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毒 ܪ
Expenditure -
GRH Educati
Expenditure Health
莓 a people's BANK PUBLICATION
 

BANKING Insurance 觀 2:3
REAL ESTATE
雷電

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FINANCE MINISTER RONNIE DE ME
SUCCESSIVE ADDRESS TO AID GROU
Extracts from the statement by the Minister
Development Programme Uninterrupted
"While we all look forward to the restoration of peace and stability in Sri Lanka, we must not overlook the salient fact that four years of internal conflict and escalating military expenditure has not resulted in any deterioration of the high standards of prudent economic and financial management which we have consistently tried to maintain in Sri Lanka during the last ten years. We have also gone ahead with our development programme without a break. On behalf of the Government, I can also assure 'Ou, that we will continue to maintain the same high standards of economic and financial management in the future too, notwithstanding the strains and stresses of the present ethnic problem. This is ensured by the medium-term financial strategy 1987-1989, which I have already outlined to you.”
Regaining Past Momentum
"Expenditure of high priority will be permitted only if additional revenue resources are mobilized or if expenditure savings in other areas are attainable. This scenario of economic adjustment would no doubt entail an initial lowering of Sri Lanka's growth performance from the high levels achieved in the past. However, with increased resources made available to the private sector, and with the productivity gains made possible by the policy reforms and the infrastructure development of the last ten years, we could expect to regain the momentum of the rapid economic development of the past. This is of course subject to the crucial assumption that there will be an improvement in the political situation. Even with the present sect rity constraints, however, I am confident that the economic activity in the rest of the country which is not affected by violence could yield an overal economic growth rate of around 3 - 4 per cent of GDP in the coming years'.
Medium Term Peblic Investment Programme
"The Medium Term Public Investment Program 1987 - 1991, which has been presented to you, has been prepared within this overall framework. The stabilization of the economy during 1987 and 1988 will be a major objective. While our exchange rate policy will be aimed at maintaining Sri Lanka's external competitiveness, and perhaps improving it, and while monetary policy will be directed essentially at containing inflation and improving the availability and cost of creuit to the productive sectors, fiscal adjustment will conti. nue to bear the brunt of this economic adjustment
Creating Neνν Εχρecιαίions
"We doubled the incomes of our people, reduced poverty and unemployment, protected the poorest, reahabilitated a run-down infrastructure and opened up income earning opportunities to millions, while preserving our democratic form of Government and our democratic way of life. We have thus created a new hope and a new expectation that rapid economic development çan be achieved within a democratic framework and a liberalized economic system, while safeguarding the living standards of the poorest of the poor'.
Constraints to Development
"What is most noteworthy is that our progress has been achieved under the most difficult circumstances that could have been faced by any country at any time. Despite our having to fight with our backs to the wall against such terrific t odds, we have made courageous and determined efforts to rec
 
 

L’S TENTH
P
Paris. June 25
Hon. Ronnie de Mel tify the remaining imbalances and to foster an incentive-related open economy, whose proven resilience under great adversity has kept incomes growing and hopes of a better tomorrow for our people very much alive...I shudder to think of the intolerable hardships Sri Lanka would have faced today, if we had not completely transformed our economic system and our economic policies since 1977',
Reducing Public Sector Consumption
- "With regard to expenditure, there could be some scope for reducing public sector consumption. A Committee on Admi. nistrative Reforms has made recommendations to streamline the administrative system. Also, greater progress in rationalization of public enterprises could produce budgetary savings. Legislation has alread been enacted to convert public enterprises to public companies under the Company' Law of Sri Lanka. Already a number of uneconomic public enterprises have been closed down, while some have been placed under private management. We are now in the process of privatizing the Telecommunication Services, the State Distilleries CorpoCorporation and the Sri Lanka Sugar Corporation. There are many other public corporations which will come up for privatization in due course. A high level Presidential Privatization Commission has been appointed to prepare the strategy and plan for future privatization. Also, several measures have already been taken and will be taken in the future too, with - World Bank assistance, to upgrade the management of the remaining public enterprises and improve their performance. An importari: means by which we hope to make public enter. prises more efficient will be by discontinuing public sector. monopolies and by encouraging greater competition from the private sector on equal termis ”!
Reducing Public Sector Consumption ܢ ܝ ܥ
"We are adopting a very pragmatic and practical approach towards public enterprises. Our policy is to bring in the private sector, where appropriate, so as to improve management and efficiency and make them less of a burden on the taxpayer and on the Budget'.
Tighter Expenditure Controls
"Meanwhile, we have also set in motion a process to further tighten Treasury control of Government expenditure. Some aspects of public expenditure controls had tended to become somewhat relaxed in the early stages of the Government's large public investment program, in order not to retard or inhibit the pace of its implementation. We now feel that very strict expenditure controls should be restored once more, and several initial steps have already been taken in this direction since 1986. The Government has laid down strict procedures and guidelines for the identification, preparation and implementation of projects, involving a two-stage approval procedure. The technical capacity of line Ministries and Departments have been further strengthened in project evaluation'.
National Priorisies
"The Government has also laid down a set of national priorities. These include social welfare programs, maintenance and rehabilitation of existing infrastructure assets and the promotion of a dynamic export oriented private sector. The Public Investment Program will in future be essentially directed at the provision of the necessary infrastructure and also the safeguarding of the living standards of the most indigent sections of the population'.
ECONOMic REVIEW MAY, 1987.

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EKONOMIQ RAVNAVANT
Published by the People's Bank Research Department, Head Office Sir Chittanpaan A. Gardinar Mawatha
Colombo 22.
Sri Lanka.
THE ECONOMIC REVIEW is intended to
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LLL GLLLLLL SLLG LLLLLLLLSLLLLL S LL S LL Y0LLLLL L0LS editorial considerations only and do not necessarily refect Bank policies or the officia viewpoint signed feature articles also are the persona views of the authors and do not represent the institutions to which they are attached LLLY J0LLLL LL LaLLLLLL S LLLLS LcL0KLL S JS comments and Viewpoints are welcome
UHE ECONOMIC REVEVV is published monthly and is available both on Subscription and on direct sale
Volume 3
Tourism
Foreign News
Trade
industry
Tilak Samaran
N. Manoranja
Ariya Abeysir
David Winder
NEXT ISSUE
* NDUS
its gro * Leadin * Plant g. over Th * Setbaçl * Emplo
COVER
Sepali
 
 

Number 2 - ly ༈987
CONTENTS
COLUMNS
20 Declining tourist arrivals and loan
rescheduling measures
Review 22 World Bank urges indonesia to change production policies
23 Agreement over Thai purchases of
- Sri Lanka's geudas
24 Sri Lanka's textile industry back from the brink
3 SPECIAL REPORT
SRI LANKA’S ECONOMY — 1987 量
World Bank's views on the economy
State of the economy - Assessment of Public investment Programmes
layake 6 A Review of the Economy
17 External debt
18 Economic development, growth and welfare
FEATURES
27 Fiscal policies for agriculture and supporting
agro-industry
nghe 30 A note on developing System 'A' of the Acce
lerated Mahaweli programme and Soviet offers of assistance
32 Prototype for Privatisation
TRIES - the current state of the sector and issues facing with and development
g quoted companies in Sri Lanka 2netic resources:growing control by industrialised world ird World seeds and crop varieties
cs for paddy in 1986
ment and productivity in Sri Lanka's manufacturing sector
ka Fernando

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- ECONOMIC REVIEW MAY, 1987.

