Sri Lanka - Recent economic developments and current prospects

Report No. 622a-CE FILE C Recent Economic Developments and Current Prospects for Sri Lanka February 20, 1975 South Asia Region Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association  l/ Currency Equivalents Currency Unit Sri Lanka Rupee Prior to 1968 US$1.00 = Rs 4.76 Rs 1.00 = US$0.21 Rs 1 mil. = US$210,000 1968 to 1971 US$1.00 = Rs 5.95 Rs 1.00 = US$0.17 Rs 1 mil. = US$168,000 1972 (end of year) US$1.00 = Rs 6.40 Rs 1.00 = US$0.16 Rs 1 mil. = US$156,200 1973 (end of year) US$1.00 = Rs 6.74 Rs 1.00 = US$0.15 Rs 1 mil. = US$148,368 1974 (October) US$1.00 = Rs 6.69 Rs 1.00 = US$0.15 Rs 1 mil. = US$149,477 FOREIGN EXCHANGE ENTITLEMENT 2/ CERTIFICATE (FEEC) RATE 1969 to 1971 US$1.00 = Rs 9.22 (55% FEEC) 1972 (end of year) US$1.00 = Rs 9.92 (55% FEEC) 1973 (end of year) US$1.00 = Rs 11.12 (65% FEEC) 1974 (October) US$1.00 = Rs 11.03 (65% FEEC) 1/ The Sri Lanka rupee, which had been linked to the U.S. dollar from November 6, 1971, was re-linked to the Pound Sterling from July 10, 1972 onward at a parity rate of 71.00 = Rs 15.60. Parity rates with all other currencies are determined from time to time by the Central Bank. 2/ This rate currently applies to about 20% of merchandise exports and about 60% of merchandise imports. This report was prepared by an up-dating mission comprising Messrs. H. Pilvin (Chief of Mission), A. S. Cleveland, M. Durdag, M. van der N]el, and S. Yusuf. The mission visited Sri Lanka from late November to mid- December, 1974. and the analysis is based on information provided to t:he mission at that time.  TABLE OF CONTENTS Page No. COUNTRY DATA SUMMARY AND CONCLUSIONS i-vi I. THE ECONOMY TODAY 1 II. BACKGROUND TO THE PRESENT SITUATION 7 III. PUBLIC FINANCES AND BALANCE OF PAYM4ENTS, 1974 AND 1975 23 IV. DEVELOPMENT POLICY ISSUES 41 APPENDIX 1 External Trade, 1974 and 1975 APPENDIX 2 Food Production Programs APPENDIX 3 Inflation and Real Income STATISTICAL APPENDIX MAP  TEXT TABLES Table 1 Economic Indicators, 1960-1973 Table 2 Average Unit Prices for Major Exports, 1968-1975 Table 3 Average Import Prices, 1972-1975 Table 4 Terms of Trade, 1968-1973 Table 5 Summary of Government Accounts Table 6 Food Subsidies Table 7 Government Net Capital Expenditure, 1968-1975 Table 8 Balance of Payments, 1970-1974 Table 9 Financing of External Gap, 1975 Table 10 Paddy Acreage and Production, 1960-1974 Table 11 Price Increases, Selected Items  Page 1 of 2 pages COUNTRY DATA - SRI LANKA AREA POPULATION DENSITY 65,607 sq.km. 13.2 million (mid-1973) 201 per sq.km. Rate of Growth: 1.9% (from 1971 to 1973) 3,030 per sq.km. of arable land POPULATION CHARACTERISTICS (1972) HEALTH (1970) Crude Birth Rate (per 1,000): 30.3 Population per physician, 3,690 Crude Death Rate (per 1,000): 7.7 Population per hospital bed, 330 Infant Mortality (per 1,000 live births): 50 (1970) INCOME DISTRIBUTION (1973) DISTRIBUTION OF LAND OWNERSHIP % of national income, highest quintile, 46 T. owned by top 10% of owners lowest quintile, 5 % owned by smallest 10% of owners ACCESS TO PIPED WATER (year) ACCESS TO ELECTRICITY % of population - urban %.. 7 of population - urban - rural .. - rural NUTRITION (1973) EDUCATION (1970) Calorie intake as % of requirements : close to 100 Adult literacy rate, 85% Per capita protein intake (grams per day): 45 Primary school enrollment, 89% 1/ GNP PER CAPITA in 1973 US $110 GROSS NATIONAL PRODUCT IN 1973 ANNUAL RATE OF GROWTH (%. constant 1959 prices) US $ Mln. % 1960-65 1965-70 1973 GNP at Market Prices 2,627 100.0 3.9 5.0 3.5 Gross Domestic Investment 389 14.8 -2.0 14.1 7.1 Gross National Saving 368 14.0 -1.2 13.2 18.7 Current Account Balance -38 -1.5 Exports of Goods, NFS 427 16.3 2.3 0.8 10.0 Imports of Goods, NFS 448 17.1 -4.3 -2.0 6.5 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1973 (Current Factor Cost) 2/ Value Added Labor Force7 V. A. Per Worker US $Mln. 7 Mln. %7 US $ M. Agriculture 785 32.9 2,098 55.8 374 60 Industry 365 15.3 419 11.0 869 120 Services 1,234 51.8 1,307 34.2 945 150 Unallocated ._.