437 ,252 875 5,127 1980 31,185 3,165 734 3,899 1/ Includes service on all debt listed on Table I prepared Aril 20, 1967 except the following debts for which terms of repayments are not nvailahle (TTS doAllar equivalents) a. $ 5,600,000 from United Kingdom b. $ 658,000 from Yugoslavia c. $30,011,000 from U.S.S.R. d. $~ 52, fro 4,,m Poan e. $ 5,000,000 from Japan g. $ 151,000 from E. Germany Economics Department April 20, 1967 TABLE III ADAC ATA rPTA RAT ADDAnTVm CO MSANT ,9) 1 AtmnD FACT cO C DTP E (Rs. million) PRODUCTION FOR EKPORT: 1963 1964 1965 1966(est.) Tea 1,241 1,240 1,3h8 Rubber 305 368 388 Coconut 256 343 269 Others 95 111 100 TOTAL 1,896 2,062 2,105 Less changes in stocks, and cost of imported materials and distribution 277 339 396 TOTAL VALUE ADDED: 1,619 1,723 1,709 1,550 PRODTCTTON FOR DOAESTT.H E (Net) AGRICULTURE: Rice 5285437 Coconut 254 260 266 Te~a 62L 63 64 Fish 98 103 102 TOTAL 1,598 1,638 1,488 INDUSTRY AND CAPITAL DEVELOPMENT 877 891 951 TRANSPORT, TRADE, HOUSING, uvIrnaP1IT AINr'n rAVL C E 2,558 r1671 218A1 TOTAT. PROnnTION FOR nOMESTIC USE 5,031 5,199 5,330 5,625 GROSS DCMESTIC PRODUCT 6,650 6,922 7,038 7,175 Net factor income from abroad -31 -34 -14 - 40 GROSS NATIONAL PRODUCT 6,599 6,888 7,024 7,135 Per capita real product 616 628 625 62n Gross National Product Less terms of trade effect; for export of Tea -134 -156 -212 Rubber -56 -94 -10 Coconut -63 -84 -12 Others 11 18 18 TOTAL -242 -316 -309 - 50 GROSS NATIONAL INCOME 6,357 6,572 6,715 6,634 Note: Since the 1966 import index is not available the figures for export crops have been deflated by the 1965 index to obtain the national income figures. Source: Central Bank of Ceylon. TART.R IV PRODUCTION OF PRMCIPAL CROPS (Estimate) Export Crops Tea (million lbs.) 455 467 h85 482 503 490 505 Rubber (1,000 IT) 96 102 104 111 117 125 13h Coconut (million nuts) 2,601 2,811 2,557 2,999 2,681 2,686 2,300 Paddy (million bushels) 43.2 68.1 h9.2 50.5 311 46.o 53.5 Source: Department of Census and Statistics. Information supplied by Ministry of Planning and Economic Affairs, and Tea, Rubber and Coconut Controller. ArnnTrD TT vATnT OP Tn\TTjnrTAT aTTfnPTn 1/ (Rs. million) 1960 1961 1962 1963 196h 1965 Miscellaneous Food Prepara- A. ---- - .I4L.~ IL 0. fN -IIZ 1 . 0 -144 . 0 ±07J 't1 4 r nn Preserved and Canned Fruit, Vegetables 1. 1.6 2.3 3.4 4. 54 Biscuits, Confestionery 11.5 18.2 21.9 28.8 30.9 34.9 Cerated Water 8.3 7.8 10.0 ll.b 13.h 16.0 Beer and Stout 3.1 2.h 2.2 2.h 2.7 7.6 Tobacco 30.0 29.0 35.0 39.0 L6.2 52.0 Garments - textiles 19.4 19.8 29.3 38.h 5h.9 16.8 Footwear, Leather Products 8.3 8.5 19.6 22.3 23.h 2b.7 Misc. Chemical Products 36.h h0.3 51.5 56.0 73.7 91.2 Paper and Paper Board 12.5 13.9 1514 18.2 30.1 29.3 Metal Products 7.4 9.1 11.2 15.1 38.5 hh.7 Manufactured Products, n.e.s. 1.5 3.7 b.3 5.8 11.0 28.7 Ceramics 1.0 1.1 1.9 2.5 2.4 2.4 Rubber Products (excl. Foot- wear) 6.8 8.3 10.9 13.7 17.0 19.1 Plywood 2.3 2.9 3.h 3.9 3.9 5.2 Mineral Sands - 0.1 0.1 0.1 0.9 1.3 Basic Industrial Chemicals - 0.2 1.1 1.2 1.0 1.6 Cement. Cement Products 19.6 17.9 20.2 22.5 23.0 36.5 Total 313.h 331.7 388.0 432.0 538.2 8L7.0 1/ Based on a survey carried out by the Central Bank. In 196h, a considerably greater numoer of :irms reporte t an in 1963. There-ore, the increase n output shown in 196h over 1963 does not represent the