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ECONOMIC REVIEW MAY, 1987.

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ECONOMIC REVIEW MAY, 1987.
 

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A REVIEW OF THE ECONOMY
Tilak Samaran ayake
While there is litt cyclical effects, su an extent the adv
In this review of the economy in terms of GDP growth performance and the developments of key macro-economic indicators, economist Tilak Samaranayake discusses the slowdown in growth trends and maintains that the economy was feeling the impact of adverse cyclical and structural effects, in addition to the external factors associated with the ethnic situation. He concludes that
from terrorist acti now to remedy through implem policies.
ജൂ (nearly twice th and a 15.4 per manufacturing s ted for the high
Performance in 1986
Sri Lanka's economy, measured in terms of the Gross Domestic Product (GDP), grew by 4.3 percent last year in real terms (1982 constant prices) or by 10.4 percent in current (1986) prices. The value of GDP in constant prices increased from Rs 109570 million in 1985 to Rs 114,261 million in 1986, and in current prices from Rs 148,321 milion in 1985 to Rs 163,713 million in 1986. Gross National Product, which is computed by adjusting the GDP for net factor income from abroad, increased by 4.5 percent in constant prices and by 10.9 percent in current prices. However, the values of GNP, in constant (Rs 114, 261 mn) and current ( Rs 163,713 mn) prices in 1986 were lower than the respective values of GDP during the year which implied, that there has been an outflow of resources in 1986 as well. This trend has been a continuing feature in Sri Lanka's national accounts during the last few years.
Sectoral breakdown indicates that growth rates have varied from a minimum of 2.6 percent in the agricultural sector to a maximum of 8.4 percent in the manufacturing sector. Among the principal GDP sectors, only three registered a growth rate of more than the overall growth rate. that is, mining (5.2%) manufacturing (8.4%) and unclassified (6.0%). Besides agriculture, lower growth rates were recorded in construction (3.0%), transport (3.2%), wholesale and retail trade (3.9%), and banking and real estate (4.0%).
With a growth rate of 8.4 percent
"ރޮގިސީ سیکھ2
percent of the terms. Despite percent, agricul only 15 percen rate of 2.6 perce overal| GDP grow sectors, wholesal counted for 18. crease in GDP ( truction 5.0 perc cent, banking an cent and uncla Manufacturing, a sale and retail it accounted for mc the increase in GC In compariso standards of the year which rec growth rate-the turns out to be th the economic gr progressively dec 4.3 percent grow declining trend h However, in the cumstances unde rate in 1986 has Sri Lankan econd kably well. The c flict and the adve with it, such as and reduced mar and Eastern provi ble investment c and foreign entre cant drop in tot nings from touris creases in defen rently remain na nomic developme markets also caus
 

ജ്ഞ
hat can be done about as weather and also to e developments arising y; it is necessary to act the structural effects tation of corrective
growth rate of GDP, int GDP share), the tor in 1986 a.CCOUnt contribution of 29 DP growth, in value GDP share of 25.4 ure accounted for because its growth it was nearly half the th rate. Among other and retail trade acpercent of the inin value terms) consnt, transport 8.4 perdi real estate 4.1 perssified 7.5 percent. griculture and wholerade taken together, re than two third of P.
with the growth past, since 1978- the :orded the highest 1986 growth rate 2 lowest. Since 1978, owth rate has been ining and with the h rate in 1986, the as extended further. coratext of the cirwhich this growth been achieved, the my has done remarntinuing ethnic conse effects associated ) lower production ets in the Northern ces, (b), unfavouranate for both local reneurs, (c) signifiist traffic and ear, and (d) rapid inexpenditure; curir obstacles to ecot. Adverse external added constraints
in 1986, with extremely lower market
prices for major export commodities
such as tea.
REVIEW OF TRENDS OF KEY INDICATORS
Revenue and Expenditure
As demonstrated in Table 1, the developments of key macroeconomic indicators show mixed performance. As a ratio to GDP, revenue declined from 24 percent in 1985 to 23 percent in 1986, but in comparison with the 1981 to 1983 period, the 1986 performance was still satisfactory. With regard to both total and capital expenditures, the ratics were lower in 1986 relative to 1985 which indicated that there were some efforts to restrain public expenditure in order to hold down the budget deficit. The 1986 deficit ratio also suggests a marginal improvement in budgetary discipline. However, if the final figure on the total expenditure will be different from the provisinal figure currently reported by the Central Bank, the 1986 picture Will show an OVera|| deteiOration in fiscal variables compared with the ex
perience in 1985.
Money Supply
The developments in the monetary variables show a marked improvement in 1986. The rate of increase in narrow money supply (MI), moderated in 1986 with an increase of only 13 percent. In the case of the broad money supply indicator (M2), the picture looked even better, with a growth rate of 5 percent, the lowest rate recorded during the 1980-1986 period. This decline has been a result of the combination of two factors; (a) a decline in external assests and (b) a reduction in demand for domestic credit from the banking system. While both these de
| Velopments helped to reduce the pres
sure on money supply, they are not necessarily encouraging developments with regard to other sectors in the economy. The decline in external assets suggests some deterioration in the ba
ECONOMIC REVIEW MAY, 1987.

Page 9
SELECTED MACRO-ECC
1980 1981
Budget (% of GDP) (a) Revenue 23 21 (b) Expenditure 49 39 (c) Capital 22 17
Money Supply (a) M1 (% increase) 23 6 (b) M2 (% increase) 32 23
Inflation (a) CPI (% increase) 26 18 (b) GDP Deflator 18 21
(% increase)
Exchange Rates (a) SLRs/S Rate 16.5 19.3 (b) Depreciation 5.6 16.6
Rate (%)
Terms of Trade (1981-100) {a} . Overall lindes 102 100 (b) Export index 92 1OO (c) import index 90 1OO
Foreign Trade (Rs Mn) (a) Exports 17603 20507 (b) imports 33915 36 123 (c) Current Acct, Balance -10912 -8498
Source: Central Bank of Ceylon
lance of payments while the drop in demand for domestic credit may have been caused by a slower pace in economic growth.
Inflation
Compared with 1985, the rate of inflation, measured in terms of the Colombo Price index (CPI), increased, but the 8 percent rate in 1986 was still a marked improvement, compared with the experience in the decade before 1985. The GNP deflator, which measures the price movements in aggregrate terms, also captured an increasing inflationary trend in 1986 in comparison with the experience in 1985. Although both measures suggest relatively higher price increases in 1986, the increases were still within manageable limits. In the context of continuing budget deficits of substantial magnitudes, and the growing defence
ECONOMIC REVIEW MAY, 1987.
budget, inflationar have been much gr timely action taken during the year su revision of the in CP composition,
the highest increa followed by the
gory 14.4 percent and fuel 1.5 percer
Exchange Rates
The Sri Lanka against all major with the only exc dian Rupee. The rates Were recorde Mark and the Jap by the French F The rupee deprec dollar by 6.5 pe average basis and

