Sri Lanka - Policies and prospects for economic adjustment

Report No. 3466-CE Sn Lanka: Policies and Prospects for *M W Economic Adjustment May 15, 1981 South Asia Programs Department FOR OFFICIAL USE ONLY Document of the Mbrfd Bank This document has a restricted ditribution 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.  CURRENCY EQUIVALENTS a/ End-December Currency Unit 1975 US$1.00 = Rs 7.71 Rs 1.00 = US$ 0.13 Rs; 1 million = US$129,702 1976 US$1.00 = Rs 8.83 Rs 1.00 = US$ 0.11 Rs 1 million = US$113,250 1977 US$1.00 = Rs 15.56 Rs 1.00 = US$ 0.06 Rs 1 million = US$64,267 1978 US$1.00 = Rs 15.51 Rs 1.00 = US$ 0.06 Rs 1 million = US$64,475 1979 US$1.00 = Rs 15.45 Rs 1.00 = US$ 0.06 Rs 1 million = US$64,725 1980 US$1.00 = Rs 18.00 Rs 1.00 = US$ 0.06 Rs 1 million = US$55,556 Annual Average Exchange Rates Foreign Exchange Entitlement Official Rate Certificate (FEEC) Rate b/ 1969-71 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 (Jan. 1 - Nov. 15) US$1.00 = Rs 7.89 Rs 13.02 (65% FEEC) 1977 (Nov. 16 - Dec. 31) US$1.00 = Rs 15.76 1977 US$1.00 = Rs 9.15 - 1978 US$1.00 = Rs 15.61 - 1979 US$1.00 = Rs 15.57 - 1980 US$1.00 = Rs 16.53 - a/ The Sri Lanka rupee, which had been linked to the US 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 delinked from Sterling on May 24, 1976, linked to a weighted basket of currencies. On November 15, 1977, the exchange rate was unified, depreciated, and allowed to float at an initial rate of US$1.00 = Rs 16.00. b/ This rate applied to all exports other than tea, rubber, and coconut, and all imports other than food, fertilizer, and drugs. FEECs were abolished on November 15, 1977. This report was prepared by a mission composed of Messrs. K. Sarwar Lateef (Chief of Mission), Fakhruddin Ahmed, and John Borthwick, and Mmes. Martha de Melo and Evangeline Javier, which visited Sri Lanka between January 11 and January 31, 1981. Mfr. van der Mel advised the mission on fiscal policy issues. The analysis on non- traditional exports is based on a report prepared by Mr. David Wlall (consultant).  FOR OFFICIAL USE ONLY SRI LANKA: POLICIES AND PROSPECTS FOR ECONOMIC ADJUSTMENT Table of Contents List of Tables in the Text List of Annexes Country Data Map Page No. SUMMARY AND CONCLUSIONS ........................ ................... i-vii I. RECENT ECONOMIC PERFORMANCE .................... ....1...... Introduction . . . .......... 1 The Economy in 1980 ...... ............................. 2 Economic Growth ......................................... . 3 Savings and Investment ...... ........................... . 7 The Budget ............................................... 10 Monetary Development ..................................... 13 Prices .................................................... 15 Balance of Payments ...................................... 15 The Government's Response ..... ........................... 17 II. PROSPECTS FOR STABILIZATION AND GROWTH ................... 18 THE OUTLOOK FOR 1981 AND 1982 ............................ 18 THE STABILIZATION TASK ...... ........................... 20 Improving the Current Account in the Balance of Payments . 22 Reducing the Budget Deficit ............. .. ............... 25 Closing the Private Sector Savings Gap .... ............... 27 PROSPECTS FOR EMPLOYMENT AND GROWTH IN THE MEDIUM TERM ... 31 III. PUBLIC INVESTMENT, 1981-85 ............................... 34 The 1980 Out-turn ........... ................... 34 The 1981 Capital Budget ........................ . . . . .. 35 The 1981-85 Program ................... ................... 37 THE LEAD PROJECTS ................ ... ................. ..... 40 The Mahaweli Program .................. ................... 40 Housing and Urban Development ..... ....................... 