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Analysis of Sri Lankan
Economy
Lecturers name
Mr. Amila Kankanamge
Hashini Wijewickrama MG12003BB000!
"ilanka #erera MG12003BB
$hakshila "ithanage MG1200%BB0001
Heshika &an'ani MG1200%BB000!
Lakshitha (athna)ake MG1200%BB
2
ACKNOWLEDGEMENT
We are very thankful to our guide Mr. Amila Kankanamge for his valuable help. He as alays there to sho us
the right track hen e needed his help. !t is ith the help of his valuable suggestions" guidance and
encouragement" that e ere able to perform this pro#ect ork.
We are over helmed in all humbleness and gratefulness to acknoledge our debt to all those ho have helped
us to move these ideas ell above the level of simplicity and into something concrete.
We ould also like to thank our colleagues" ho often helped and gave us support at critical #unctures during the
completion of this pro#ect.
3
Table of Contents
!ntroduction...................................................................................................................................................$
%. &ational income.....................................................................................................................................$
%.%Methods of calculating the national income in Sri Lanka.....................................................................'
%.%.%E(penditure approach....................................................................................................................'
%.%.) !ncome approach..........................................................................................................................'
%.) *evie of the status of &ational !ncome............................................................................................+
). !nflation.....................................................................................................................................................+
).%Methods of calculating inflation............................................................................................................+
,. -ritical revie of SL economy...................................................................................................................
/. 0overnment fiscal policy 1 monetary policies.......................................................................................%)
/.%2iscal 3olicy.......................................................................................................................................%)
/.)Monetary policies..................................................................................................................................%$
$. Measures of Economic 4evelopment....................................................................................................%+
'. 3ossible economic threats SL has to face in near future.......................................................................%5
5. 673 status in the Sri Lankan Economy................................................................................................))
.. Economic position of Sri Lanka ith compare to other Asian countries and est................................),
%8. *ecommendations to improve status of the Sri Lankan economy......................................................)/
%%. -onclusion............................................................................................................................................)$


4
*ntr+'ucti+n
Sri Lanka continues to e(perience strong economic groth folloing the end of the )'9year conflict ith the
Liberation :igers of :amil Ellam ;L::E<. :he government has been pursuing large9scale reconstruction and
development pro#ects supplemented ith private investment in its efforts to spur groth in ar9torn and
disadvantaged areas" develop small and medium enterprises and increase agricultural productivity. :he
government=s high debt payments and bloated civil service have contributed to historically high budget deficits" but
economic reforms in recent years in line ith !M2 recommendations have helped bring don the government=s
fiscal deficit.
:he )88598. global financial crisis and recession e(posed Sri Lanka=s economic vulnerabilities and nearly caused
a balance of payments crisis. 0roth sloed to ,.$> in )88.. Economic activity rebounded strongly ith the end
of the ar and an !M2 agreement" resulting in three straight years of high groth in )8%89%). 3er capita income of
?'"%88 on a purchasing poer parity basis is among the highest in the region.
5
1. National income
1.1Methods of calculating the national income in !i Lan"a
&ational income measures the total value of goods and services produced ithin the economy over a period of
time.
:here are , ays of calculating national income
%. E(penditure approach
). !ncome approach
, .3roduct method
1.1.1E#$enditu!e a$$!oach
:he e(penditure approach is basically an output accounting method. !t focuses on finding the total output of a
nation by finding the total amount of money spent. :his is acceptable" because like income" the total value of all
goods is e@ual to the total amount of money spent on goods. :he basic formula for domestic output takes all the
different areas in hich money is spent ithin the region" and then combines them to find the total output.
G,# - ./*/G/012M3
i< -onsumption e(penditure ;-< A -onsumption e(penditure is the largest component of national income. !t
includes e(penditure on all goods and services produced and sold to the final consumer during the year.

;ii< !nvestment e(penditure ;!< A !nvestment is the use of today=s resources to e(pand tomorro=s
production or consumption. !nvestment e(penditure is e(penditure incurred on by business firms on ;a< ne
plants" ;b< adding to the stock of inventories and ;c< on nely constructed houses.

;iii< 0overnment e(penditure ;0< A !t is the second largest component of national income. !t includes all
government e(penditure on currently produced goods and services but e(cludes transfer payments hile
computing national income.

;iv< &et e(ports ;B 9 M< A &et e(ports are defined as total e(ports minus total imports.
&ational income calculated from the e(penditure side is the sum of final consumption e(penditure" e(penditure by
business on plants" government spending and net e(ports.

1.1.% &ncome a$$!oach
:he income approach e@uates the total output of a nation to the total factor income received by residents or
citiCens of the nation.

GD' ( National income ) de$!eciation ) *indi!ect ta#es + subsidies, ) net facto! $a-ment f!om
!est of the .o!ld ) othe!
1.1./ '!oduct a$$!oach
0oods and services are counted in gross domestic product at their market values. :he product approach defines
a nation=s gross product as that market value of goods and services currently produced ithin a nation during a
one year period of time.
6