ABILE 1.
OMIC INDICATORS (1980-1986)
82 1983 1984 1985 1986
8 21 25 24 23 38 39 35 40 38 9 13 - 14 19 18
17 25 14 12 13 25 22 17 11 5
11 14 17 1.4 8.0 10 15 17 O 5.8
'O.8 23.5 25.4 26.2 28.04 7.5 11.5 7.5 3.1 6.5
92 113 134 108 102 38 125 160 142 126 O7 110 119 132 124
21098 25038 371.98 35728 33881 415O1 45206 49048 55529 54898 1 1844 -11122 -1406 -11408 -11461
y experience would eater if not for the by the government :h as the downward erest rates. In the clothing registered se of 15.5 percent, miscellaneous catefood 7.1 percent t.
rupee depreciated urrencies in 1986, ption being the Inighest depreciation | for the Deutsche nese Yen, followed Inc and the SDR. ted against the US :ent on an annual y 3.9 percent from
the beginning and the end year basis. A much greater depreciation of the exchange rate was prevented by the moderate inflation and the relative weakness of the US dollar, the intervening currency for exchange rate determination in Sri Lanka, particularly during the second half of the year.
Terms of Trade
International price movements for major export commodities from Sri Lanka remained less encouraging in 1986 compared with 1985, and particularly compared with the experience in 1984 when the international price of tea reached unprecedented price levels. One redeeeming feature in the movement of price indices in 1986 was that import prices also experienced a decline, helping Sri Lanka to reduce its expenditure bill on imports.

Page 10
Both earnings from exports and expenditure on imports declined in 1986, in rupee terms; exports by 5.2 percent and imports by 1 percent. When adjusted for rupee depreciation, the value of exports declined by 10.5 percent and expenditure on imports by 6.5 percent. The current account deficit in the balance of payments marginally increased in rupee terms from Rs 11,408 mn in 1985 to Rs 11461 mn in 1986 and as a ratio to GDP, it declined from 7.7 percent in 1985 to 7 percent in 1986.On the other hand, the overall resource gap in the balance of payments increased from Rs 29,739 million in 1985 to Rs 31,360 million in 1985. The principal sources of financing this gap was (a) official grants (Rs 4,988 million), (b) long terms loans (Rs 9,915 million), (c) Short term Credits (Rs.8,018 million) (d) Commercial borrowings (Rs 2,722 million) and (e) Reserves (Rs 1215 million). The use of Reserves in financing balance of payments in 1986 led to the decline in the value of gross reserves from Rs 18,367 million at the end of 1985 to Rs 17,512 milion at end of 1986.
KEY DETERIMANTS IN
ECONOMIC GROWTH
While the economic growth performance and the developments of the key economic indicators in 1986, were to an extent encouraging given particularly the extremely vulnerable economic and political environment currently prevailing, the declining economic growth and the remote prospects of maintaining economic stability in the coming years vvarrant immediate policy attention. Lower economic growth directly translates into lov ter production which in turn leads to lower income, earnings from exports, government revenue and domestic investments. In the absence of concerted efforts, this process could repeat itself year after year, reducing the growth next year, relative to this year, to
gether with a economic Stanc The issue ra
eCOn Onny Can I der these d While a straigh point is not ea deal of analysis of the econom improved ecor in favourable C cal front and t as the develops will be the key and economic the developme will in turn de velopments of and the fiscal a fronts suggest production per ly determines ir mance and ecor
The rest of potential for h by reviewing th agricultural and in the recent p. taken following roles of fiscal at in economic de highlight the ne lopment strateg cies to increase come the const economy by a a traditional ex
Role of Fiscal I
Increased n ment has been the impressive g ring the last ter liberalization it and 1986, gro: averaged 24.0 pared with 16.( and 1977. Inv sector account GDP while the domestic invest
s cent of GDP ( riod. The disa
investments af

decline in overal socioards. ised here is whether the erform better, even unfficult circumstances. forward answer to this sy, and requires a great of the different facets y, any potential for an omic performance lies evelopments in the fishe balance of payments ments in these two areas determinants of growth stability. Apparently, hts in these two areas bend largely on the dethe production base; hd balance of payments that it is the improved ormance that eventualnproved growth perforomic stability. the paper explores the igher economic growth 1e production trends in manufacturing sectors ast. This will be undera brief review of the hd balance of payments velopment in order to ed to consolidate deveies and economic poliproduction and overraints imposed on the Weak revenue base and
Ort SectOr.
levelopments
obilization of investa major determinant of rowth performance duyears, since economic 1977. Between 1978 S domestic investment percent of GDP compercent between 1970 stment in the public di for 14.5 percent of private sector share in ment averaged 9.5 peruring the 1978-86 pegregation of domestic er 1978 in terrns of
national and foreign savings indicate that national savings contributed 14.3 percent of GDP and foreign savings 9.6 percent of GDP. The respective ratios between 1970 and 1977 were 12.7 percent and 3.3 percent. These ratios of the two periods demonstrate that higner domestic investment since 1978 has been made possible largely because of the increased foreign assistance consisting of concessionary foreign loans and outright grants. The difference in the national savings ratios of the two periods, (between 1970 and 1977 and after 1978) is very small which means that the role of national savings has been practically the same during both periods.
The fiancing of the public investment programme during the 1978-86 period indicates that 14.3 percent of GDP has come from national savings
and 9.6 percent of GDP from foreign savings. Of the national savings, the
private sector share has been about 11.7 percent of GDP. The volume of savings that occured in the public sector after 1978 amounted to 2.7 percent of GDP, but the amount of public sector national savings that resulted from budgetary operations was equivalent to only 1.7 percent of GDP. Thus even within the public sector, a greater part of public investment (excluding the contribution made by the private sector) has come from sources outside the budget.
The significance of non revenue sources in financing Sri Lanka's economic development is well demonstrated in Table 11. During the six year period between 1981 and 1986, total public spending (both current and capital) amounted to Rs 300 billion, of which domestic revenue accounted for about Rs 178 billion. About 5 percent of the everal deficit, which amounted to Rs 124 billion, has been financed by foreign loans and grants (52%) and the balance by non-bank sources (36%) and the banking system (12%). This breakdown clearly places foreign assistance as a highly dominat source of deficit financing after 1978.
ECONOMIC REVIEW MAY, 1987.