actual increase that occurred during the year. Data for l96 again are not on a comparable basis since for the first time a really thorough survey by the 1inistry of industries was carried out in -overber which included a much larger number of firms than previously. Source: Central Bank of Ceylon. TABLE VI SUMIARY OF GOVE.NMENT ACCOUNTS (Rs. millon 1960/1 1963/2 1962/3 1963/4 1964/5 1965/6 1966/7 P.rov.) Torig.est.) 1. Revenue 1,h2 1,598 1,572 1,606 1,764 1,798 1,998 2. Current expenditure 1,377 1,456 1,489 1,581 1,6h9 1,718 1,838 3. Losses of Government enterprise - 22 - 19 - 24 - 20 - 31 - 29 - 19 h. Current surplus 43 123 59 5 84 51 J1 5. Capital expendi.ture 519 586 489 518 580 632 893 6. Advance payments (Net) + l + 15 - l - 16 - 12 7. Adjustment for extra budgetary ) ) ) ) ) ) capital expense 27 ) 22 ) 24 ) 35 ) 41 ) 15 52 8. Under-expenditure provision ) ) ) ) ) 1:26 9. Net cash operating deficit _W3 - 392 72 70 Financing 10.. a) Non-expansionary 221 270 213 301 400 486 516 11. 1) Administrative borrowing 29 105 -- 34 - 2 57 112 :25 12. 2) Net foreign loans and grants 27 56 93 95 100 118 233 13. 3) Non-bank borrowing 165 109 154 208 243 256 258 14. b) Eppansionary 242 186 179 161 43 80 58 15. 1) Bank borrowing 242 226 178 115 18 162 16. 2) Decline in cash balances - hO 1 46 25 - h7 17. 3) Decline in non-U.S. Counter.- part funds - - - - -- 35 18. c) Decline in U.S. Aid Counter- part funds - 8 4 - 17 2 - 3 42 19. d) Expansionary impact of budget 234 190 162 163 40 122 58 (Continued on next page) TABLE VI CONTINUED) SUMMARY OF GOVERNMENT ACCOUNTS Source: Central Bank Reports Notes: The presentation of the Government accoun,s presents considerable problems. To facilitate reconciliation with various published sources, the following example is presented for 1963/4. 1. Recurrent expenditure in Govt. accounts, (Votes 1,2,4,6) 1091 2. Less sinking funds and special payments 3. Recurrent expenditures in Table II E (1) of CB Report 1963. 4. Less capital items in rotes 1,2,4,6. 8 5. Current expenditure as in Table II E (3) and item 19, Table 20. 6. Less current expenditure of Govt enterprises. 7. Add -ross food subsidy, less net food subsidy, i.e. profits on rates of sugar and flour 84 8. Current expenditure in Table VI above. 1 81 1. Capital expenditure in Govt. accounts (Votes 3,,7) 403 2. Add capital items in Votes 1,2,,6. 80 3. Add capital expenditure from extra-budgetary funds. (See adjustment in Table (VI). 35 4. Capital expenditure in Table II (E) B, Table 20 (Item 20) and Table VI (above). 1. Revenue as in Govt. accounts (C.B. reports) 1,759 2. Less income from Govt. enterprises 237 3. Add profits from sale of sugar and flour 84 4. Revenue as in Table VI (above). The reasons for the approach adopted here are firstly, with regard to using gross figures for the food subsidy, that insofar as revenue is collected it cannot sirly be set off against the gross subsidy, but should be re- flected in the revenue figures since it limits the capacity of the Government to raise revenues. On the other hand, in the case of Government enterprises, revenues represent charges directlj related to tle cost of pro- ducing their services and are not available to the general fund. A net figure is thus presented for these but see further the note on Table XI. T-BL2 VII GOVERITI.ENT REVENUET :1960/1 1 2 23 1963/ 