:he product approach measuring national income involves adding up the value of all the final goods and services
produced in the country during the year. Here e focus on various sectors of the economy and add up all their
production during the year.
1.% 0e1ie. of the status of National &ncome
&ational income
Dear )8%) )8%% )8%8
*eal &ational income
at constant
;)88)<prices
;*&!<"*s.Mn
,"8%)"/88 )"5'%")5' )"'+/")/%
;-6SL" )8%,<
&ational income of recent , years has been increase because of high import ta(es" e(port encouragement high
and domestic production increase.
)8%) have
Agriculture sector
!n )8%8 the composition from agriculture to the 043 is %%..> and 043 as slightly decreased to %%.)> in )8%%
and )8%) it decrees to the %%.%> .:he contribution to the 043 from agriculture sector is getting lo. So that ill
effect to the production of the Sri Lanka
!ndustry sector
!n industry sector contribution to the 043 as in )8%8 )5.+> and in )8%% it is slightly increased .6ut in )8%%E)8%)
it is )..,> to ,8./>. :hat means the contribution to 043 from the industry sector is increasing because of the
investments and other aspects.
Service sector
!n service sector )8%8 it as $..,> but in )8%% it also increased to $..$> that means the service sector also in
groing stage.
7verall the agriculture sector contribution is getting lo but there are opportunities in groing industry sector and
the service sector.
:o calculate &ational income e should add &et factor income from aboard.
)8%8 it as 9'."++' millions" )8%% it as 9+)"8/% million and )8%) it as 9%/5"/)). When consider further about
the net factor income from aboard there is deficit.
0ross &ational 3roduct as in )88. )"/)8".$)" in )8%8 )"'%)"'8, and )8%% it as )"5,)"%5. millions.
%. &nflation
%.1Methods of calculating inflation
!nflation is a continuous increase in the average price levels .
7
:he opposite of inflation is deflation hich is a decrease in the cost of living or average price level.
!nflation is usually estimated by calculating the inflation rate of a price inde(" !n Sri Lanka usually the -onsumer
3rice !nde(. :here are to typesF
-onsumer 3rice !nde( *C'&, + -onsumer price inde( reflects changes in the cost to the average consumer of
ac@uiring a basket of goods and services that may be fi(ed or changed at specified intervals" such as yearly.
:he Laspeyres formula is generally used. :his is the formula hich in use to calculate -3!
-onsumer price inde( of current year Gconsumer price inde( of last year
%88 ;-6SL" )8%/<
-onsumer price inde( of last year
A measure of price changes in consumer goods and services. !t measures the inflation rate of Sri Lanka by using
year on year or annual average bases.
6ase )8%8 )8%% )8%)
Annual Average '.) '.+ '
Dear on Dear '.. /.. $./
!n Sri Lanka the !nflation is +.'> in )8%)" and in )8%% inflation ere '.+> and in )8%8 inflation '.)>.
&on9food category giving a ma#or contribution to the inflation and it contributed to +8.+> of the annual average
change in the overall --3! throughout the year.
!nflation" as measured by the year9on9year ;DoD< change in the -olombo -onsumersH 3rice !nde( ;--3!<
;)88'E8+A%88<" declined further to /.) per cent in 2ebruary )8%/" from /./ per cent in Ianuary )8%/. :his is the
fourth consecutive month in hich inflation fell continuously from high of '.+ per cent in 7ctober )8%,. Annual
average inflation" hich folloed a same declining trend since Iune )8%," moderated further to '.8 per cent in
2ebruary )8%/" from '.$ per cent in Ianuary )8%/.
4eceleration of inflation in 2ebruary )8%/ as mainly attributed to the moderate increase in the price inde( over the
previous month and the base effect. Within the food category" the price declines ere recorded in red onion" big
onion" potatoes" eggs and most varieties of vegetables. Hoever" prices of rice" coconut" chicken" milk poder"
some varieties of fish and fruits recorded increases.
!n the &on9food category" prices in the Housing" Water" Electricity" 0as and 7ther 2uels sub9category recorded a
decline in 2ebruary )8%/. Meanhile" the prices in the sub categories of -ommunicationF *ecreation and -ultureF
and Education remained unchanged during the month. Hoever" price increases ere reported in the sub9
categories of 2urnishing" Household E@uipment and *outine Household Maintenance ;8.5 per cent<F Miscellaneous
0oods and Services ;8.' per cent<F -lothing and 2ootear ;8.% per cent<F Health ;8.% per cent<F and :ransport ;8.%
per cent< in 2ebruary )8%/" compared to the previous month.
-ore inflation continued its declining trend" reflecting the effectiveness of monetary policy measures implemented
by the -entral 6ank. Accordingly" core inflation on both annual average and DoD basis decelerated to ,.5 per cent
8
and ,.% per cent" respectively" in 2ebruary )8%/ from /.% per cent and ,.$ per cent" respectively" in Ianuary )8%/.
;-6SL" )8%,<
'!oduce! '!ice &nde# *''&, 9 A family of inde(es that measure the average change over time in selling
prices by domestic producers of goods and services
/. C!itical !e1ie. of L econom-
GD'
Dear )8%) )8%% )8%8 )88.
043 current market
prices
+"$5)",+' '"$//"88. $"'8/"%8/ /"5,$").,
043 groth rate ;>< './ 5.) 5.8 ,.$
;-6SL" )8%,<
4evelop small and medium enterprises and increase agricultural productivity. :he government=s high debt
payments and bloated civil service have contributed to historically high budget deficits" but fiscal consolidation
efforts and strong 043 groth in recent years have helped bring don the government=s fiscal deficit. Hoever"
lo ta( revenues are a ma#or concern. :he )88598. global financial crisis and recession e(posed Sri LankanHs
economic vulnerabilities and nearly caused a balance of payments crisis. 0roth sloed to ,.$> in )88..
Economic activity rebounded ith the end of the ar and an !M2 agreement" resulting in to straight years of 5>
groth in )8%89%%. 0roth moderated './> in )8%). Agriculture sloed due to a drought and eak global
demand affected e(ports and trade. !n early )8%)" Sri Lanka floated the rupee" resulting in a sharp depreciation"
and took steps to curb imports. A large trade deficit remains a concern. Strong remittances from Sri Lankan
orkers abroad have helped to offset the trade deficit.
043 9 composition" by end useJ Household consumptionJ '..'>
government consumptionJ %,.$>
investment in fi(ed capitalJ )5..>
!nvestment in inventoriesJ %.5>
E(ports of goods and servicesJ )).5>
imports of goods and servicesJ 9,'.$> ;-6SL" )8%,<
043 9 composition by sector J AgricultureJ %%.%> industryJ ,%.$> servicesJ $+.$ >
0roth >
Sector )8%%;*evised< )8%);3rovisional<
Agriculture 9/./ %.. '.' )./ %,.8 %8., 98.' 98.%
!ndustry %%.% ..$ %8.5 %8.8 %8.5 ..$ +., %,./
9
Services ..$ 5.5 +.5 5.$ $.5 /.$ /.' ,.+