Page 11
TA
SUMMARY OF BUDGETA
Revenue, Expenditure 1981 1982 198 and Financing (Rs Mn)
(a) Revenue 16,228 17,809 25, (b) Current Expenditure 17,721 19,231 25, (c) Capital Expenditure 13,373 18,669 23, (d) Revenue Surplus
Over Current
Expenditure 1,493 1,422 (e) Budget Deficit 14,866 20,091 21,
Financed By (a) Foreign Grants &
Loans 8,208 8,794 10, (b) Domestic
Borrowing (i) Non-Bank 2,779 7,697 10, (ii) Bank System 3,917 3,915 1, (iii) Other -38 -315 -6
AS GDP SHARE (a) Revenue 20.5 19.4 2 (b) Current Expenditure 22.3 21.0 2 (c) Capital Expenditure 16.9 20.4 2 (d) Budget Deficit 18.7 21.9 1
Other (a) Budget Deficit 92 113 8 (b) Foreign Assistance
As a rate of 61 47 4.
Capital spending
Source: Central Bank of Ceylon
According to the five year Public investment plan for the 1987 to 1991 period, the projected investments on development projects and programmes amount to Rs 151 billion (Table 111). During the last six years, the actual development expenditure totallied Rs 120 billion compared with Rs 94. billion that results from the aggregation of annual totals in respective plans during the 1981-86 period. It should be noted that the amount of development expenditure for the 1981-1986 period, differs from the amount in the capital budget (Table 11), as the latter includes capital transfers to public corporations. During the 1981-86 period only about Rs 15 billion of the capital budget has been met from budgetary savings, that is the surplus of revenue over current expenditure, and the bulk of capital expenditure has been financed from nonrevenue sources of which as demos
ECONOMC REVIEW MAY, 1987.
trated above, the rc cing has been extrer
A major conces year Public investin
lity of the gover adequate resources year development dium and long terr is unlikely to be least at the same recent past, which nancing of develop years will have to domestic sources. rent projections, it cing from externa projected at Rs 4. cent of the total budget during the compared with 52 last six years. A ment during the ni is expected by th
itS OWn reVenuje SC

量_E重量
RY OPERATIONS (1981-86)
Total
3 1984 1985 1986 1981-1986
1 Ο 37,731 39.010 41.955 177,943 83 31,842 34,156 34,602 162,635 31 21,750 30,529 32,949 140,401
27 5,889 4,854 7.353 15,308 O6 15,861 25,676 25,596 123,696
}50 11,251 12,205 13,575 64,983
82 6,589 8,520 8,963 44.730 68 -2,644 7,451 2,299 16,106 94 666 -2,501 760 2,123
Average 2.6 24.5 24。Q 23.4 22.4, 2.5 20.7 21.0 19.3 21.1 O.8 14.1 18.8 集8.4 18.2 9.4 10.3 15.8 售车。3 雀6.7
6 42 66 79 8O
7 52 4Q 4靠 43
ble of foreign finanmely important.
in of the next five nent plan is the abiment to mobilize to finance the five budget. In the men, foreign financing easily available, at magnitude as in the means that the fiment in the corining be mostly met from According to curne volume of finansources has been | billion or 42 perive year investment 1987-1981 period,
percent during the arge part of investext five year period e government from
urces. According to
tentative estimates, about Rs 88 billion or 58 percent of the investment budget is accounted for by domestic revenue.This share during the 1981-86 period remained around 12 percent.
As the Public investment plan expects approximately Rs 88 billion to come from domestic revenue sources, compared with only Rs 15 billion during the 1981-1986 period, a substantial increase in revenue appears extremely important during the plan period. However, the past trends do not provide supportive evidence of the ability of the government to increase revenue by any substantial margins. In 1986, for example, domestic revenue increased only marginally by 7.6 percent over 1985, and this increase has been lower than the average price increase of 8 percent during 1986. Substantial increases in government revenue after 1977 occurred only in 1983 and 1984 (Table V). In 1983, the

Page 12
government revenue went up by 42 percent compared with 1982, and in 1984 by another 50 percent. In both years, the revenue increases were essentially a result of the increases in tax rates on turnover, sales and import duties. The agreement with the International Monetary Fund (IMF) for SDR 100 milion in November 1983, was a major factor for the increases in tax rates in 1983 and 1984.
Whether the government can effectively implement the Public investment Plan thus depends largely on its ability to raise adequate revenue from domestic sources. While the role of foreign assistance is expected to decline progressively, the picture with regard to non-bank domestic sources also remains uncertain. As the Minister of Finance and Planning remarked during the budget speech last year, the availability of budgetray support from the non bank sector such as Provident Fund and Trust Fund, and savings institutions, is extremely limited particularly as a source of additional support in the event of increasing budget deficits or reduced availability of foreign assistance.
While the revenue picture is not encouraging, the situation could be further aggravated if defence expenditure continues to demand an increasing share of budgetary expenditure. From 1985, the defence expenditure allocation has remained extraordinarily high; in 1985, the defense budget amounted to Rs 6 billion and in 1986 to Rs 9 billion. The allocation is expected to go up to Rs 15 billion in 1987 and to Rs 18.5 billion in 1988. If such high spending has to be maintained on security operations, the government would have to either raise more revenue or reduce spending on development actii vities. Unfortunately, both are ex
tremely difficult options.
Defence expendi tie as a ratio to revenue has increased from about 15 percent in 1985 to 25 percent in 1986, indicating the tremendous pressure brought about by rapid increases in defence expenditure on revenue. How: ever, defence expenditure as a ratio to
O
SECTORAL
Lead Projects
MahavVeli
Housing and Urban
Greater Colombo Ec
Other Projects and Pr. Non-Mahavveti Irriga Plantation Agricultu Field and Minor Exp Animal Husbandry Forestry and Lands Fisheries industry
Major Economic Over
POWer Ports, Transport and POSțS and TeleConnn Integrated District D. Decentralized Budget Other Construction
Social Overheads
Water Supply Education Health Social Overheads Economic and Admini Una located New Projects Miscellaneous
Grand Total
Source: Public Investin
GDP is Stil around is relatively mode with most other cc gion such as Pakista and Singapore, whe the region of 20 pe that emerges from two ratios, that is and defence/GDP is pressure currently e economy is not enti creasing defence equally important r played by the mar revenue; with the e and 1984. The defe will not be so large
be raised correspon
could go up further
as the revenue base capable of absorbi
 
 