1961/ l965/6 1966/7 196prov.) (orig.est.) 1. I Customs duties 731 756 676 759 749 730 917 2. Export duties 296 291 278 277 313 253 306 3. Import duties 435 465 398 482 436 477 611 4. II Excise duties 136 169 211 218 239 277 278 5. III Turnover tax 16 35 39 66 6. IV Profits from sale of sugar and flour 132 190 199 84 184 199 226 7. V Taxes on income and 283 306 307 309 321 293 282 profits of which: 8. Income tax 259 262 259 285 292 275 261 9. VI Other taxes 77 74 90 103 107 66 63 10. VII Miscellaneous receipts 83 10 89 117 136 19h 166 11. TOTAL REVENUE 1,hh2 1,598 1,572 1,606 1,771 1,798 1,998 Notes on TABLE 7IM1 All references are to the Estimates of the Revenue and Expenditure of the Government of Ceylon for Financial years 1962/3 to 1966/7. The first part consists of the details of revenue divided into 16 heads. An item s ich as 1-2 refers to Head I, sub-head 2. 2) Export duties: 1-2,3, III-6. 3) Import duties: I-1, V-7. 4) Excise duties: III-1,2,3,,. 5) Turnover tax: 111-7. 6) Profits on sale of surar and flour. The Government accounts include this as not food subsidy. See Expenditure estimates Head 139. Vote h, also Central Bank Report 1965 Table II () 5, Nu. 9 and Table VI. 7 Taxes on Income and Profits: Income Tax: IV-7, 11, Profits Tax IV-1, Land Tax IV-10, Personal Tax IV-12,13,6, V-8. (Continued on next page) TABLE VII (CONTINUED) 9) Other taxes: Stamp Duty: 1T-3, Estate Duty, IV-2, Licenses and other revenue, V-1,32,3,4,5,6,10,11. Export duty under Medical Wants Ordinance. VII-5. Social Security contribution, XI-2,3,12. Bank debits tax, IV-8. 10) Miscellaneous receipts: National Lottery, V-9. Fees bf Court, VI. Health Services, VII (except 5). Reimbursements VIII. Interest Annuities, Dividends, etc., X. Miscellaneous receipt2s XI (except 2,3,12) IV-4,9. Land Revenue XII. Land Sales XIII. The remainin,, five heads of revenue not covered above are those for the five Government enterpriLses and are containod in Table XI. Sirree: Central Bank of Ceylon and information supplied to mission. TABLE VIII CURRENT EXPENDITURE (Rs millio, 1960/1 1961/2 1)b2/3 19b /4 1964/5 -1965/6 1966/7 (prov.) Erigest.) 1 I Administration 239 235 231 238 244 262 276 2 Civil administration 183 179 178 185 190 205 :215 3 Defence 56 56 53 53 .5 57 61 4 II Social Services 412 431 446 465 4692 14914 523 S Education 264 280 292 309 329 328 318 6 Health 1-41 143 145 148 1154 156 164 7 Housing 2 3 3 3 3 4 5 8 Special welfare services 5 5 6 5 6 6 6 9 III Economic Services 115 113 113 116 124 129 144 10 Agriculture and Irrigation 76 78 77 80 88 87 96 11 Fisheries 3 2 2 3 2 2 3 12 Manufacturing and Mining 13 10 11 10 10 16 18 13 Trade 10 10 11 11 11 10 12 14 Communications 13 13 12 12 l3 14 15 15 'IV Transfer Payments 626 696 818 784 809 861 916 16 Food Subsidy (gross) 380 421 438 454 463 503 533 17 Balance on food subsidy account in treasury - -12 5 1 18 Interest on public debt 69 83 98 114 106 118 140 19 Pensions 100 109 115 130 1143 1:2 156 20 Direct relief ho 38 38 37 3 49 10 21 Other payments to private current account 1 5 3 4 5 14 5 22 Grants in aid to local authorities 36 36 38 10 38 14 12 23 V Less amounts already allo- cated to expenditure of government enterprises -15 -19 -19 -22 -20 -28 -21 TOTAL CURRENT EXPENDITURES 1,377 1,456 1,485 1,581 1,61L9 1,718 1,838 Notes on TABLE VIII 1) .