48 Greater Colombo Economic Commission ....... ............... 52 NON-LEAD PROJECTS ............ ............................ 52 Conclusion ....................... ........................ 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.  Page No. IV. ENERGY ......................... .......................... 55 TflE ENERGY CRISIS ........................................ 55 CONSUMPTION PATTERNS ..................................... 56 Commercial Energy .... .................................... 56 Non-Commercial Energy .................................... 59 PRICING POLICIES ......................................... 60 Electricity .............................................. 60 Petroleum Products . ...................................... 61 SUPPLY AND DEMAND PROSPECTS ..... ......................... 64 Electricity ...... ........................................ 64 Petroleum Products ................... .................... 70 Alternative Domestic Energy Supply Prospects . ............ 71 CONCLUSIONS AND RECOMMENDATIONS . ......................... 72 Pricing Issues ........................................... 72 Conservation Measures .......................................... 73 Additional Energy Sources ............................... . 74 Institutional Development ...... .......................... 75 V. NON-TRADITIONAL EXPORTS: INSTITUTIONS AND POLICIES ...... 77 EXPORT INSTITUTIONS AND POLICIES ......................... 77 Attracting Export-Oriented Foreign Investment ........... . 77 The Greater Colombo Economic Commission ........ .. ........ 78 The Foreign Investment Advisory Committee ................ 79 Local Investment Approvals Committees ................. ... 79 Export Development Board ...... ........................... 80 Sri Lanka Export Credit Insurance Corporation ............ 81 EFFECTIVENESS OF THE NEW EXPORT STRATEGY ................. 82 Foreign Investment: Attraction and Performance .......... 82 The Relative Attraction of Exporting ........ .. ........... 87 CONCLUSIONS ........ ............................. 93 VI. THE ROLE OF EXTERNAL FINANCE ........ ..................... 96 Balance of Payments Prospects 1981-82 ........ .. .......... 96 External Assistance Trends since 1978 ....... .. ........... 101 Recommendations for 1981 and 1982 ........................ 102 Commercial Borrowings Trends and Debt Service Implications 104  Page No. LIST OF TABLES IN TH1E TEXT Table 1: Changes in GDP and its Composition, 1970-80 .... ........ 3 Table 2: Key Agricultural Indicators ............................ 5 Table 3: Savings and Investment, 1970-80 Selected Years. 8 Table 4: Summary of Government Finance, 1978-81 .11 Table 5: Casual Factors in Money Supply Expansion, 1979-80 .14 Table 6: Wage and Price Movements, 1977-80 .15 Table 7: Balance of Payments, 1978-80 .16 Table 8: Selected Macro-Economic Indicators ...... ............... 19 Table 9: Elements of the Stabilization Problem ..... ............. 21 Table 10: The Savings-Investment Balance in 1980 ..... ............ 27 Table 11: Non-Tax Budgetary Impact on Public Corporations, 1970-71, 1975, 1979, and 1980 ....... ................. 30 Table 12: Sectoral Classification of Public Investment Program, 1980-84 and 1981-85 . ................................. 38 Table 13: Phasing of Public Investment Program, 1981-85 .... ...... 41 Table 14: Accelerated Mahaweli Program: Changes in Allocations .. 44 Table 15: Accelerated Mahaweli Program, 1980-85 ...... ............ 45 Table 16: External Financing of Accelerated Mahaweli Program, 1981-85 ........................................ 47 Table 17: National Housing Development Authority Program, 1971-80 ........................................ 