__ Total/Average 100.0 3,82 100.0 612 100.0 GOVERNMENT FINANCE Central Government (Rs. gln.) 7, of GDP 19743/ 197U-72 1973 Current Receipts 4,111 24.9 22.5 Current Expenditure 4,274 25.8 20.9 Current Surplus -163 -1.1 1.6 Capital Expenditures 1,674 7.5 6.9 External Assistance (net) 667 2.3 1.5 1/ The Per Capita GNP estimate is at 1972 market prices, calculated by the same conversion technique as the 1974 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 2/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. 3/ Provisional not available not applicable  Page 2 of 2 pages COUNTRY DATA - SRI LANKA 1/ MONEY, CREDIT and PRICES 1969 1970 1971 1972 1973 1974 (Sept.) (Million Rs. outstanding end period) Money and Quasi Money 2,301 3,061 3,379 3,917 4,093 4,592 Bank Credit to Public Sector 2,334 2,571 2,724 2,900 2,679 2,588 Bank Credit to Private Sector 1,470 1,617 1,760 2,187 2,165 2,941 (Percentages or Index Numbers) Money and Quasi Money as 7. of GDP 21.4 26.0 28.3 30.5 27.1 General Price Index (1963 - 100) 119.9 127.0 130.4 138.6 152.0 176.0 Annual percentage changes in: 2/ General Price Index 5.1 5.9 2.6 6.3 9.6 13.02/ Bank credit to Public Sector 10.1 9.6 6.0 6.5 7.6 2.7 Bank credit to Private Sector 19.0 10.0 8.8 24.3 -1.0 38.8- BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1969-73) -1/ 1969 1973 1974 US ? Mln % (Millions US $) Exports of Goods, NFS 345 427 591 Tea 179.4 54.7 Imports of Goods, NFS 456 448 806 Rubber 64.4 19.6 Resource Gap (deficit - -) -111 _7 _T3 Coconut Products 36.4 11.2 Interest Payments (net) - 18 - 17 - 22 All other commodities 47.6 14.5 Workers' Remittances - 1 - - 1 Total 1QQ0 Other Factor Payments (net) - 12 - 4/ Net Transfers EXTERNAL DEBT. SEPTEMBER 30, 1974 Balance on Current Account T4 -38 -238 US $ Mln Direct Foreign Investment - 3 4 - Net MLT Borrowing 48 30 *- Total Outstanding 661.4 Disbursements (61) (52) Amortization (13) 22) Total outstanding & Disbursed 504.5 Subtotal 45 34 .. Capital Grants 8 13 34 DEBT SERVICE RATIO for 1974-/ 13X Other Capital (net) 31 40 Other items n.e.i 1 - 3 Increase in Reserves (+) 5 4 - Gross Reserves (end year) 63.3 117.5 155.73 Net Reserves (end year) -122.0 -11.4 -31.0-/ RATE OF EXCHANGE IBRD/IDA LENDING,December 31, 1974 (Million US S): 1968 - 1971 Foreign Exchange Entitlement IBRD IDA US $ 1.00 Rs 5.95 Certificate (FEEC) Rates - Rs 1.00 - US $0.17 Outstanding & Disbursed 37.4 25.06/ 1968 US$1.00- Rs.8.57 (447. TEEC) Undisbursed 16.9 17. 0-6 End 1972 1971 US$1.00 = RS.9.22 (55. FEEC) Outstanding incl. Undisbursed 54.3 42.0-/ US $1.00 - Re 6.40 1972(end)US$l.O0 = Rs.9.92 (55% FEEC) Rs 1.00 - US$0.16 1973(end)US$l.OO - Rs.11.12(657. FEEC) 1974 End 1973 (Oct.) US$1.00 Re.11.03(65X FEEC) US S1.00 - Rs 6.74 Rs 1. nnf - TUSSO.15 October 1974 US $1.00 a Rs 6.69 Rs 1.00 - US$0.15 1/ Provisional Estimates. 2/ Changes over September 1973. 3/ As of end-October 1974. 4/ Repayable in foreign currencies and with a maturity over one year. excluding the Food Commissioner's borrowings. 5/ Ratio of Debt Service to Exports of Goods and Non-Factor Services. 6/ Excluding a $9 million credit for dairy development which became effective in February 1975.  