- 14). Corresponds exactly with Central Eank Report 1965. Table 20. 17, a,b, and c. 16). Central Bank Report 1965. Table II (E) 5. 5. For earlier years see respective Food Subsidy Bill in previous Central Bank Reports. 17). This figure represents the difference between the figure for the food subsidy bill of the Food Commissioner (quoted in 16), and the Treasury' s figure. 18).- 22). Correspond. to 18. a). ii -v. and 18 b). in the Central Bank Report 1965. Table 20. 23). Certain items defined in the estimates under the votes for the five government enterprises are allocated in the Treasury and Central Bank figures to other heads. Since data is lacking for subtracting the precise amounts from the other heads, a simple balancing figure has been included to reconcile the figures used in Table VII. i.e. the Government estimates with the final treasury figures for expenditure. See Table I 14-17. Source: Central Bank of Ceylon and information supplied to mission. TABLE IX CAPITAL EXPENDITURE (Rs million) (orig 1960/1 1961/2 1962/3 1963/4 196h/5 1965/6 (prov.) 1966{ est.) 1 I Administration 30 29 19 18 17 41 2 Civil Administration 12 1h 12 12 10 31, 3 Defence 18 15 7 6 7 10 4 II Social Services 68 82 78 95 88 136 5 Education 33 29 36 49 h1 53 6 Health 13 13 14 12 9 27 7 Housing 21 39 8 3h 38 56 8 Special welfare services 1 1 - - - - 9 III Economic Services 300 285 264 285 336 540 10 Agriculture and Irrigation 184 162 144 139 159 207 11 Fisheries 1 4 4 3 3 41 12 Manufacturing and Mining 63 69 65 8h 109 184 13 Trade 1 1 - 1 2 1 14 Cormnications 51 49 51 58 63 107 15 IV Government Enterprises 74 104 118 91 106 151 Acquisition of real assets 472 79 49T8 16 V Acquisition of financial assets 47 86 10 29 33 ho 22 17 TOTAL CAPITAL EXPENDITURE 519 586 489 518 580 632 893 Notes on TABLE IX. The table reproduces Central Bank Report 1965 Table 20, 21, and 22, Source: Central Bank of Ceylon. TABLE X THE FOOD SUBSIDY 1960/1 1961/2 1962/3 1963/) 1964/5 196%/6 1966/7 Wv.) (orig.st.) 1. Subsidy on imported rice 125 125 139 180 176 163 2. Subsidy on local rice 269 283 286 246 283 333 3. Subsidy on local red onions 3 2 3 4 4 4. Distribution expense and other charges 27 27 27 34 10 33 5. Total gross subsidy 380 421 436 454 463 503 533 6. Profit on sale of sugar 123 157 155 73 173 202 200 7. Profit on sale of flour 9 30 27 1 -1 -3 20 8. Other goods 3 17 10 12 - 6 9. Total gross receipts 132 190 200 864 184 199 226 10. Deficit on food items 246 231 238 370 279 304 307 11. Advance payments - 4 -12 5 11 -- 12. Food subsidy account of treasury 248 235 226 375 290 30 307 Notes on TARLE X. Central Bank Report 1965. Table II (E) 5, 1-10 and corresponding table in previous Central D.nk reports. The full information for 1960/61 is n)t availaDle in the report for 1962. Fiures for 1965/' and 1966/7 were provided by the Central Bank of Ceylon. Source: Central Bank of Ceylon and infoimation supplied to mission. TABLE~ XI GOVER\hiENT ElITERPRISES (P s millioA) (rg 196o/1 1961/2 1 2 1963/. 