TABLE
CLASSIFICATION OF PUBLIC INVESTMENT PROGRAM
(Rs. Million)
evelopment nomiC ComrinįSsjon
graMnS ion
drt Crops
leads
Civil Aviation
nications velopment
Strative Overheads
(Actual) '886 (planned) 1987-199.
37,040 36,983 24,051 32,171 32,440 19441 4,545 4,253 4,451 324 29O. 159
15,004 14,894 14396 4,900 4,571 4.942 3,246 3,413 1,356 3,495 3,747 3.365 380 674 562 873 950 2,51O. 965 1085 1,123 1,145 434 538
19,823 21,361 31,023 4,989 3899 11,226 5,751 8,532 9,971 3,172 2,797 3,698 2,133 1,945 2,980 2,588 1,606 1,192 1,190 1,606 1,192
9,815 9,806 18,667 4,143 4,323 4,767 3,743 35OO 5,890 1929 1,448 6,907 - 535 1,103 6,567 25,987 5,984 11, 121 - - 24,329 38,518 - 1,800
120,2OC 95,595 151,376
2nt Reports, Ministry of Finance and Planning
10 percent which it in comparison untries in the ren, India, Thailand ré this ratio is in cent. The picture he comparison of defence/revenue hat the budgetary perienced by the ely a result of inXpenditures. An ble has also been inal increases in ception of 1983 Ce revenue ratio revenue also can ingly. This ratio in 1987 and 1988 at present is not even marginal
increases in defence spending.
in 1986, the government made strong efforts to contain inflationary pressures by maintaining a reduced growth in money supply. While this has proved successful, the effectiveness of such management policies in the future will largely depend on the fiscal front and more specifically on the amount of budget financing that will be required by expansionary sources such as bank borrowings and sale of treasury bills to the Central Bank. If appropriate measures are not taken to limit financing from this source, high inflation will be an added constraint to development. Since 1977, average prices have more than doubled and Sri Lanka's inflation rate remained high relative to its major tra ding partners, with few exceptional
ECONOMIC REVIEW MAY, 1987.

Page 13
years such as 1985 and 1986. This difference in the inflation rate, between Sri Lanka and the rest of the world is reflected in the depreciation of the rupee against major currencies. For example value of the Sri Lankan rupee has dropped against the US dolar by over 50 percent between 1978 and 1986.
The picture that emerges from the above analysis is that economic development in the coming years is likely to be affected by the lack of resources to finance the investment programme, particularly if adequate foreign assistance is not forthcoming and defence expenditure continues to increase even further. The present revenue outturn does not shovy any potential for supplementing resource shortfalls that could be created by reduced foreign assistance or increased defence spending. As demonstrated in Table IV, revenue from exports is on a declining trend, and in the absence of some buoyancy in international tea prices, this trend is unlikely to be reversed. Substantial increases in import duties, sales and business turnover taxes are also not promising unless the economy maintains a high degree of dynamism. The opportunities of obtaining additional resources from other donestic non-bank sources are also extremely limited. On the other hand, using the banking sector to finance development expenditure could exacerbate the economic problems. Given this extremely complex situation, the government has only two options: (a) cutback development expenditure and rephase deveopment programmes, with the possible outcome of foWer economic growth or (b) re-consider development priorities and policies with a greater focus on income and revenue generating activities.
Balance of Payments
In order to sustain liberalized economic policies in the long run, Sri Lanka needs a healthy balance of payments support, which has not been the experience so far, particularly
ECONOMIC REVIEW MAY, 1987.
Since the remo Val controls and exch tions. Apart from a of payments Out tur Sonne extent in 198 of apyments positic most other years. Th the persistence of ba difficulties lie in a including (a) interna tors, with fluctuatin mand and prices; (b) dency on traditional tea, rubber and coco Ces of export earnin trade restrictions an foreign exchange tra spill over effects monetary and fiscal imports. In addition, flation relative to th ding partners, high C borrowings between riod, stagnation in fc since 1985 and re. ceipts since 1983 are contributed to furth balance of payme from time to time.
Table V provides lance of payments fo riod. The most favou Lanka in terms of bal has so far been 198 1978 and and this in ted mainly from th earnings from tea 1985, tea prices pl world market whic
Tea, Rubber, Cocon Petroleum Products Other industrial Pro Minor Agri. Product: Gems Other

of foreign trade Inge rate restricavourable balance in 1984, and to 5, a weak balance n continued over e explanations for ance of payments number of factors tional market facg commodity decontinued depenexports such as nut as major sourgs; (c) removal of d liberalization of nsactions; and (d) of expansionary policies on higher high domestic ine inflation of traost of commercial the 1981-84 pepreign remittances duced tourist reother factors that er exacerbate the nts deterioration
data on the bar the 1984-86 perable year for Sri ance of payments 4, at least since provement resule un precedented 2xports. By mid ummeted in the h resulted in a
downward trend in export earnings accompanied by considerable pressures on balance of payments. Although partial price recoveries were observed from time to time, they lasted over only short durations. Thus, the favourable or adverse developments in the balance of payments are still determined largely by the price movements of tea in the international market and its external demand and domestic production. Tea earnings in 1986 declined by S 106 million compared with 1985, and by S. 284 million compared with 1984. If the 1984 international tea prices were maintained during the last two years, the price advantage would have amounted to nearly $ 400 million, which would certainly have eased the balance of payment pressures that Sri Lanka is beginning to experiecne Once again.
The experience of drastic price fluctuations for exports, of the developing countries exporting primary commodities has been quite common. The experience could certainly repeat itself in the future because demand and supply conditions do not stay fixed. Moreover, a number of other developing countries are beginning to include crops such as tea (which is traditional for Sri Lanka) in their export diversification plans. Although Sri Lanka has made a few important inroads into the non-traditional external market, the progress has been very marginal. Even the long term outlook does not show total export composition consisting of
TABLE IV
VALUE OF EXPORT 1977-1986 (SDR MILLION)
1977 1982 1983 1984 1985 1986
It 457 421 499 790 613 4拿0 57 142 O7 126 140 72 jucts || 37 217 244. 357 372 411 48 88 79 74. 75 69 25 3O 38 24 17 23 27 36 31 6. 84 51 - 651 934 998 1432 1311 1036
1

Page 14
of products and services,
a variety capable of providing a regular source of export earnings. Excluding agricultural exports, there are only three other major sources of foreign exchange earnings at present, namely,
industrial exports, tourism receints
and private remittances, but their gro.
With in the coming years is constrained by a variety of factors. The capacity to expand industrial exports is limited by the nature of demand for such products, particualry petroleum, and by the prevalence of quotas in the case of textile exports, while a recov ery in the tourist trade has so far not been possible and remains uncertain, there is visible stagnation in the case
of foreign earnings from private remitt aՈCeS.
Sri Lanka's import bill is quite significant in relation to the absorption capacity dictated by foreign exchange
In the last Lanka was abl lized trade poli restrictions on imports throu foreign exchan the uninterrup assistance. In 1 ject assistance ( ted for 13 perc on imports; in cent ($ 404 m went up to 14. lion). If exter comes down, would invariab wing from the market, at comi serious limitatio pects for higher the growing exte the same time, the import bill
earnings. because a major
FOREIGN EXCHANGE EARNIN
(S
1984 1985
Total Foreign Earnings 2,100 1933
a) Tea 62O 442 b) Other Agricultural 267 258 c) industrial 508 526 d) Tourist Receipts 105 69 e) Private Remittances 300 294 d) Other 226 237
Total Foreign Payments 3,044 2,993
a) Imports 1928 2,044 d) debt Amertization 686 497 c). Other 430 452
Resource Gap -944 -106 Borrowings and use of Reserves 716 840 Grants & Investments 240 196 Other -12 24 Gross Reserves 745 676 Net Reserves 392 341
Source: Central Bank of Ceylon
12
 