When consider about the sector ised contribution to 043 it can say that agriculture contribution increased in
)8%) compared to )8%%" and no significant change in contribution of industry sector to 043. 6ut there is a
significant decrease in service sector contribution in )8%).
0&3
Dear )8%) )8%% )8%8
0&3 at current
market prices
+"/,,".$/ '"/+%".'5 $"$,/",)+
0&3 groth rate ;>< $.$ 5./ +..
;-6SL" )8%,<
When comparing )8%8E)8%% 0&3 have been increase from 8.$ > but from )8%%9)8%) 0&3 have been decrease
from ).. > .043 comply ith net factor income from abroad can get the 0&3 as belo.
)8%) )8%% )8%8
043 +.$5)",+' '"$//"88. $"'8/"%8/
&et factor income
from abroad
9%/5"/)) 9+)"8/% 9'."++'
0ross &ational
product
+"/,,".$/ '"/+%".'5 $"$,/",)+
;-6SL" )8%,<
&et factor income has been decreased in )8%) hen compared to )8%%.
:here is a deficit in net factor income because of higher groth in outflo in the income account.
*easons are J inflos declined during the year due to loer interest earnings as a result of the lo
interest rate environment prevailing in the global market.
0roth rates ;!n real terms<" >
Dear )8%) )8%% )8%8
0roth of 043 './ 5.) 5.8
0roth of 0&3 $.$ 5./ +..
0roth of *&! $., +.8 %).8
;-6SL" )8%,<
Sri Lanka=s economy gre by './ per cent in )8%) due to the slo recovery in the global economy resulting in
loer e(ternal demand for goods and services produced by domestic industries and adverse eather conditions
that affected e(port and domestic agriculture sectors.
10
According to the Annual -entral 6ank report )8%) the year9on9year groth of broad money moderated to %+.' per
cent by 4ecember )8%) from %..% per cent a year ago" mainly as a result of the year9on9year groth of credit to
the private sector decreasing significantly to %+.' per cent in 4ecember )8%) from ,/.$ per cent at end )8%% and
credit to the public sector increased its impact on monetary groth as offset by the decline in net foreign assets
;&2A<. As a result of tight monetary conditions" interest rates moved up during the year.
3er capita income increased to KS dollars )"5,' from KS dollars )"/88 in the previous year )8%8.
0roth of e(ports" hich as at ))./>" as far outpaced by the groth of imports at $8.+>" trade deficit idened
sharply to %'./> of 043. !n nominal terms" the outstanding government debt increased notably by %'.. per cent
to *s. '"888 billion at end )8%) from *s. $"%,, billion at end )8%%. :he total foreign currency denominated debt
stock increased by *s. )8+ billion ;).+ per cent of 043< during )8%) due to the depreciation of the rupee against
ma#or foreign currencies. 0overnment issued the fourth international sovereign bond" amounting to KS dollars %
billion. 3olicy interest rates of the -entral 6ank ere increased by $8 basis points in 2ebruary. A second round of
policy tightening as carried out in April" here the *epurchase rate as raised by )$ basis points to +.+$ per
cent and the *everse *epurchase rate as increased by +$ basis points to ..+$ per cent" thus idening the
policy interest rate corridor to )88 basis points. A ne 2inance 6usiness Act as enacted hile several ne
directions ere issued. &on9performing loan ratios declined over the year.
2nem$lo-ment
Dear )8%) )8%% )8%8
> of labour force /.8 /.) /..
;-6SL" )8%,<
Knemployment *ate in Sri Lanka increased to /.%> in the third @uarter of )8%) from ,..> in the second @uarter
of )8%). When consider about male and female there is increase of male labour force than female labour force.
6ut there is a increasing in female labour force than previous years ith according to that fact there is increase in
supportive activities such as day care services" outdoor food preparation restaurants and etc.