19 d 2.56 (prov.) 121 est) I Railway 1 Revenue 85 88 92 100 97 100 102 2 Current exrenditures 109 109 :116 121 1215 1-21 119 3 Current surplus/deficit -2h -21 --24 -21 -28 -18 -17 II Electrical Department 4 Revenue 39 41 46 h8 51 61 61 5 Current Expenditures 27 31 35 37 ha 54 57 6 Current surplus/deficit 12 :O1 11 11 7 3 7 III Port, Harbour and warehouse 7 Revenue 27 28 26 30 29 27 29 8 Current expenditures 22 22 21 23 22 22 22 9 Current surplus/deficit 6 5 7 7 5 7 IV Post and telecommiuni- cations 10 Revenue 46 47 47 50 50 52 57 11 Current expenditures -63 6 6 69 -70 -h5 12 Current surplus/deficit -17 -18 -19 -19 -20 -18 -18 V Broadcasting 13 Revenue 7 9 9 9 9 9 9 14 Current expehditures 5 6 7 6 7 7 15 Current surplus/deficit 2 4 3 2 3 2 2 TOTAL 16 Revenue 20h 213 220 237 236 249 261 17 Current expenditure 2-26 232 2257 2-67 278 280 :18 Current surplus/deficit -22 -19 -2h -20 -31 -26 -19 Notes on TABLE XI. 1). b). 7). 10). 13). 16). These are the Revenue obtained under Heads II, IX, XIV, XV and XVI of the Government accounts and estimates. (1966/7 classification). 2). 5). 8). 11). 14). 17). The current expenditure figures consist of Hlead 27, Votes 1 and 2, Head 63, Votes 1, 2 and 6. Head 86, Votes 1,2,h, and 6,. Head 165, Votes 1 and 2, Head 171, Votes 1,2,h, and 6. Since only the Notes on TABIE XI Page 2 Electrical department includes interest and annuities as an item of current expenditure and none of the five enterprises include depreciation, the current deficits for each year are a considerable understatement of the true positian and the true loss of the enterprises may be abcut 2-3 times the figures quoted. Source: Central Bank of Ceylon and information provided to mission. TABLE XII ANALYSIS OF FACTORS AFFECTING 7ONEY SUPPLY September 30 (Rs million) December 31 1961 1962 1963 1964 1965 1966 1966 A. Public Sector I. Government C. 3. Loans and Advances 186 166 203 183 213 263 26L Government Securities in C. B. 687 878 997 1,162 1,11 1,246 1,265 Government Securities in Comm. Banks 30 08 930 306/ 332 50 h8o Gross Bank Credit 1,223 1,7[7 1,630C 1,770 1,-30 2,01 2,009 Deductions Government Cash Balance 1/ 110 166 197 203 186 234 2[4 Counterpart Funds 58 5h 70 68 70 65 23 Total 168 220 267 271 254 :299 267 Net Credit to Government 1,05l 1,232 1,363 1,169 1,576 1,742 1,7h2 II. Government Cororations 2/ Comnercial Bank Credit to Govt.Corps. N.A. N.A. N.A. 56 5O 69 74 Deductions Time and Savings Deposits W.A. N.A. N.A. 71 5:2 45 14 III. Net Credit to Govt. & Govt. Corps. 1,055 1,232 1,363 1,1454 1,574 1,766 1,802 Deductions Net miscellaneous accounts of C.B. 126 1140 154 213 213 200 191 IV. Net credit to Puolic Sector 929 1,092 1,209 1,21 1,361 1,.66 1,611 (continued on next page) TABLE XII (CONTINUED) ANALYSIS OF FACTORS AFFECTIIG HO' ;Y SUPPLY Rs million) Eptember 30 December 31 1961 1962 1963 1964 1965 1966 1966 B. Private Sector V/-- - - - - - - - - - - - ? i( T1 T-nkCredit 4/ $16 578 634 746 703 762 798 Deductions Time and Savings Denosits 347 397 473 467 536 559 571 Cotrmercial bank misc. accts. (net) 61 85 43 39 66 9( 116 Total 408 482 516 506 602 654 685 Net Credit to Private Sector 108 96 118 240 101 108 113 C. Net Domestic Credit 1,137 1,188, 1,327 1,481 1,462 1,674 1,724 Change, eween perIods 187 151 139 154 -19 212 607 D. Net External Bankiny Assets 5/ 224 106 172 68 213 46 E. Total Money SupolY 1,261 1,29L 1,499 1,549 1,675 1,678 1;659 Change between periods 80 33 20 50 126 3 .19- l/ These fi.rures differ from those -iven in the Government accounts because of difference in coverage, and because of sizeable leads and lags in recording transactions. 2/ Up to September 1962 included in the private sector. 