Sri Lanka - Issues and prospects for industrial development

Report No. 2261-CE Sri Lanka Issues & Prospects for Industrial Development September 28, 1979 F LE ur Industrial Development and Finance Division South Asia Projects FOR OFFICIAL USE ONLY Document of the World Bank 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.  Report No. 2261-CE Sri Lanka Issues & Prospects for Industrial Development September 28, 1979 LE A Industrial Development and Finance Division South Asia Projects FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otlherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS a 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 lmn = US$168,634 1972 US$1.00 = 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 15.56 Rs 1.00 = US$0.06 Rs 1 mn = US$64,267 1978 US$1.00 = Rs 15.50 Rs 1.00 = US$0.06 Rs 1 mn = US$64,516 Annual Average Exchange Rates Foreign Exchange Entitlement Official Rate Certificate (FEEC) Rate b 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 US$1.00 = Rs 9.15 Rs 13.02 (65% FEEC) 1978 US$1.00 = Rs 15.61 - a/ 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 bI.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. b/ This rate applied to about 35% of current receipts of foreign exchange and 60% of current payments. FEECS were abolished on November 15, 1977. c/ The average FEEC rate for 1977 shown here applies to the January-November 15, 1977 period.  FOR OFFICIAL USE ONLY This report is the first review by the World Bank of the Sri Lanka industrial sector. The mission, on whose findings the original version of this report was prepared, visited Sri Lanka in March 1978. It comprised Frederick Moore (Chief of Mission), Shyamandas Banerji, Nancy Barry, Nils Fostvedt, Yukon Huang, Pham Van Thuyet, S.J. Basu (Consultant), Harry Choi (Consultant). A separate volume reviewing the performance and prospects of selected subsectors will be issued at a latter date. 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.  FOR OFFICIAL USE ONLY This report is the first review by the World Bank of the Sri Lanka industrial sector. The mission, on whose findings the original version of this report was prepared, visited Sri Lanka in March 1978. It comprised Frederick Moore (Chief of Mission), Shyamandas Banerji, Nancy Barry, Nils Fostvedt, Yukon Huang, Pham Van Thuyet, S.J. Basu (Consultant), Harry Choi (Consultant). A separate volume reviewing the performance and prospects of selected subsectors will be issued at a latter date. 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.   SRI LANKA: ISSUES AND PROSPECTS FOR INDUSTRIAL DEVELOPMENT TABLE OF CONTENTS Page No. List of Tables in Text Country Data CONCLUSIONS .......... i- iii Chapter I: ISSUES IN INDUSTRIAL DEVELOPMENT ................... A. Recent Industrial Performance and Present Industrial Structure ........................ 1 Recent Industrial Performance .... ............. 1 The Industrial Structure ..... ................. 3 B. Evolution of a New Industrial Strategy .... .... 6 Economic Liberalization ....................... 6 The Medium Term Development Program (1979-83) . 8 C. Factors Affecting Potential for Growth .... .... 10 Industrial Efficiency ...... ................... 10 Cost of Labor ........ ......................... 12 D. Industrial Statistics ...... ................... 12 Chapter II: INDUSTRY POLICY FRAMEWORK ...... .................... 13 Introduction ......... ......................... 13 Tax Incentives ........ ........................ 13 Tariffs and the Protection System .... ......... 14 Export Incentives and Promotion .... ........... 18 The Investment Promotion Zone (IPZ) .... ....... 19 Foreign Investment Outside the IPZ .... ........ 21 Chapter III: INDUSTRIAL FINANCE .... 23 Introduction .... 23 Demand and Supply of Industrial Finance .... 24 Industrial Lending Structure .... 27 Recent Financial Developments .... 29 F Other Financial Sources .... 31 Export Financing .... 31 National Development Bank .... 33 Chapter IV: PUBLIC INDUSTRIAL CORPORATIONS ...... ............... 35 Introduction . .................................. 35 Measurement of Performance ...... .............. 35 Factors Affecting Performance ..... ............ 37 Improving Efficiency ........ .................. 40 Chapter V: SMALL AND MEDIUM-SCALE INDUSTRIES ..... ............. 