Sri Lanka - Development issues and prospects

RepoDrt No. 1937-CE Development in Sri Lanka: FILU LE j " Issues and Prospects March 22, 1978 Soui.h Asia Region Country Programs Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients onlylin the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS-/ End-December Currency Unit Prior to 1967 US$1.00 = Rs 4.77 Rs 1.00 = US$0.21 Rs 1 mn US$209,644 1967-1971 US$1.00 = Rs 5.93 Rs 1.00 = US$0.17 Rs-1 n = US$168,634 1972 US$1.00 R Rs 6.70 Rs 1.00 = US$0.15 Rs 1 mn - US$149,254 1973 US$1.00 = Rs 6.75 Rs 1.00 = US$0.15 Rs 1 mn = US$148,148 1974 US$1.00 = Rs 6.69 Rs 1.00 = US$0.15 Rs 1 mn = US$149,477 1975 US$1.00 = Rs 7.71 Rs 1.00 = US$0.13 Rs 1 mn = US$129,702 1976 US$1.00 = Rs 8.83 Rs 1.00 = US$0.11 Rs 1 mn = US$113,250 1977 US$1.00 = Rs 16.00- Rs 1.00 = US$0.06 Rs 1 In = US$62,500 Annual Average Exchange Rates Foreign Exchange Entitlement Official Rate Certificate (FEEC) Rate 1969-1971 US$1.00 = Rs 5.95 Rs 9.22 (55% FEEC) 1972 US$1.00 = Rs 6.00 Rs 9.30 (55% FEEC) 1973 US$1.00 = Rs 6.40 Rs 10.56 (65% FEEC) 1974 US$1.00 = Rs 6.65 Rs 10.97 (65% FEEC) 1975 US$1.00 = Rs 7.05 Rs 11.63 (65% FEEC) 1976 US$1.00 = Rs 8.46 Rs 13.96 (65% FEEC) 1977 (until Nov. 15) US$1.00 = Rs 7.89 Rs 13.01 (65% FEEC) 1978 US$1.00 = Rs 16.00 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 1.00 = Rs 15.60. Parity rates with all other currencies were determined from time to time by the Central Bank. The rupee was de-linked from sterling on May 24, 1976, and linked to a weighted basket of currencies. On November 15, 1977, the exchange rate was unified, depreciated, and allowed to float at a rate near US$1.00 = Rs 16.00. 2/ This rate applied to about 35% of current receipts of foreign exchange and 60% of current payments. FEECS were abolished on November 15, 1977. This report was prepared by a mission composed of Messrs. E. B. Waide (Chief of Mission), R. Christensen (consultant), P. Garg, Y. Huang, P. Isenman, K. S. Lateef, K. Pranich, and S. M. Suh, which visited Sri Lanka from November 16 to December 7, 1977.  FOR OFFICIAL USE ONLY DEVELOPMENT IN SRI LANKA: ISSUES AND PROSPECTS Table of Contents Page No. List of Tables in the Text List of Annexes Glossary Country Data Map SUMMARY AND CONCLUSICINS ............................... i - iv I. THE INHERITANCE ..................................1 Preface ...................................... Introduction ...... .......................... The Growth Record ........................... 4 Savings and Investment ...................... 7 Employment and Unemployment .... ............. 9 Conclusions: ................................. 11 II. THE RESPONSE ..................................... 13 Freeing the! Economy ......................... 13 Medium-Term Development Strategy ............ 18 III. AGRICULTURE AND INDUSTRY ......................... 20 AGRICULTURE: ................................. 20 Field Crop Prospects ........................ 20 Tree Crop E'rospects ......................... 28 INDUSTRY .................................... 30 Industrial Policy ........................... 30 Public Enterprises .......................... 34 Small-Scale! Industry ........................ 35 IV. EMPLOYMENT AND WELFARE ........................... 37 Employment Policy ........................... 37 Education iPolicy ............................ 41 Health Policy ............................... 42 V. MEDIUM-TERM PROSPECTS ............................ 44 Sectoral Potentials ......................... 44 Investment Requirements ..... ................ 