3/ Up to September 1963 includes credit to, and time and savinrs deposits of the Government corporations. 4/ Includes items in transit. 7/ Excludes counterpart funds on the liability side. 6/ EIncludes Government import bills. 7/ As compared with September 30, 1966. Source: Central Bank of Ceylon. TABLE XIII CONSOLIDATED ASSETS AM) LIABILITIES OF COMIMERCIAL BANKS (Rs million) Dec. Dec. Dec. Dec. Dec. Dec . 1L961 1962 1963 1964 1965 19,66 Assets 1. Loans and. Advances 563 564 684 783 850 858 2. Govt. Securities 1/ 293 317 318 329 329 -2f 3. Treasury Bills 64 131 104 94 127 116 4. Foreign Exchange 2/ 46 il 33 54 45 60 5. Liquid Reserves 37 195 280 285 327 348 3L9 Liabilities . Private Demand Deposits 595 628 674 768 7. Govt. Demand Deposits 59 126 126 129 132 8. Private Time and Savins Deposits 354 405 468 521 567 9. Govt. Time and Savings Deposits 9 22 31 31 39 18 Ratios 10. Liquid Assets to Demand Deposits 4/ 58 58 56 55 63 55 11. Loans and Advances To Total Deposits 56 48 53 54 50 57 1/ 17ncludes securities g,uaranteed by- the Government and issues of the Central Bank. 72/ C'onsists of forei-n currency on hand and balances due from, banks abroad. 7/ Comprises cash on hand, balances due from Central- Bank and other domestic banks and items in process o:C' collection. 4/ LjLquid assets consist of cash on hand, balances clue from Cent.ral D-anlk, for(ci -P cu~rrenc.y, on hand, ba;,larcas due from-n banks abroad, I'llu~ bil-1 a' b*lls discutd So 4 1, A sc u560 SOUTCE196 280ra 28nk 327 3eyo8 Ta i C 2 T9ei TABLE XIV COST OF LIVING INDEX 1/ 2/ (1952 = 100) Aug. Dec. Weights 1960 1961 1962 1963 1964 1965 1966 1966 All Items 100 103.5 104.8 106.3 108.8 112.2 112.5 111.8 112.6 Food 61.9 100.8 99.8 100.9 103.0 106.4 107.4 108.0 109.7 Clothing 9.4 95.1 103.9 108.2 118.2 127.2 126.8 1l6.9 116.4 Rent 5.7 101.5 101.5 101.5 101.5 101.5 10L.5 101.5 101.5 Fuel and Light 4.3 102.7 104.4 105.6 103.0 103.2 100.7 96.3 95.3 Miscellaneous .18.7 117.5 122.8 124.9 126.6 129.3 128.3 128.6 127.7 Domestic Group 51 108.9 112.3 113.9 113.4 116.7 116.4 116.4 115.2 Import Group 44 93.7 94.6 96.7 102.5 106.6 106.5 105.1 108.2 Export Group 5 138.4 119.1 113.8 117.7 115.3 127.3 121.2 126.4 1/ Index refers to Colombo Town. Figures represent annual averages unless noted otherwise. 2/ The index is based on surveys of household expenditures of low-income families in 1949-1950. 'It gives heavy weights to goods whose prices are kept almost constant by the Government through subsidies, price controls or a combination of both and is, therefore, not an accurate indicator of movements in market prices. Source: Central Bank of Ceylon, Table I (a) 1. TABLE XV BALANCE CF PAYMENTS (Rs. million) 1960 1961 1962 1963 1964 1965 1966" -Est.) 1. Merchandise Trade a. Exports 1,796 1,707 1,763 1,708 1,767 1,911 1,680 b. Imports 2,UUb 1,794 1,90b 1,868 1,9bU 1,916 2,U43 Trade Balance - 210 - 86 - 143 - 160 193 - 5 - 363 2. Services & Current Invisibles - 61 - 47 - 4 - 50 - 44 - 9 - 23 a. Port expenditure:Transport & Insurance 75 73 71 65 62 66 91 b. Foreign Travel - 24 - 18 - 14 - 16 - 9 - 7 - 10 c. Investment Income - 44 - 40 - 46 - 52 - 36 - 15 - 42 d. Government Expenditures - 14 - 9 - 2 - 1 3 6 e. Other Services - 23 - 23 - 23 - 17 - 26 - 32 - 42 f. Private Remittances - 31 - 30 - 30 - 30 - 36 - 24 - 26 3. Current Account Balance - 271 - 133 - 187 - 210 - 237 - 14 - 386 f4. Capital