50 Table 18: Selected Urban Development Authority Projects, 1979-81 . ........................................ 52 Table 19: Petroleum Imports and Re-exports, 1970-80 ..... ......... 55 Table 20: Commercial Energy Consumption - 1979 ...... ............. 57 Table 21: Production, Trade and Sales Patterns of Major Petroleum Products - 1980 ......... ................... 58 Table 22: Fuel Wood Sources for the Household Sector, 1960-75 .... 59 Table 23: Growth in Petroleum Product Consumption, 1977-79 ....... 62 Table 24: Petroleum Production Cost Structure - Domestic Sales ... 63 Table 25: Export Sales Pricing Structure (January 1981) .... ...... 64 Table 26: Electricity Demand, 1977-90 ......... ................... 66 Table 27: Energy Balance, 1980-88 ................................ 68 Table 28: Peak Power Capability, 1981-88 ....... .................. 69 Table 29: Thermal Generation Program and Petroleum Requirements, 1980-85 ................................ 69 Table 30: Net Petroleum Imports, 1980-85 ....... .................. 71 Table 31: Potential Commercial Energy Savings by 1990 .... ........ 73 Table 32: Projects Approved by GCEC as of December 31, 1980 ...... 83 Table 33: Balance of Payments, 1979-82 ......... .................. 97 Table 34: Gap Fill Requirements, 1981-82 ........ ................. 98 Table 35: Composition of Aid Commitments and Disbursements, 1978-80 ........................................ 101 Table 36: Summary Aid Pipeline, 1980-82 ........ .................. 103 Table 37: Debt Service Payments, 1981-86 ........ ................. 105  - iv - LIST OF ANNEXES Page No. ANNEX I: Selected Policy Changes in 1980 ......................... 107 ANNEX II-A: Macro-Economic Accounting in Current and Constant Prices, 1979-82 ............................................... 117 ANNEX II-B: Revenue Prospects and Trends ............................ 131 ANNEX II-C: Financial Position of Sri Lanka Central Transport Board.. 157 ANNEX III: Public Investment Outside the Lead Projects, 1981-85 .... 161 ANNEX IV-A: Electricity Sales to Medium and Large Industrial and Commercial Enterprises, 1979 .... ...................... 187 ANNEX IV-B: Generation Plant-Power and Energy Capabilities, 1981-86.. 188 ANNEX IV-C: Medium-Term Petroleum Import and Export Projections ...... 189 ANNEX V: Incentives for Foreign Investment ....................... 195 ANNEX VI-A: Merchandise Trade, 1979-80 and 1981-82 . ................. 199 ANNEX VI-B: Major Medium- and Long-Term Commercial Financing Arrangements, 1979-March 1981 ......................... 201 STATISTICAL APPENDIX ................................................. 202 GLOSSARY ............. ................................................ 274  Page 1 of 2 pages COUNTRY DATA - SRI LANKA AREA POPULATION DENSITY 65,607 sq km 14.9 million (mid-1981) a/ 227 per sq km (1981) Rates of Growth: 1.7% (from 1971 to 1981) a! 763 per sq km of agricultural land (1979) POPULATION CHARACTERISTICS (1980) HEALTH (1979) Crude Birth Rate (per '000): 28.0 Population per physician: 6,718 Crude Death Rate (per '000): 6.4 Population per Hospital Bed: 341 Infant Mortality (per '000 live births): 49 INCOME DISTRIBUTION (1978) DISTRIBUTION OF LAND OWNERSHIP % of national income, highest quintile: 54 % owned by top 10% of owners - lowest quintile: 4 % owned by smallest 10% of owners - ACCESS TO PIPED WATER (1971) ACCESS TO ELECTRICITY (1971) % of population - urban: 77 % of dwellings - urban: 9 rural: 5 rural: 3 NUTRITION (1974-77) EDUCATION (1979) Calorie intake as % of requirements: 91 Adult literacy rate: 85% Per capita protein intake (grams per day): 43 Primary school enrollment: 80% GNP PER CAPITA in 1979: $230 b/ OUTPUT IN 1980 BY SECTOR ANNUAL RATE OF GROWTH (%, constant prices) Value Added $ Million % 1970-77 1977-80 