 

en years, however, Sri to maintain a liberay without quantitative mports or controls on h the rationing of e, largely because of ed flow of external 184, for example, pro396 million) accounnt of the expenditure 985 it was 13.5 perlion) and in 1986 it percent ($ 452 milall project assistance he country's imports be affected. Borrointernational money mercial rates, has also ns due to poor pros
export earnings and rnal debt problem. At arge scale trimming of s clearly not possible share of imports con
ABLE V
sists of essential inputs, raw materials and capital goods. Thus the only feasible answer to the balance of payments problems lies in the expansion and promotion of new non traditional exports.
While the identification of the Soution to the problem is not difficult specially when the gap between export earnings and import expenditure is quite explicit, the implementation of appropriate export promotion strategies is extremely difficult and likely to be confronted with increasing complexities because Sri Lanka is not the only country pursuing export promotion strategies; more than half of the developing countries are currently engaged in manufacturing of industrial products for markets in the developed world and others are contemplating doing the same. A number of semideveloped countries have already ac
GS, PAYMENTS AND RESERVE POSITION
MILLION)
AbsoluteChange 1986 1985 to 1984 to
1986 1986
1949 16 -151
336 -106 -284 237 -21 -30 57.7 51 69
71 2 -34 332 38 32 3O7 70 81
3,090 97 46
1996 -48 68
542 45 -144 552 1OO 120
-1,141 81 197
949 109 233 212 16 28 -20 - -
624 -52 -121 322 -19 -70
ECONOMIC RE WEEW MAY, 1987.

Page 15
quired a fairly steady share of the developed countries markets. Competing with such countries with similar products, is no easy task.
In this setting, Sri Lanka faces stiff competition from other countries and any immediate improvement in the situation, is being clouded by the social and political instability caused by the on-going ethnic confrontation. Under these circumstances, the export development strategies adopted need to be extremely sound and highly competitive.
EXAMINING POTENTIAL FOR
IMPROVED ECONOMIC GROWTH
This section reviews the prospects for higher economic growth, by examining the recent sectoral growth trends. The objective of this analysis is to identify the sectors or sub sectors where higher growth potential exists and to stress the need for further research towards the de
sign of appropriate cies and priorities i a higher growth economy. This app alternative to Cush advance factors Su tivity and higher c and to improve bol and export earni mainly on agricult production since t to the overal ect well as the growth
tors
Sectoral Growth T.
Table VI provic average GDP grov sectors from 1978 ges have been com period (1978-86) 1978-82 and 1982 aggregation into ty sary since the Cent a new series of n 1982 which does respond to the seri
TAB
GDP GROWTH RA
GDP shares" (%)
1978 1986
Agriculture 26.2 25.4
Tea 2.3 2.4
Rubber 13 O.7
COCOn ut 2.8 3.4.
Paddy 6.4 5.8
Other 11.2 9.5 Mining 3.5 2.3 Manufacturing 14.7 15.3 Construction 4.6 7.2 Transport 9.3 11.7 Wholesale and) Retail Trade) 18.9 2O.8 Banking and) Real Estate) 18 4.5 Other b/ 21.0 12.8 Overal 1 OO 1OO
Source: Central Bank of Sri Lanka
a/Sector share as a percent of total GDP.
b/ This sector includes (a) Banking, insurance and real estate, (t
(c) services not reported elsewhere.
ECONOMIC REVIEW MAY, 1987.

development poli
order to maintain Omentum in the ars to be the only on the impact of :h as terrorist acfence expenditure domestic revenue gs. The focus is Ira and industrial heir roles are Vital nomic growth, as in other GDP sec
ends
es GDP shares and th rates by major to 1986. The averabuted for the entire and also for the 86 periods.This disVO periods is neces. ra | Bank introduced ational accounts in not vey neatly corres before 1982. The
LE V1
last column shows the growth rates by sectors for 1986.
A comparision of growth rates by sectors makes it clear that only manufacturing and mining performed better in 1986 than their respective perfor. mance in the past. The 8.4 percent growth rate achieved by the manufacturing sector in 1986, was higher than the average growth rates of 4.1 percent (1978-82) and 7.3 percent (1982-86) or the overal (1978-86) average growth rate of 5.6 percent. Mining also achieved a higher rate of 5.2 percent in 1986 more than the average that works out after 1978. However, with only about 2 percent shares in the GDP composition, the rate of growth in the mining sector, makes no major impact in the economy. All other sectors show a disappointing performance in 1986 relative to the average performance since 1978, with the exception of construction and other sectors. These two sectors have grown relatively faster during the 1978-82 period.
TES BY SECTORS (1978-86)
GROWTH RATES (%)
1978 to 1982 to 1978 to 1986 1982 1986 1986
3.9 4.1 40 2.6 -15 3.1 O.8 -1.3
-48 2.8 -1.O
4.4 5.1 4.8 2.8 3.4 5.1 4.3 -2.5 5.2 5.9 5.6 6.1 5.0 4.2 4.6 5.2 4.1 7.3 5.6 8.4 12.O 1.1 7.0 3.0 7.3 6.4 6.8 3.2
7.7 5.2 6.5 3.9
15.6 33.O 24.3 4.O 5.4 6.8 6.0 6.O 6.2 4.9 5.6 4.3
public administration and defence, and
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TABLE VII
COMPARISON OF ANNU
(1986 GR
1978 1979
GDP Growth 191 147 1
Agriculture 203 77 1 Manufacturing 93 55
Construction 940 697 3
Transport 225 212 2
Wholesale 228 223 2
Banking 193 250 3
Source: Central Bank of Ceylon
Using 1986 as the base year, Table VII compares the sectoral growth rates in 1986 with the annual growth rates since 1978. As demonstrated, the annual GDP growth rates between 1978 and 1985 have all been higher than the GDP growth rate in 1986. Compared to 1986, the GDP growth rate in 1978, for example, which registered the highest growth rate during the refinance period, was 91 percent higher, which means that the economy in 1986 has grown only half as fast as the growth rate in 1978. Even com pared with the previous lowest growth rate of 5.0 percent, recorded in both 1983 and 1985, the 1986 growth rate was down by 16 percent.
While the declining trend of GDP is clearly evident in Table VII it is not quite clear as to what causes this drop in the growth over time. There is no clear pattern which reflects or contributes to the progressive decline of the overal GDP growth. In the case of the agricultural sector, for example, growth has been better in the past, with the exception of 1979 and 1982, than the performance in 1986. With 8.4 percent growth, the best growth performance in the agricultural sector has been reported in 1985 and its contribution to overall GDP growth in that year was around 43 percent. Unfortunately, because of the relatively weak performance of most other sectors, this substantial contribution of the agricultural sector failed to impact upon the overall GDP growth.
14
In the manus 8.4 percent grov 1986 Was the sec. 1984 growth rate all other years sir rate in the manu been less than ith For example, co the achievement i sector was equival 1978. and 55 perc gest unkown fact. manufacturing set not perform bett why it is doing be rate in the Cons been substantial 1978 to 1980 pe until 1986, its gr tically stagnant. sectors, such as and retail trade,
or unclassifieds, in relation to 198 fluctuations in grc major GDP sector determine the ext pective sectors overa|| growth.
The important out in the foregg there is no straight to the performan during the period Starting from a ve
mance in 1978,
growth rate of 8 nomy progressivel