Account a. Official Grants 53 141 37 144 76" 60 141 b. Long-term Liabilities t Private 2 - 8 - 2 5 - 2 - 7 -16 (ii) Official 20 19 40 75 614 36 185 c_. Sh ort- tprm Tin hi i tiPs 6 Private - 7 14 - 1 4 -17 6 -30 (ii ) Offn - 216 1 - 2 6q - 36 - d. External Assets 220 - 42 56 - 2 1 126 TMP' TrnqP.n. - 514 51 1 5 75 3. Curren~ Ac cn aac - 21 - ~1 - 17 2 9 239-l - 386 Prr. . Canit l AcOuiqnti 1/ Includes commodit aid arrivals under 1st and 2nd Prorams of Rs. 50 million. All P.L.480 shipments included in this figure. 2/ Includes commodity aid arrivals under 1st and 2nd Programs of Rs. 200 million. Source: Central Bank of Ceylon. Ministry of Planning and Economic Affairs. TABLE XVT COMTOSITIC OF EXPORTS Ms. m ill.LJAin) EOst. Proj. 1960 1961 1962 1963 196h 1965 1966 1967 19W7 Tea 1,096 1,115 1,19 1,1L1 1,102 1,210 1,028 1,10 1,238 Rlubber 378 260 290 257 290 304 311 322 319 Major Coconut Products 18L 202 227 198 273 275 195 152 286 Other Domestic Excports 117 104 100 110 137 127 IL IM~ 6 Domestic Exports 1,775 1,681 1,766 1,706 1,8h42 1,916 1,680 1,723 2,008 Re-exports 57 52 12 26 3V 0 30 30 Total Exports 1,832 1,733 1,808 1,732 1,876 1,956 1,710 1,753 Percentage of Do- mestic Exports Tea 61.7 66.3 65.1 66.9 62.0 63.2 61.2 64.1 Rubber 21.3 15.5 16.4 15.1 15.7 15.9 18.5 18.7 Major Coconut Products 10.4 12.0 12.8 11.6 14.9 14.4 11.6 8.8 Sub-total 93.h 93.8 94.3 93.6 92.6 93.h 91.3 91.7 Other Domestic Exports 6.6 6.2 5.7 6.h 7.b 6.6 8.7 8.4 Domestic Exports 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Ceylon Customs Returns. Ministry of Planning and Economic Affairs. TABLE XVII ACTUAL AND PROJECTED EXPORTS Est. Proj. 1959 196 1965 1966 1967 1971 Tea Production mi. lbs. 4i3 482 503 u90 505 585 Exports mil. lbs. 384 456 495 441 480 550 Unit price Rs. per lb. 2.72 2.51 2.65 2.33 2.30 2.25 Export value Rs. per lb. 105 112 1210 1028 110 1238 Rubber Production mil. lbs. 205 246 261 289 300 362 Exports mil. lbs. 206 253 267 275 293 354 Unit price Rs. per lb. 1.45 1.15 1.14 1.13 1.10 0.90 Export value Rs. mil. 298 290 304 311 322 319 Coconut Products Production mil. nuts equiv. 2306 3000 2681 2486 2300 3300 Exports mil. nuts equiv. 1131 1625 1274 1028 800 1680 Average export value Rs. mil. 0.21 0.17 0.22 0.19 0.19 0.17 Export value Rs. mil. 243 273 275 195 152 286 CoDra thous. cwt. 852 1162 819 416 720 286 Unit price Rs. per cwt. 60.5 47.h 59.1 60.0 Export value Rs. mil. 51 55 148 25 Coconut Oil thous. cwt. 1389 2351 1738 1457 Unit price Rs. per cwt. 84.4 65.4 83.1 75.0 Exnor+.vaine Rs. mil. 117 l54 145 109 Desicae Coou thous.e ct. 1050 1080 10141 931 Unit price Rs. per cwtv 715~ 59 79%1 670~ Export value Rs. mil. 75 64 82 63 Other domestic exports Rs. mil. 105 137 127 116 145 165 Total dmmeti4 eApoto Rs mil. 1692 182 1016 160 1723 2008 Source: Ceylon Customs Returns; Ministry of Planning and Economic Affairs. rAnTV VITTTT I LLI A V .L -L INTERNATIGNAL RESERVES End -L7uu 1960 1961 1962 1963 1964 1965 Sept. Dec, Government and Government agencies 239 242 250 213 10o 66 oo 6 Commercial Banks 112 105 102 105 107 92 127 113 Central B~ank 1L90 185 152 lihJ 130 28 1b7 I43 of which Securities 100 92 66 66 68 102 101 100 Balances due to Ceylon on Bi-lateral Accounts 27 16 23 15 18 21 20 23 Cash and Balances Abroad 63 76 63 33 50 159 26 20 Total 541 532 50b 62 351 hLO 3L0 316 Source: Central Bank of Ceylon.