&nflation
Dear )8%) )8%% )8%8 )88.
> +.' '.+ '.) ,.$
;-6SL" )8%,<
!nflation remained at single digit levels for the fourth consecutive year supported by improved domestic supply
conditionsF Annual average inflation" hich declined during the first five months of )8%) to $.' per cent by May"
increased gradually thereafter to +.' per cent by 4ecember )8%)" hile Dear9on9year headline inflation" as
measured by the -olombo -onsumersH 3rice !nde( ;--3!<" declined to a lo level of ).+ per cent in 2ebruary
)8%).
!nflation rate in Sri Lanka as recorded at +.$8 percent in March of )8%,.
:he -olombo -onsumersH 3rice !nde( ;--3!< is the main retail price inde( used in Sri Lanka to measure the
changes of prices. !t measures the inflation rate of Sri Lanka on the folloing bases.
a< Dear on year
b< Annual average
11
6asis )8%) )8%% )8%8
--3!;Annual
Average< >
' '.+ '.)
--3! ;year on year<
>
$./ /.. '..
;-6SL" )8%,<
:he 2ood and &on9alcoholic 6everages sub9inde( contributed )..,> to the annual average inflation. -ore
inflation" hich is figured by e(cluding fresh food" rice" coconut" energy and transport from the --3! basket" also
increased on both annual average and year9on9 year bases by $.5>. Dear9on9year core inflation hich remained
in the mid9single digit levels during the first half of )8%)" increased gradually to +.'> in end of the year.
!n )8%% inflation is '.+>" in first fe months there as a high inflation due to an increase in prices as a result of
supply disruption caused by adverse eather conditions. Significant improvements in the domestic supply
conditions coupled ith the moderation of prices of food commodities in the international market" amidst a
relatively stable e(change rate helped contain inflation.
:he 2ood and non9alcoholic beverages sub9inde( /%> in the --3!" contributed to '8> of the annual average
change in the overall --3! during the year. :he year9on9year increase of the 2ood sub9inde( as ).$>
!n )8%8 inflation as $..> due to mainly attributable to the improved domestic supply conditions and supportive
fiscal policies aided by the ad#ustment in import duties" and donard revisions in administered prices as ell as
the prudent monetary policy stance and stable e(change rate and improved productivity also helped loer price
pressures during the year.
3rice increases in domestically produced goods largely impacted on inflation during the year.
2ood and non9alcoholic beverages sub9inde( /'.+> in the --3!" the price increases of key items such as fish"
vegetables" fruits" bread" sugar" egg" meat and meat products" coconut" coconut oil and condiments contributed to
the increase.
3. Go1e!nment fiscal $olic- 4 moneta!- $olicies
:here are to economic policy practices in Sri LankaJ
%. 2iscal 3olicy
). Monetary 3olicy
3.15iscal 'olic-
2iscal policy involves the government changing the levels of ta(ation and government spending in order
to influence Aggregate 4emand ;A4< and the level of economic activity. Aggregate demand is the total
level of planned e(penditure in an economy ;A4 A -L ! L 0 L B G M<. Main purposes of fiscal policy areF
Stimulate economic groth in a period of a recession.
Keep inflation lo
StabiliCe economic groth
Avoiding a boom and bust economic cycle
12
As e(plain above definition there are to main parts in fiscal policy such as ta(ation and government
e(penditure.
%. :a(ation
:a( is main income of any countryMs government. :here are many types of ta( in Sri Lanka such
as income ta(" NA:" &6: etc. Ho those ta( rates are change during the last three years as a
percentage of 043 given beloJ
As a percentage of 043
!n )8%8 !n )8%% !n )8%)
!ncome :a(es )./> )./> ).,>
NA: ,..> ,.,> ).+>
E(cise :a(es
&6:
).,>
8.5>
).5>
8.$>
).$>
8.$>
!mports 4uties %.%> %.)> %.8>
7ther :a(es ,.%> ).+> ).+>
*evenue from income ta( as a percentage of 043 in )8%8 1 in )8%% as e@ual but in )8%) it had been
declined marginal by 8.% per cent. 6ecause -orporate and non corporate ta( revenue increased only
marginally due to loer than e(pected revenue collected particularly from banking and financial services
and the e(ternal trade activities. :he 3ay9As9Dou9Earn ;3ADE< ta( collection declined marginally during
the year than previous to years.
*evenue from NA: as a percentage of 043 declined significantly to ,., per cent in )8%% compared to
,.. per cent in )8%8 and to ).+ per cent in )8%) from ,., per cent. Main reasons for significant declined
of NA: income are the granting of e(emptions to telecommunication services" educational services and
for goods and services supplied to foreign funded infrastructure pro#ects also contributed to the loer
NA: collection from domestic goods and services budget. :he decline in revenue from NA: in )8%) as
mainly due to the granting of e(emptions.
*evenue from e(cise duties as a percentage of 043 increased to ).5 per cent in )8%% from )., per cent
in )8%8 mainly due to the significant increase in e(cise duty collected from motor vehicle imports but it
has been declined in )8%) to ).$ per cent because of due to a decline in e(cise duty collected from
motor vehicle imports.
*evenue from &6: as a percentage of 043 declined to 8.$ per cent in )8%% from 8.5 per cent in )8%8
due to &6: on domestic goods and services declined. Although &6: as e(tended to the holesale and
retail trading sectors" the e(pected revenue increase from the base e(pansion did not materialiCe due to
delays in the registration of ne ta(payers but in )8%) &6: remained constantly as 8.$>.!n )8%) also
13
increased registration of holesale and retail businesses liable for &6: contributed to the groth in &6:
collection.
*evenue from import duties as a percentage of 043 !ncreased marginally to %.) per cent in )8%% from
%.% per cent in )8%8 mainly due to an increase in imports" particularly of motor vehicles and consumer
goods although it has declined to %.8 per cent in )8%) from %.) per cent in )8%% because of the loer
groth in motor vehicle imports during the year due to the implementation of policy measures to curtail
imports and the depreciation of Sri Lanka rupee.
*evenue from other ta( as a percentage of 043 declined significantly to ).+ per cent in )8%% from ,.%
per cent in )8%8 and it as remained as ).+ per cent in )8%) also.
). 0overnment e(penditure
0overnment e(penditure for public is many types Such as E(penditure on salaries and ages for public
sector employee" transfer and subsidies" pension and social elfares payments etc. :hose e(penditure
change year to year base on countryMs economic activities. Sri Lankan government e(penditures have
been change during the last three years as follo.
0overnment e(penditure for public as a percentage of 043 given beloF

As a percentage of 043

!n )8%8

!n )8%%

!n )8%)
0eneral public services /.$> /.)> ,.+>
Social services $.5> $.5> $./>
Economic services '.$> '.%> $./>
7ther './> $.$> $.$>
7EW interest e(penditure '.,> $.$> $./>
:otal e(penditure and lending ),.%> )%.'> )8.+>
;-6SL" )8%,<
E(penditure on salaries and ages for public sector employee increased by '., per cent in )8%% than
)8%8 but in )8%) it declined by 8.,> as percentage of 043 than in )8%%.:ransfer and subsidies as a
percentage of 043" it declined to ,., per cent in )8%% from ,.$ per cent in )8%8 and ,.% per cent in
)8%). 3ension and social elfares payments increase every year continuously because number of ne
pensioner increase. :here ere %'",'' ne pensioners in )8%8" there ere ),"//+ ne pensioners in
14
)8%% and there ere %+",+$ ne pensioners in )8%) contributed to increase pension payments.
E(penditure on the fertiliCer subsidy program increase *s. ,'.$ billion and e(penditure on the Samurdhi
program increase *s. %8.' billion in )8%).
:otal government e(penditure for public during the last three year as follo.
!n )8%8
*s. Million
!n )8%%
*s. Million
!n )8%)
*s. Million
:otal e(penditure and lending %").,"'%, %"/88"8.+ %"/.)"55)
;-6SL" )8%,<
3.%Moneta!- $olicies
Monetary policy involves influencing the supply and demand for money through interest rates and other
monetary tools. :he main purpose of monetary policy is to achieve lo inflation ;and usually promote
economic groth<
!n )8%8