L GROWTH PERFORMANCE 978-86
WTH RATES = 100)
80 1981 1982 1983 1984 1985 1986
5 135 119 116 119 116 100 9 265 98 192 185 331 1OO 1 62 57 27 145 62 1 OO 7 1O - O 33 O 50 OO 2 2O3 194 141 319 131 1OO 5 123 154 136 159 105 1ΟΟ O 373 298 535: 275 248 1 OO
acturing sector, the tih rate achieved in nd highest after the
of 12.2 percent. In ce 1978, the growth facturing sector has : 1986 performance. mpared with 1986, n the manufacturing ent to 93 percent in ent in 1979. The arr with regard to the ctor is why it could er before 1985 and tternow. The growth truction sector has y high during the riod, but thereafter, with has been pracAlthough all other transport, wholesale banking, and other
show higher indices 6, the year to year With rates among the make it difficult to nt to which the resave contributed to
message that comes ng analysis, is that orward explanation e of the economy rom 1978 to 1986. y impressive perfors reflected by the percent, the ecoslowed down. How
ever, this slow down cannot be attributable either to the performance of a single sector or a few selected sectors, as there is no discernible relationship between the trends in the overal GDP growth and the growth trends of respective sectors. It is also not possible to explain the behaviour of the economy in a specific period such as the period after 1983, following the communal disturbances and stepping up of terrorist activity. The decling overal|| growth rate was not exclusively limited to the period after 1983, but it was a feature of a continuing trend.
The difficulty of identifying the causes of the slow down in growth performance makes the solutions to the problem more complex. If the slow down can be explained by a single factor or few inter-related factors such as terrorism and the associated increase in defence expenditure, the solution to the ethnic problem will certainly be the answer to bringing dynamism into
- the economy. Unfortunately, the in
tertemporal trends, as mentioned earlier, do not suggest such a simple explanation.
VALUE ADDED BY MAJOR GDP SECTORS Agriculture
A brief review of the Value added in agriculture and industry overtime is useful to extend the above argument further. Agriculture accounts for approximately 25 percent of the GDP
ECONOMIC REVIEW MAY, 1987

Page 17
composition. Within agriculture, there. are five sub categore is; tea which accounts for 10 percent, rubber 3 percent coconut 13 percent, paddy 24 percent, and other categories 50 percent. This breakdown within the agricultural sector shows that it is primarily the non-traditional sector, consisting of subsidiary crops, Cash crops, animal husbandry and home gardening, that contributes greatly to the share in the agricultural GDP.
Perhaps the most useful approach to evaluate the progress in the agricultural sector and its Contribution to overall economic development in the country, particualry in a macro setting, is to review the trends in value added by agricultural sub sectors. Table Will provides this information in the form of percentage contributions in the annual increase in Value added (in the agricultural sector) for the 1978-86 period.
As demonstrated in Table Vill, there is no consistency in the contribution to the increase in agricultural GDP by its sub sectors. The contribution by respective sub sectors fluctuates from year to year, frequently by subtantial margins. Sometimes, the percentage contributions turn from positive in one year to negative in the next year. Only in the case of the 'Other' sub sector which primarily includes non-traditional crops, has there been no negative contribution to agri
cultural GDP grow 1986 period; but
there is no consist Contribution to the tural Value added have experienced
tions during the ref
The bottom line cates the share of tor in OVera|| GDP line provides the p tion of agriculture increase. The fig showing the contri before the last line substantial year tC in Contribution Of growth ranging frc 1979 to 42.5 Throughout the ent tribution of agricult raging from 5.7 p. 42.5 percent in 198 entire period, the c culture to GDP gr GDP share only in t
Not all sub sect ter e Ven in those 1983 and 1985) w in agriculture was g in GDP compositi value added in 19 from the 'Other' from paddy and
and in 1985 from p. Apparently, the ar
agricultural sector
PERCENTAGE CONTRIBUTION TI
BY MAJOR CATEGORIES I
1978 1979. 198
Tea -9.0 22.2 -2. Rutoper 6.O -3.2 -2 Coconuts 32.7 49.2 -5 Paddy 6.3.3 25.4 124 Other 7.O. 6.3 6 Contribution to Increase in GDP 15.O 5.7 1. Ag-Share in GDP 24.0 23.0 22.
Source: Central Bank of Ceylon
ECONOMIC REVIEW MAY, 1987.