1970-80 Agriculture 1,038 27.6 2.0 3.5 2.5 Industry c/ 1,116 29.6 2.1 8.6 4.0 Services 1,612 42.8 3.7 7.6 4.9 Total d/ 3,766 100.0 2.9 6.8 4.0 GOVERNMENT FINANCE Central Government (Rs Million) % of GDP at Market Prices 1980 1975 1979 1980 Current Receipts e/ 12,927 17.2 23.1 18.9 Current Expenditures f/ 14,594 18.3 22.8 21.4 Current Surplus -1,667 -1.1 0.2 -2.4 Capital Expenditures g/ 12,772 7.3 14.1 18.7 External Assistance 5,717 3.2 7.2 8.4 a/ Provisional Census estimates, and not consistent with Table 1.01. b/ World Bank Atlas estimate. c/ Manufacturing, mining, construction, and utilities. d/ GDP at factor cost. e/ Includes capital revenue. f/ Includes advance accounts. g/ Includes net lending.  Page 2 of 2 pages COUNTRY DATA - SRI LANKA November MONEY, CREDIT, AND PRICES 1970 1975 1976 1977 1978 1979 1980 (end of period) (R Million) Money and Quasi Money 3,061 4,712 6,251 8,636 10,803 14,957 18,948 Bank Credit to Public Sector 2,680 2,460 3,725 4,834 4,518 6,703 12,273 Bank Credit to Private Sector 1,446 3,363 3,919 5,714 8,666 11,853 16,145 (Percentages or Index Numbers) Money and Quasi Money as X of GDP 22.4 17.8 20.9 24.0 25.3 28.7 - General Price Index (1970 - 100) 100.0 143.3 145.2 147.0 164.8 182.6 230.3 a/ Annual Percentage Changes in: Ceneral Price Index +5.9 +6.7 +1.3 +1.2 +12.1 +10.8 +26.1 a/ Bank Credit to Public Sector +15.9 +9.4 +51.4 +35.0 -6.5 +48.4 +83.1 Bank Credit to Private Sector +0.7 +5.5 +16.5 +45.8 +51.7 +36.8 +36.2 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (1980) 1979 1980 ( US$ Million) $ Million % Exports of Goods, NFS 1,135 1,295 Tea 373 35.7 Imports of Goods, NFS 1,539 2,211 Rubber 156 14.9 Resource Gap (deficit = -) -404 -916 Coconut Products 45 4.3 Interest Payments (net) -9 -12 All Other Commodities 471 45.1 Workers' Remittances - - Other Factor Payments (net) -7 -14 Total 1,045 b/ 100.0 Net Transfers 48 137 Balance on Current Account -372 -805 Direct Foreign Investment 47 43 EXTERNAL DEBT ($ Million) c/ Net MLT Borrowing 162 247 Disbursements 225 309 December December Amortization 63 62 1979 1980 Capital Grants 144 138 Other Capital (net) +67 +157 Total Outstanding 1,773.3 2,264.9 Change in Reserves (+ = increase) +48 -220 Total Outstanding Gross Reserves (end-year) 626 377 and Disbursed 1,091.1 1,327.6 Net Reserves (end-year) 258 38 DEBT SERVICE RATIO d/ (%) 9.8 9.3 RATE OF EXCHANGE IBRD/IDA LENDING, December 31, 1980 ($ Million) IBRD IDA 1967-71 End 1976 US$1.00 = Rs 5.93 US$1.00 = Rs 8.83 Outstanding and Disbursed 30.7 97.9 Rs 1.00 = US$0.17 Rs 1.00 = US$0.11 Undisbursed - 263.8 Outstanding, including Undisbursed 30.7 361.7 End 1972 End 1977 US$1.00 = Rs 6.70 US$1.00 = Rs 15.56 Rs 1.00 = US$0.15 Rs 1.00 = US$0.06 End 1973 End 1978 Foreign Exchange Entitlement Certificate (FEEC) Rates e/ US$1:00 = Rs 6.75 US$1.00 = Rs 15.51 Rs 1.00 = US$0.15 Rs 1.00 = US$0.06 1968 US$1.00 = Rs 8.54 (44% FEEC) 1969 to 1971 US$1.00 = Rs 9.19 (55% FEEC) End 1974 End 1979 1972 (end) US$1.00 = Rs 10.38 (55% FEEC) US$1.00 = Rs 6.69 US$1.00 = Rs 15.45 1973 (end) US$1.00 = Rs 11.13 (65% FEEC) Rs 1.00 = US$0.15 Rs 1.00 = US$0.06 1974 (end) US$1.00 = Rs 11.04 (65% FEEC) 1975 (end) US$1.00 = Rs 12.72 (65% FEEC) End 1975 End 1980 1976 (end) US$1.00 = Rs 14.57 (65% FEEC) Us$1.00 = Rs 7.71 US$1.00 = Rs 18.00 1977 (until Nov. 15) US$1.00 = Rs 13.02 (65% FEEC) Rs 1.00 = US$0.13 Rs 1.00 = US$0.06 a/ Full year data. b/ Customs data. ci Repayable in foreign currencies and with a maturity over one year. d/ Ratio of debt service, excluding short-term capital repayments and IMF repurchases to exports of goods and non-factor services. e/ The certificates were abolished on November 15, 1977. South Asia Programs Department May 12, 1981  IBRD 3839R2 80. ni, FE BR UARY 1978 Kankesr "I SRI LANKA