6road money e(pansion continued to moderate during the first three @uarters of )8%8" indicating
subdued demand pressures. Supply9side developments meanhile" ere also favorable" as domestic
supplies increased during the year" hile commodity prices in international markets including
3etroleum prices moderated toards mid9)8%8. :he outlook for prices therefore as benign" supporting
a further rela(ation of the monetary policy stance to promote economic activity. Accordingly" policy
interest rates of the -entral 6ank ere reduced further" in Iuly and August )8%8. :he targeted groth of
broad money in )8%8 as also revised upard in Iuly )8%8" in order to facilitate the smooth functioning
of economic activity" as it became evident by mid9year that the domestic economy as e(panding at a
higher rate in )8%8 than originally pro#ected. 2olloing the reduction of the -entral 6ankHs policy interest
rates" market interest rates ad#usted further donards during the second half of )8%8" providing
additional impetus to economic activity. :his declining trend in interest rates continued into )8%% as ell"
as the 6ank reduced its policy interest rates further in Ianuary )8%%.
-redit obtained by the private sector regained momentum during the year )8%8 in vie of the improved
outlook for economic activity and the continued accommodative monetary policy stance of the -entral
6ank. Dear on9year groth of credit granted by commercial banks to the private sector" hich as at a
negative $.5> at end )88." turned positive in March )8%8" and after that continued to increase at a
healthy rate to reach )$ per cent in 4ecember )8%8. :his e(pansion as reflected in credit flos to all
sectors of the economy. &evertheless" average
groth of broad money ;M)b< during the year )8%8 remained around the targeted level of %$> by
yearend" as net foreign assets of the banking system declined gradually during the year along ith
increased financing of imports" hile net credit obtained by the government from the banking system
also declined toards the end of the year. Dear9on9year groth of daily average reserve money in )8%8
as also consistent ith the target stipulated in the monetary programmed for )8%8.
3ersistently high rupee li@uidity as a challenge in conducting monetary policy in )8%8. Mainly as a
result of foreign capital inflos to both the government and the private sector and subse@uent purchases
by the -entral 6ank" the money market continued to have e(cess li@uidity in )8%8. Hence" the -entral
15
6ank continued to absorb the e(cess li@uidity through open market operations in order to ensure that
interest rates remain stable and that reserve money ould remain at targeted levels.
!n )8%%
!n an environment of lo inflation for the third consecutive year" the -entral 6ank eased its monetary
policy stance in Ianuary )8%%" but initiated a cautious and gradual tightening of monetary policy
thereafter as credit and monetary aggregates continued to gro at a higher pace than pro#ected. :he
conductive environment for groth as strengthened ith a further reduction in the *epurchase rate and
the *everse *epurchase rate by )$ basis points and $8 basis points" respectively" in Ianuary )8%%.
Hoever" in vie of the continued high e(cess li@uidity in the domestic money market" largely an
outcome of the -entral 6ank absorbing e(cess foreign e(change inflos to the country" the Statutory
*eserve *atio ;S**< applicable on all rupee deposit liabilities of licensed commercial banks ;L-6s< as
ad#usted upards by one percentage point in April )8%% to permanently absorb a part of e(cess li@uidity
from the market as ell as to signal the policy direction of the 6ank.
A further reduction in e(cess li@uidity as effected by the in#ection of foreign e(change to the market by
the -entral 6ank during the latter part of the year to maintain the stability in the foreign e(change
market. :hese measures eliminated a large amount of li@uidity and resulted in an upard shift in the
short term interest rate structure. Amidst signs of credit groth remaining unabated" the -entral 6ank
resorted to moral suasion" and ith e(cess li@uidity declining" daily auctions under open market
operations ;7M7< ere recommenced toards the latter part of the year to contain interest rate volatility
and maintain short term interest rates at desired levels. :o address the impact of high credit groth on
the trade deficit and on the macro economy" in 2ebruary )8%)" the -entral 6ank raised its *epurchase
rate and the *everse *epurchase rate by $8 basis points each hile issuing a 4irection to licensed
banks" in March )8%) of the Monetary La Act to limit the groth of credit to a more desirable level.
&otithstanding high international commodity prices and adverse domestic eather conditions at the
beginning of the year" inflation remained at single digit levels in )8%%. !ncreased domestic food supplies"
including those from the &orthern and Eastern provinces" a stable e(change rate" favorable inflation
e(pectations of market participants" as ell as appropriate monetary policy measures supported the
maintenance of inflation at single digit levels in )8%% for the third consecutive year. As per the Ouarterly
Survey of -ommercial 6anksH Loans and Advances to the private sector" the groth of credit to all ma#or
categories decelerated toards end )8%). 6y end )8%)" credit to the Agriculture and 2ishing sector
accounted for %,.' per cent of total loans and advances. :he groth in long term lending declined during
)8%).
!n )8%)
!n comparison to the previous to year" in )8%) rupee li@uidity in the domestic money market as mostly
in balance" hich as in line ith the fi(ed monetary policy stance" and these circumstances and the
contact of the credit ceiling ere imitated in the interest rate structure. :he increase inflation in )8%)
as basically due to the one9off impact of the upard revision to several administratively determined
prices and the depreciation of the rupee. :he high e(pansion in money and credit in )8%% continued into
)8%)" the -entral 6ank raised its policy interest rates by $8 basis points each in 2ebruary )8%)" hile
alloing greater fle(ibility in the determination of the e(change rate. :his as the first increase in policy
interest rates since )88+. :he interest rates applicable on foreign currency deposits remained lo during
)8%) due to the near Cero policy interest rates of the advanced economies
16
7n a daily basis auctions under open market operations ;7M7< that ere recommenced in September
)8%% ere continued in )8%). !n addition" to address structural li@uidity" the -entral 6ank conducted term
auctions" outright sales of :reasury bills and fore( saps. Accordingly" rupee li@uidity remained at
around a balanced position in the last four months of the year" providing greater stability to the short end
of the interest rate structure.
:he overall groth of reserve money" hich remained high for over last to years" as maintained
ithin the targeted level through tight monetary policy measures the overall groth of reserve money"
hich remained high for over to years" as maintained ithin the targeted level through tight monetary
policy measures. 7n a @uarterly average basis" reserve money as maintained ithin the targets
stipulated under the Monetary 3rogramme during the first and the last @uarters of the year hile it
remained marginally above the targeted levels in the second and third @uarters of )8%). Average daily
reserve money amounted to *s. /'..5 billion in )8%) compared to *s. /8..) billion in )8%%. :his as a
groth of %/.5 per cent in )8%) in comparison to the high groth rate of )).% per cent recorded in )8%%"
and ithin the targeted average groth of reserve money of %$ per cent in )8%). 7n the asset front" the
e(pansionary effect on money supply arising from the groth of credit to both public and private sectors"
as somehat offset by the decline in &2A of the banking system. Although it is at a sloer pace than
in )8%%. :he increase in policy interest rates" the high borroing re@uirement of the government and
tight li@uidity conditions caused the yield rates of government securities in the primary market to
increase