48 Domestic Resource Mobilization .... .......... 49 External Resource Mobilization .... .......... 52 Implications of Low Growth .... .............. 53 Mahaweli ..................................... 53 Planning anid Administration .... ............. 54 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -2- TABLE OF CONTENTS (Cont'd) Page No. VI. THE ROLE OF EXTERNAL FINANCE .... ................. 57 The Balance of Payments in 1978 and 1979 57 Medium-Term Needs to 1982 .... ............... 60 The Form of Aid ............................. 61 LIST OF TABLES IN THE TEXT Table A: Selected Social Indicators 2 Table B: Changes in GDP and Its Composition, 1960-77 5 Table C: Consumption, Investment, and Savings 7 Table D: Summary of Government Finance, 1977-78 17 Table E: Capital Budget for 1978 18 Table F: Asweddumized Area 21 Table G: Potential Paddy Production in 1982 22 Table H: Percentage Annual Growth of Macro-Economic Parameters 45 Table I: Growth of Central Government Budget 50 Table J: Fiscal Implications Assuming Less Restrictive Subsidy and Transfer Program 51 Table K: Balance of Payments Prospects 53 Table L: Financing of External Gap, 1977-79 58 Table M: Medium-Term Debt Service Projections 61 LIST OF ANNEXES Annex A: Social Indicators and Per Capita Income Annex B: Major 1978 Budgetary Proposals Annex C: Medium-Term Projections GLOSSARY Asweddumized - Leveled and bunded land, suitable for paddy cultivation Atta - Whole wheat flour Chena - Slash and burn cultivation FEECs - Foreign Exchange Entitlement Certificates (see Currency Equivalents) Maha - Northeast monsoon, October-February Yala - Southwest Monsoon, May-September  Page 1 of 2 pages COUNTRY DATA - SRI LANKA AREA POPUIAT[ON 1/ DENSITY 65,607 sq km 13.8 million (mid 1976)- 210 per sq km (1976) Rate of Growth: 1.7% (from 1971 to 1976) 554 per sq km of agricultural land (1974) POEULATION CHARACTERISTICS (1976) HEALTH (1976) Crude Birth Rate (per '000): 27.4- Population per physician: 6,107 Crude Death Rate (per '000): 7.') Population per hospital bed: 330 Infant Mortality (per '000 live b:Lrths): 51 (1974) INCOME DISTRIBUTION (1973? DISTRIBUTION OF LAND OWNERSHIP % of national income, highest quinitile: 45 % owned by top 10% of owners ** lowest quint ile: 13 % owned by smallest 107 of owners ** ACCESS TO PIPED WATER (1971) ACCESS TO ELECTRICITY (1971) 7. of population - urban: 77 % of dwellingS - urbane 9 - rural: 5 - rural: 3 NUTRITION (1973) EDUCATION (1973) Calorie intake as % of requirements: close to 100 Adult literacy rate: 78% Per capita protein intake (grams per day): 45 Primary school enrollment: 86% 2/ GNP PER CAPITA in 1976: US$200 GROSS DOMESTIC PRODUCT IN 1976 ANNUAL RATE OF GROWTH (7, constant prices) US$ Mn % 1960-65 1965-70 1970-76 GDP at Market Prices 3,114 100.0 3.6 5.3 2.7 Investment 495 15.9 ** ** ** Domestic Saving 430 13.8 ** ** ** Current Account Balance -65 -2.1 * * * Exports of Goods, NFS 628 20.4 3.8 -0.6 -0.8 Imports of Goods, NFS 679 22.0 -8.4 3.5 -5.0 OUTPUT, EMPLOYMENT, AND PRODUCTIVITY IN 1976 Value Added Empleyment/ V. A. Per Worker US$ Mn % Mn IJS _ Agriculture 1,053 36.1 2.029 50.1 519 73 Industry 4/ 46B 16.3 0.389 9.6 1,203 171 Services 1,343 46.9 1.632 40.3 823 110 Unallocated * * Total/Average 7, 864 100.0 4.050 10A0. 707 100.0 GOVERNMENT FINANCE Central Government (Rs Mn) % of GDP 1976 1970-72 1976 Current Receipts 5,837 21.0 18.8 Current Expenditure 5.925 23.1 19.1 Current Surplus -88 -0.3 Capital Expenditures 2,030 6.4 6.5 External Assistance (net) 1,050 2.7 3.4 1/ E'rovisional estimates. 