44 Introduction . .................................. 44 Characteristics and Role of SMIs .... .......... 44 Industrial Policy and SMIs ...... .............. 45 Financing SMIs ........... ..................... 47 Technical Services ........ .................... 49 Statistical Appendix Map  SRI LANKA: ISSUES AND PROSPECTS FOR INDUSTRIAL DEVELOPMENT TABLE OF CONTENTS Page No. List of Tables in Text Country Data CONCLUSIONS .......... i - iii Chapter I: ISSUES IN INDUSTRIAL DEVELOPMENT ............. 1 A. Recent Industrial Performance and Present Industrial Structure ........................ 1 Recent Industrial Performance .... ............. 1 The Industrial Structure ..... ................. 3 B. Evolution of a New Industrial Strategy ... ..... 6 Economic Liberalization ....................... 6 The Medium Term Development Program (1979-83) . 8 C. Factors Affecting Potential for Growth .... .... 10 Industrial Efficiency ...... ................... 10 Cost of Labor ........ ......................... 12 D. Industrial Statistics ...... ................... 12 Chapter II: INDUSTRY POLICY FRAMEWORK ...... .................... 13 Introduction ......... ......................... 13 Tax Incentives ........ ........................ 13 Tariffs and the Protection System .... ......... 14 Export Incentives and Promotion .... ........... 18 The Investment Promotion Zone (IPZ) .... ....... 19 Foreign Investment Outside the IPZ .... ........ 21 Chapter III: INDUSTRIAL FINANCE ....... 23 7 Introduction ....... 23 Demand and Supply of Industrial Finance ....... 24 Industrial Lending Structure .. ..... 27 > Recent Financial Developments .... ..r.29.| 2 Other Financial Sources ....... 31 Export Financing ........31 National Development Bank ........33 Chapter IV: PUBLIC INDUSTRIAL CORPORATIONS ...... ............... 35 Introduction . .................................. 35 Measurement of Performance ..... ............... 35 Factors Affecting Performance ..... ............ 37 Improving Efficiency ....... ................... 40 Chapter V: SMALL AND MEDIUM-SCALE INDUSTRIES ..... ............. 44 Introduction . .................................. 44 Characteristics and Role of SMIs .... .......... 44 Industrial Policy and SMIs ...... .............. 45 Financing SMIs ........... ..................... 47 Technical Services ........ .................... 49 Statistical Appendix Map  LIST OF TABLES IN THE TEXT Page No. Table 1.1: Sectoral Growth of GDP, 1960-77 .... ............. 1 Table 1.2: Public and Private Industrial Value Added ....... 3 Table 1.3: Main Characteristics of Industry, 1977 .... ...... 3 Table 1.4: Percentage Distribution by Major Industrial Groups (Organized Sector), 1977 .... ........... 5 Table 1.5: Projected Growth in Industry, 1978-1983 .... ..... 9 Table 1.6: Capacity Utilization and Use of Imported Raw Materials in Organized Industry, 1977 .10 Table 1.7: Organized Sector: Capacity Intensity and Labor Productivity, 1973 .11 Talbe 2.1: Effect of Recent Changes in Tariffs on Cost of Selected Imports ........ .................... 17 Table 3.1: Sources of Finance, 1975-77 ..... ................ 25 Table 3.2: Annual Investment and Finance Needs for Industry During 1979-83 at Alternative 26/. Growth Rate Assumptions.. 26. Table 3.3: Commercial Bank Outstandings for Industry ....... 28  Page 1 of 2 pages COUNTRY DATA - SRI LANKA AREA POPULATION 1/ DENSITY 65,607 sq. km. 14.0 million (mid 1977)- 213 per sq. km. (1977) Rate of Growth:1.7% (from 1971 to 1977) 579 per sq. km. of agricul- tural land (1977) POPULATION CHARACTERISTICS (1977) HEALTH (1977) Crude Birth Rate (per '000): 27.4 Population per physician: 4,010 Crude Death Rate (per '000): 7.9 Population per hospital bed: 330 Infant Mortality (per '000 live births): 51 (1974) INCOME DISTRIBUTION DISTRIBUTION OF LAND OWNERSHIP % of private income, highest quintile: 42.8 % owned by top 10% of owners ** lowest quintile: 7.3 % owned by smallest 10% of owners ** ACCESS TO SAFE WATER ACCESS TO ELECTRICITY (1971) % of population - urban: 36 % of dwellings - urban: 9 - rural: 13 - rural: 3 NUTRITION EDUCATION Calorie intake as % of requirements: close to 100 Adult literacy rate: 78% Per capita protein intake (grams per day): 48 Primary school enrollment: 77% GNP PER CAPITA IN 1977:- US$200 GROSS DOMESTIC PRODUCT IN 1977 ANNUAL RATE OF GROWTH (%, constant prices) Rs. Mn