SUMMARY AND CONCLUSIONS i. The efforts of successive Sri Lankan Governments over several decades to achieve a number of social welfare objectives have met with some success, as those persons who were successful in finding employment bene- fitted from a policy of maintaining real wage rates, while most of the population also enjoyed subsidized basic wage goods and public services. Yet, since declining export fortunes, steady decline in terms of trade, and a concomitant failure to generate the savings and investment required to restructure output and exports prevented real income and employment opportunities from growing at a rate adequate to absorb a rapidly expanding labor force, the improvement in living standards of much of the population was limited, or indeed nonexistent. In the past four years, the Government's efforts to place the economy on a development path have been repeatedly frustrated by a number of factors, domestic and external. Domestic savings have failed to grow in part because of the decline in income arising out of falling terms of trade. In addition, savings in the public sector have been hindered largely because of continuation of the food subsidy and of the inability of public corporations and enterprises to generate a surplus. In the private sector savings and investment have been hampered because of continuing uncertainty, if not pessimism, over the future role of large entrepreneurs in the society. Severe drought in several years has depressed agricultural production, with serious implications for the balance of pay- ments, public finances, and domestic price stability. Finally, in the last few years Sri Lanka has experienced an extreme further deterioration in terms of trade that has placed her among the unfortunate group of countries which the international community has recognized as "most seriously affected" by the world commodity price inflation. The hope expressed in early 1974 that Sri Lanka's development prospects appeared to be improving have unfor- tunately failed to materialize, largely because of the severity of terms of trade decline in 1974 but also because of limited progress in framing the ingredients of a development program. ii. There has been little expansion in commodity output in recent years. Between 1969-70 and 1972-73 gross product increased at an annual rate of about 2.3% and gross income at a considerably lower rate because of the sharp decline in terms of trade. With population growing at a 2% rate, there was a decline in average annual gross income per capita. On a per capita basis total agricultural output, paddy and tree crop production have declined since 1970. An exception to this general record of poor agricultural performance has been the success achieved in promoting pro- duction of several minor food crops in response to the Government's efforts to attain greater self-sufficiency in the supply of foodstuffs. iii. The failure of agricultural production to expand more rapidly, despite considerable potential for higher output levels, may be attributed to a number of factors. As emphasized in the report of the Bank's recent agricultural policy and program review mission, inadequate investment in tree crops, reflected in low replanting rates, has been due to poor financial returns caused in part by low world market prices, high taxation and, most recently, estate owners' uncertainty revolving around land reform. In addition, replanting costs have risen. Food crop production has also  - ii - nCoUntareat QOriemt nvrnblama =Qan-rintDel wit-Ih a lack of npowe equlpment and inefficient use of water resources. There are acute shortages of wi t' de r.nge of Current ir..P e ns.tn as rehntly be er. reduced and while fertilizer supplies are ample high prices have res- tricted their use. Tn consierable mesueth ecn decl.Ie ir. per capi"a ~ LLI~.LL Ua~. .LA ~. L DLA L J.L= UA=4MQUA.= ULML LCV=I..LI UCI.%..LLII= "I jJCL %I%.djJ