6. Measu!es of Economic De1elo$ment
:here are a number of measures hich are used to measure the economic development of the country.
&nc!ease in !eal $e! ca$ita income.
:he per capita income ;3-!< in KS dollar terms gives an indication about the average amount of goods
and services that an individual of a particular country could purchase throughout the globe assuming no
restrictions on currency conversion and trade. Sri Lanka has already graduated from a lo income
country to a loer middle income country.
:he 3er -apita !ncome is derived by dividing the 0ross &ational 3roductE!ncome ;0&3E!< of a country by
the total population of a country during a given period of time. !t is a commonly used yardstick for
practical and analytical purposes.
3er -apita
!ncome
)8%8 )8%% )8%)
043 3er -apita"
KS ?
)"/88 )"5,' )".),
0&3 3er -apital"
KS?
)",+8 )"58$ )"5''
17
043 per capita has increased and also 0&3 per capita has increased.
7uman De1elo$ment inde#.
Human development inde( is divided under" education and health. Health rate is gradually increased.
and also literacy also human development inde(. Sri lankaHs human development inde( has
progressively increased. and literacy rates also increased. -omparing ith )8%8 literacy rate has been
improved.
Dear )8%8 )8%% )8%)
*ate .%./> .%..> .%..>
-ountry
Human
4evelopment
inde(
;H4!<
H4!
*ank
Life
E(pectancy
of 6irth
)8%)
0ross
&ational
income
;0&3<
per
capita
Mean
Dears of
Schooling
)8%8
E(pected
years of
schooling
)8%%
0&3
per
capita
rank
minus
H4!
rank
)8%)
&on
income
H4!
value
)8%)
Sri
Lanka
8.+%$ .) +$.% $.%+8 .., %).+ %5 8.+.)
-omparing ith last three years )8%% has better development than the other ) years.
0&3 per capita and 0&3 per capita both has been increased hich is a good results.
8. 'ossible economic th!eats L has to face in nea! futu!e

2oreign investors and competition
18
Here" foreign investors are shifting to countries lika 6angladesh due to lo labour cost. :his is a big
threat to sri Lankan economy. Labor cost of the 6angladesh is becoming cheaper comparing to ours. So
that the investors have to pay less to labours and investors ould like to shift to countries like
6angladesh. With the rise in age level Sri lanka has to compete ith countries like 6angladesh"
Myanmar and -ambodia. Since labour cost of those countries are lo sri lanka has to compete ith
them in order to attract more investors.
4ebt
6y no Sri Lanka has been taken long term debt from many countries and from the orld bank. 4ebt
servicing accounted for %8,> of revenue in )8%). &ot only money there are some contracts as ell.
High ay development" casino industry all these pro#ects are running by foreign contracts. So our money
is going out of the country. And e have to pay the long term debt plus interests. :herefore government
has to gain money. 6ut they canHt print more money if they do that it ill adversely effect on our currency
and also the inflation ill be high. So to collect money" government has to increase the ta(es then the
prices of the goods and services ill be more e(pensive. 3eopleHs living standards ill get decreased.
E#$o!ts
7ur e(ports have declined from ,,> of 043 in )888 to %'> in )8%).!tHs because of groth having been
done on non9tradables. Such as construction" mining and @uarrying" retailEholesale trade and public
administration. :he current incentive structure is such G resources ;both financial and human< are being
directed to such non9tradable sectors. Amongst the ma#or causal factors for this are the overvalued real
effective e(change rate and the tariff regime. 6ut e have to face the fact" given the siCe of the domestic
market" it is not possible to achieve 5> groth on a sustained basis ithout e(port e(pansion.
Lo. $!oducti1it-
When comparing to countries like :hailand" Sri lankan productivity is half of the :hailand ith regard to
agriculture" productivity in agriculture is only one9third of the national average in srilanka" hich is
anyay very lo. :hrough agricultural sector government can get more revenue if they effectively
involve in it. :hen the economic stability ill get unstable. Addition to that" due to paying debt and
interest for years" our per capita income also get reduces.
9. &nto .hat e#tent L achie1es its mac!o:economic ob;ecti1es
Economic ob#ectives of Sri Lanka
%. 2ull employment" or lo unemployment
). 3rice stability
,. High economic groth
/. 6alance of payments in e@uilibrium
5ull em$lo-ment and lo. em$lo-ment
2ull employmentis"a situation in hich all available labor resources are being used in the most
economically efficient ay. 2ull employment embodies the highest amount of skilled and unskilled labor
that could be employed ithin an economy at any given time.
19
Knemployment occurs hen a person ho is actively searching for employment is unable to find ork.
Knemployment is often used as a measure of the health of the economy. :he most fre@uently cited
measure of unemployment is the unemployment rate. :his is the number of unemployed persons divided
by the number of people in the labor force.
Dear *ate
)8%8 /..>
)8%% /.)>
)8%) /.8>
-omparing to last ,years unemployment rate has gradually decreased. :hat means the disposable
income of a person has increased due to increment of employment rate. :herefore itHs clear that the Sri
Lankan economy has achieved its loer unemployment ob#ective.
'!ice stabilit-
:he main ob#ective is to simply safe guard against aggressive and unpredictable inflation. :his effects
most people in terms of ho much can ! actually buy ith the money ! have. !nflation is the average
increases in price on consumer goods. Having lo levels of inflation" or rather predictable levels of
inflation" has been associated in the past ith stable and healthy economies and our history confirms it.
:he best ay to e(plain this is that hen inflation is lo or predictable it allos both consumers and
producers to make decisions ithout having to factor in too many variables and so makes decision
making easy and gives them a sense of confidence. :he central bank tries to achieve this by controlling
monetary policy.
Dear *ate
)8%8 '.)>
)8%% '.+>
)8%) +.'>
;-6SL" )8%,<
:he inflation rate has gradually increased during last , years. When the rate is increasing the purchasing
poer is decreasing. So hen comparing )8%8 and )8%) inflation rate has increased by %./>. !n )8%)
2ebruary inflation rate as at a very loer level of ).+ percent. 6ut inflation gradually edged up during
the year to a peak.
7igh economic g!o.th
An increase in the capacity of an economy to produce goods and services" compared from one period of
time to another. Economic groth can be measured in nominal terms" hich include inflation" or in real
terms" hich are ad#usted for inflation. 2or comparing one country=s economic groth to another" 043 or
0&3 per capita should be used as these take into account population differences beteen countries.
Dears and *ates
)8%8 )8%% )8%)
0roth of 043 5.8 5.) './
0roth of 0&3 +.. 5./ $.$
0roth of *&! %).8 +.8 $.,
;-6SL" )8%,<
20
043 G this has increased by 8.)> in )8%% comparing to )8%8 but in )8%) it has reduced by %.5>.
ithappened because the of the less contribution of agricultural and service sector. *eason is the bad
eather conditions" subdued performance in e(ternal trade activities" and declaration in transport.
0&39
<alance of $a-ments in e=uilib!ium
Maintaining a balance of payments ith the rest of the orld is a macroeconomic ob#ective. !n simple
terms" if the balance of payments balances" then the combined receipts from selling goods and services
abroad" and from the return on investments abroad" e@uals the combined e(penditure on imports of
goods and services" and investment income going abroad.
Last , years deficit of the 673 has been increased due to high out flos from the country regarding to
inflos to the country. :his is a bad situation to the country and as a result of deficit country has tend to
take more loans from foreign countries.
21
>. <O' status in the !i Lan"an Econom-