2/ The per capita GNP estimate for 1976 is taken from the World Bank Atlas. Per capita adjusted GNP in 1977 (see Annex C) at the near exchange rate is $160. All other conversions in this table are at the average official exchange rate prevailing during the period. 3/ T'he sectoral distribution was af;sumed to be the same as for 1971. 4/ Includes mining. ** not available * not applicable  Page 2 of 2 pages COUNTRY DATA - SRI LANKA September MONKY, CREDIT, AND PRICES 1971 1972 1973 1974 1975 1976 1977 (end of period) Money and Quasi Money 3,379 3,916 4,093 4,504 4,712 6,521 7,795 Bank Credit to Public Sector 2,738 2,709 2,600 2,468 2,497 3,580 3,016 Bank Credit to Private Sector 1,736 2,117 2,133 3,188 3,363 3,919 5,222 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 26.6 28.7 24.8 20.9 19.6 23.7 1 General Price Index (1970 - 100) 102.7 109.2 119.7 134.4 143.3 145.2 146.2-/ Annual percentage changes in: General Price Index +2.7 +6.3 +9.6 +12.3 +6.6 +1.3 +1.3-/ Bank credit to Public Sector +8.3 -1.1 -4.0 -5.1 +1.2 +43.4 -13.0 Bank credit to Private Sector +8.6 +21.9 +0.8 +49.5 +5.5 +16.5 +34.8 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (1977) 1976 19772/ US$ n h (US$ Million) Tea 419 53.6 Exports of Goods, NFS 627 864 Rubber 109 14.0 Imports of Goods, NFS 679 809 Coconut Products 38 4.9 Resource Gap (deficit = -) -52 +55 Interest Payments (net) -20 -17 All other commodities 215 27.5 Workers' Remittances - - Total 781 100.0 Other Factor Payments (net) - - Net Transfers +7 +7 EXTERNAL DEBT, (US$ Mlillion)- Balance on Current Account -65 +45 December 1976 December 1977 Direct Foreign Investment 1 -1 Total Outstanding 1,102.6 1,124.0 Net MLT Borrowing 83 74 Disbursements (111) (122) Total Outstanding Amortization (28) (48) and Disbursed 702.3 784.-2 Subtotal 83 Capital Grants 58 62 DEBT SERVICE RATIO for 1977- 22.8% Other Capital (net) 44 1 Other items n.e.i. +4 2 Increase in Reserves (+) 5/ +67 +183 Gross Reserves (end year) 92 292 Net Reserves (end year) -67 +116 ELATE OF EXCHANGE IBRD/IDA LENDING, December 31, 1977 CUSS MilJion) 1967 - 1971 IBRD IDA UTSl. 7 = Rs 5.93 IRID Rs 1.00 = US$0.17 Outstanding & Disbursed 34.3 57.5 Undisbursed 5.8 64.2 End 1972 Outstanding incl. Undisbursed 40.1 121.7 US$1.00 - Rs 6.70 Rs 1.00 = US$0.15 End 1973 US$1.00 - Re 6.75 Rs 1.00 - US$0.15 End 1974 Foreign Exchange Entitlement US$1.00 = Rs 6.69 Certificate (FEEC) Retes 6/ Rs 1.00 = US$0.15 1968 US$1.00 - Rs 8.54 (44X FEEC) End 1975 ~~~~~~~~~~~1969 to End 1975 1971 US$1.00 - Rs 9.19 (55% FEEC) US$1.00 = Rs 7.71 1972 (end) US$1.00 - Rs 10.38 (55% FEEC) Rs 1.00 = US$0.13 1973 (end) US$1.00 - Rs 11.13 (652 FEEC) 1974 (end) US$1.00 - Rs 11.04 (65X FEEC) End 1976 1975 (end) US$1.00 5 Rs 12.72 (65% FEEC) US$1.00 = Re 8.83 1976 (end) US$1.0U - xS 14.57 (65X FEEC) Re 1.00 = US$0.11 End 1977 US$1.00 = Rs 16.00 Rs 1.00 - US$0.06 1/ Average of first three quarters of 1977. 2/ Preliminary estimate as of March 1978. 3/ Repayable in foreign currencies and with a maturity over one year. 4/ Ratio of debt service including short-term and IMF credits to exports of goods and non-factor services. 5/ Includes errors and omissions. 6/ The certificates were abolished on November 15, 1977. South Asia Programs Department March 20, 1978  IBRD 3839R2 rNn. al.* .1FEBRUARY 1978 Kanhesont SRI LANKA NaiJ tional roads { ------- Ro Iways - --_ Ostrict boundaries Rivers Agro-ctimatic zone J A F IF N A I Elevation (in feet)- )'-- '/ \ '>' / \ 0-0 Pcnnr r \J ,Monhulom / ' % | 0.100 --I \.~~~~~~~~~~~~~~~~~~~Ioc 0 *~~-~~) M/nk r m100-3000 A C < zJ ) VAVUNIYA-3-- *0M sonnoN9K, h A N N A R 9 } ( t5S