;-6SL" )8%,<
673 is combined ith -apital account and current account of the country. -urrent account has the more
impact to 673. !n )8%8 current account has a balance of 9%)%"/+$. And trade deficit of 9$/$",$8
Supported by the improved investment climate" attractive prices and the gradual recovery of the global
economy" the earnings from e(ports reached a record high" surpassing the previous peak performance
in )885. 4espite the ithdraal of the 0eneralised System of 3references 3lus ;0S3L< concessions
since August )8%8"e(ports to all ma#or destinations increased. !mports also recovered strongly ith
significant contributions from consumer and intermediate goods reflecting tariff reductions" higher
commodity prices and the strong groth in the domestic economy. As a result" the trade deficit
e(panded in )8%8 subse@uent to the sharp contraction in )88.. in vie of the loer domestic and global
demand. !nard orkersH remittances increased substantially and continued to be the foremost foreign
e(change earner in )8%8. Sri LankaHs travel and tourism industry" hich suffered immensely due to the
protracted internal conflict" staged a remarkable recovery during the year. :he current account deficit in
)8%8 stood at )..>of 043 compared to the %89year average of ,.$>
!n )8%8 capital account balance has ,))"8,$ due to increased inflos to the financial account. And
overall balance of the 673 recorded a surplus of 5+".+/ in )8%8.
!n )8%% current account has a deficit of 9$%%"8.8 and 0lobally" the intensified sovereign debt crisis in the
Euro area"recovery in the global economy" and geopolitical uncertainties in some oil producing Middle
Eastern and &orth African countries e(erted pressure on oil prices and financial inflos. 4omestically"
the e(panded aggregate demand resulted in arapid groth in imports idening the trade deficit
Substantially amount 9%"8+,".88 despite an impressive groth in e(ports. E(ports gre by )) per cent
supported mainly by industrial e(ports" hile imports gre by $% per cent reflecting a sharp groth in
intermediate goods led mainly by oil imports and investment goods for pro#ect related imports.
!n )8%% !nflos to the capital and financial account remained strong" though such inflos ere
insufficient to offset the high current account deficit and due to that the overall balance becomes a deficit
of 9%8$"5$8.
!n )8%) 673 has a current account balance of 9/.$"5$, and trade deficit of 9/.$"5$,.
:he idening trade deficit driven by a sharp groth in imports and a slodon in e(ports due to eak
global demand as a key policy challenge faced at the beginning of )8%). With a vie to ensuring
macroeconomic stability" the -entral 6ank and the government implemented a strong policy package"
hich included alloing greater fle(ibility in the e(change rate" increasing the policy interest rates"
imposing a ceiling on the groth of credit granted by licensed banks and raising customs duties on
selected imports. *eflecting the effectiveness of these policy measures" e(penditure on imports declined
by $./ per cent in )8%)" ith non9fuel imports decreasing at a higher rate of 5.' per cent. Although
22
)8%8 )8%% )8%)
:rade balance 9$/$",$8 9%"8+,".88 9%"%.$",'5
*atio to 043 in ;>< 9..+ 9%'./ 9%$.5
greater fle(ibility in the e(change rate helped augment e(port competitiveness" the decline in
international commodity prices and subdued global demand amidst faltering economic activity in the KS
and the euro area resulted in e(ports declining by +./ per cent in )8%). Hoever" the decline in import
e(penditure as larger than the decline in earnings from e(ports.
Supported by the significant improvement in the current account and the continued inflos to the capital
and financial account" Sri Lanka has a overall balance surplus in )8%).
?. Economic $osition of !i Lan"a .ith com$a!e to othe! Asian count!ies and .est.
:he international economic donturn is idespread. Even -hina=s state capitalism has been unable to eather
the global storm and the -hinese economy is e(pected to slo don this year. :he !ndian economy may
e(perience a precipitous decline in its groth. !ndia=s economic progress that had been impressive in the last
decade has been halted and its first @uarter economic groth dipped to #ust $., per cent. !ndia=s sloer groth
could affect the Sri Lankan economy in several ays. !ndia is an important trading partner. 2urthermore" foreign
investors tend to vie investment prospects regionally. !ndia=s troubles could intensify foreign investor concerns
on Sri Lanka as a destination for 24!. Moreover our long term economic e(pectations are linked to the fortunes of
!ndia.
:he most pertinent global developments for Sri Lanka in the short run is the instability of European economies
that have sloed don and reduced their purchasing poer of commodities e(ported by Sri Lanka. European
countries and the KS that accounted for $/ per cent of our e(ports last year is a siCeable one for industrial
e(ports. :he decrease in e(ports to Europe is being felt in the trade statistics this year. Sri Lankan industrial
e(ports have faced a drop of ,.% per cent in the first four months in )8%%.
What is particularly disconcerting is that there is a trend of decreasing industrial e(ports" especially of garments.
!n March industrial e(ports declined by %8.) per cent and in April it declined by 5.+ per cent" compared to the
respective months of last year. :ea e(ports to the Middle East and *ussia too have been adversely affected and
in the first four months" tea e(ports decreased by %%.5 per cent" contributing heavily to the decline in agricultural
e(ports by %%.+ per cent compared to the previous year=s first four months. :otal e(ports declined by ,.% per cent
in the first four months of this year compared to the same period last year. !ndications are that both industrial and
agricultural e(ports ould face adverse conditions and are not likely to recover
Sri Lankan=s main economic sectors are tourism" tea e(port" clothing" rice production and other agricultural
products. !n addition to these economic sectors" overseas employment" especially in the Middle East" contributes
substantially in foreign e(change. Sri Lanka is the orldMs )
nd
largest e(porter of tea.
According to the international monetary fund" Sri Lanka has a yearly gross domestic product ;043< of KS ? '/..
billion in )8%). Sri Lanka is second only to the Maldives in South Asian region in terms of per capita income. !t
recorded a 043 groth of 5.,> in )8%%.
Sri LankaMs economy as transiting from the factor9driven stage to the efficiency9 driven stage and that it ranks $)
nd
in global competitiveness an also Sri Lanka ranked /$
th
in health and primary education. Sri Lankans have a life
e(pectancy of ++.. years at birth" hich is %8> higher than the orld average. :he infant mortality rate stands at
5.$ per %"888 births and the maternal mortality rate at 8.,. per %"888 births" hich is on par ith figures from the
developed countries. Sri Lanka ranked ,)
nd
in business sophistication" /)
nd
in innovation and /%
st
in goods market
efficiency. Sri Lanka ranks 5
th
in orld giving inde( registering high levels of contentment and charitable behavior
in its society. Sri LankaMs human development inde( is 8.+%$ points hich it is ell above the other South Asian
-ountry. Sri LankanMs literacy rate is .).$> hich that rate ! amongst develop notations. Sri Lanka as the first
country in the South Asian region to introduce ,0 ;:hird 0eneration<" ,.$0 HS43A" ,.+$0 HS3KA and /0
L:E mobile broadband !nternet technologies
23
1@. 0ecommendations to im$!o1e status of the !i Lan"an econom-
Encou!age e#$o!ts
When considering past , years SL had a trade deficit so country must encourage imports inorder to gain a
trade surplus. :his can be done through giving ta( holidays" giving subsidies to e(port and by improving
the @uality of e(port products. :hrough this country can e(pand the siCe of the e(ports as ell.
Att!act mo!e fo!eign in1esto!s
-urrently most of the investor are shifting to countries like 6angladesh"Myanmmar due to cheap labour. So
SL must attract investors by making them understand no the SL is a peacefull country ith less risk to
invest and also must sho them compliance ith la" absence of frauds etcP
&nc!ease sala!- $a-ment fo! labou!s
Today most of the educated people are shifting outside the country due to cheap salary in ! and also they get "# in
those countries as $ell. o they li%e there&earn there and pay ta'es to those countries as $ell. Therefore if !
companies can impro%e their salary payment these (ind of people may stay in ! rather than going a)road.
Ta# collection should be mo!e effecti1e
When considering about income ta( of the SL most of the people are trying to avoid ta( payment in
different ays. :herefore& SL income ta( collection should be more effective.
24
11. Conclusion
!n overall e analyCed the status of the Sri Lankan economy during past , years under different criteriaHs like
national income" 043" 0&3" groth rate" unemployment" inflation" monitory policy" fiscal policy and 673. :hen e
identified hat are the threats that SL has to face in the future and then e compared Sri Lankan economy ith
Asia and est. 2inally e gave recommendations in order to develop the status of the economy. Knder those
recommendations most important recommendation to implement instantly is encourage e(ports. :hrough that
country can gain a income to country hich ill be helpful to decrease the debts as ell as to decrease the
unemployment level as ell.
*
25
0efe!ences
Bibliography
+,! -2013. Economic and social statistics of Sri Lanka. "/0. +,!.
+,! -2014. 1online2. 3%aila)le from4 http455$$$.c)sl.go%.l(5htm5english5026prs5p61.asp 13ccessed4 4 march 20142.
http455ceylontoday.l(5597339347ne$s7detail7potential7threats7and7changes7of7the7lan(an7economy.html
htt4566www.7t.lk620136086126sri2lankas27uture2a24art2+727l)ing2geese2chain2+r2just2a2sitting2'uck6
26