| during the 1978Ven in this Sector cy in terms of the increase in agriculAll other Sectors negative contriburence period.
in Table V || || || indihe agriculture secwhile the preceding rcentage contribun the overal GDP ures in the line ution to GDP (that | clearly point out year fluctuations agriculture to GDP m 5.7 percent in ercent in 1985. ire period, the conure to GDP growth 2rcent in 1979 to 5. Throughout the ontribution of agriowth exceeded its hree years.
ors performed betthree years (1981, hen the Value added reater than its share n. The increase in 31 principally came category; in 1983
'Other' category; addy and coconuts. nual growth in the including those
TABLE VIII
years where performance was relatively better, has been contributed by only a few sectors. The figures in Table V|| || || demonstrate the fact that there was no single year when all the sectors contributed positively to the increase in value added. Accordingly, this trend explains the year to year fluctuations in both value added in agriculture and its annual contribution to GDP. The magnitude of the fluctuations largely depended on the difference between the positive and negative contributions by different sectOr S. -
The above analysis of sub sectoral trends in agriculture leads to a number of vital observations. First the overa|| performance in the agricultural sector shows no evidence of a positive trend, or in other words an increasing trend,
in value added in agriculture in an
overal context or at least by a single sub sector throughout the period. The year to year fulctuations in value added in this sector, makes it increasingly difficult to assess its role in the overall GDP growth. By looking at the trends in the past, it is not possible even to predict, in the very short term, the performance in the agricultural sector. This situation appears to be a result of a combination of a number of complex factors which might include Weather, prices, production costs, domestic and foreign demand, availability of inputs including low cost credit, marketing, storage facilities and government policies pertaining
D INCREASE INAGRICULTURAL GDP
THE AGRICULTURAL SECTOR
1981 1982 1983 1984 1985 1986
4. 13.2 -37.8 -9.9 86.1 3.4 -4.4 6 -4.5 - 8.7 3.0 -1.2 O.6 3. 18.4 48.7 - 11 O.9 59.7 13.3 24.7 O 16.O -36.9 76.O -35.2 28.0 -21.1 4. 56.9 125.2 49.9 1570 1O.O 78.O
1 25.4 11.3 23.3 8.6 42.5 17.1
22.3 21.8 22.0 21.4 22.4 21.9
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Page 18
TAB
RATES OF GROWTH AND
ADDED BY RESPE
1978 1979
1. Growth Rates:
Overal) 7.8 4.6 Export Processing 2.1 4.4 Factory | ndi í stry 11.O 4.O Small Industry 2.1 9.8 Other 44 3.8
2. Contributions to) Value Added):
Export Processing 9.2 31.4 - Factory industry 73.3 46.6 1 Small industry 2.2 17.8 Other 2.3 4.2 4
Source: Central Bank of Ceylon
to fiscal, monetary and foreign exchange variables.
The second point is that the contribution of traditional sectors such as tea, rubber, coconut and also paddy to agricultural GDP is relatively small compared with the contribution by the non traditional sector. However, these sectors constitute priority areas in agriculture and accordingly they regularly claim substantial resources in annual investment programmes. Unfortunately, the same focus is not to be seen in the case of the subsidiary crop sector, despite its highly important role in the agriculture sector and thus in the overall GDP growth.
Industry
Sri Lanka's manufacturing sector is divided into three sub categories: Export processing, factory industry and small industry. Export processing industry Consists of processing activites in the plantation sector with great con centration in the state owned plantation, and manufacturing in the export promotion zones. Factory industry includes large and medium Scale industreis located mostly in Colombo and
16
the suburbs mai
tor. The last Cat variety of activit ted in the private principal towns
outside urban cer
Within the m factory industries of about 65 perc port processing and other catego this highly signif tory industry, it overal growth i. Sector. Table IX trends and COntri in manufacturing grOU OS.
Examining cic Table IX, it is cla to the increase ir factory industry g kable. In Some y has been much gr share in the GDF ever, the export also play an imp Contribution to V negative, the grow

E IX
ONTRIBUTIONS TO VALUE
TIVE SUB GROUPS
18O 1981 1982 1983 1984 1985 1986
O 5.2 4.8 O.8 12.3 5.8 8.4 8 7.6 -5.2 -4.6 9.9 8.0 O.O 5.0 4.0 8.9 2.O 15.O 5. O 12.. O - 5.1 10.1 4.1 4.0 3.0 3.9 2.8 4.2 9.8 2.7 3.0 1.9 2.4
5.1 43.2 -33.3 -12O2. 15.9 29.8 - O8.9 43.2 102.2 | 16 1.5 | 80.0 64.1 95.0 - 8.6 18.5 29.3 1.9 3.1 2.6 S.2 5. O 12.6 29.3 2.2 3.1 2.4
nly in the public sec2gory includes a Wide ies mainly concentraa sector, and located in and cities as Well as
treS.
anufacturing sector, account for a share tent, followed by ex2 percent, and small y 13 percent. Given cant share, for facplays a Vital role in the manufacturing lustrates the growth ution to Value added by each of these sub
sely the figures in ar that Contribution value added by the oup has been remarars its contribution ater than its relative composition. Howrocessing industries tant role. When its |ue added has been h rate in the manu
acturing sector has also declined, at times the decline has been quite substantial. In the case of the small industry and other category, the contribution has been of extremely limited significance and the growth trends of this group have no major impact on the overal growth performance in the manufacturing sector.
The picture that emerges from the above analysis leads to two major consederations. First, factory and export processing industries are the two major industrial groups influencing the overall growth in the manufacturing sector. Factory industry, in particuair, plays a vital role in the overall growth of the manufacturing sector and therfore in order to strengthen production, the implementation of appropriate policies in this sector becomes imperative to sustain the overall stability of the manufacturing sector. The experience with the production performance in
this sector, where nearly 70 per cent
of the industries belong to the public Sector, have in the past been disappointing in part due to stiff competition from imports and in part due to inefficiencies in management and un
ECONOMEC REVIEW MAY 1987.

Page 19
ECONOMIC REVIEW MAY, 1987.
 

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18
 

ECONOMIC REVIEW MAY, 1987.

Page 21
due political pressures. While the on going efforts of the government to correct the situation appear encouraging, the delay in implementing such measures could result in both direct and indirect costs.
However, an important strategy that needs to be given high priority is the promotion of small and medium
ECONOMIC REVIEW MAY. 1987
puts.
scale industries in the activities in sector. This is p. in the Sri Lankan Oreneurs mostly categories.
Even if there is provement in pul turing corporatio of the added ber scale sector to the is limjited due to ti in msot of these p ses. Of the major in the public sec ges, textiles and c nearly 75 percent
added in manufac
of value added to is relatively low
chemicals. The n
this situation is th vily on imported
Given the indu the Sri Lankan e rate in industry is indicator to asses rest of the econo above, a greater growth originates try category whic in Colombo and til therefore have ve fects; and also the jn relation to vall. the manufacturing meaningful contr employment and efforts need to be dustries where the relatively high, SUMMARY AND
The first part reviewed the ecc terms of the GDP and the developm economic indicatc paper has been de the need for incre nue and generati earnings. As demo |ysis of sectoral most effective mea these objectives higher production
 
 

order to broad base
the manufacturing rticularly important context where entreall within these two
a considerable imlic sector manufacis, the transmission efits from the large rest of the economy he lower value added blic sector enterpriindustrial groupings or, food and bevehemicals account for of the total value turing; but the ratio value of production in both textiles and lain implications of at they depend heaaw materials and in
strial composition in conomy the growth not an appropriate sits impact on the my. As demostrated
part of industrial in the factory indussh is mostly located fie suburbs and they ty limited spread efre is low value added e of production. If sector is to make a ibution to growth,
household incomes, o
1 concentrated in invalue added ratio is
CONCLUSION
of this paper briefly onomy in 1986 in growth performance ents of key macroDrs. The rest Of the voted to emphasize asing domestic reveng increased export instrated by the anagrowth trends, the ns of achieving both is clearly through
in agriculture and
industry.
A conclusion that emerged from the analysis of sectoral growth trends was that the economy appears to be affected by cyclical and structural effects, in addition to exogenous effects such as terrorism. All these adversities are now operating in the economy, both singly and collectively, forcing the economy to slow down and at the sametime, making economic management extremely difficult. While there is little that can be done about cyclical effects, such as weather fac
tors, and adverse developments arising
from terrorist activity, structural ef. fects need to be remedied through the implementation of corrective policies. If this is not undertaken, even if normalcy is returned to the country, the economy is not likely to improve significantly on a sustainable basis. Given the current characteristics in the economy, a solution to the ethnic problem will only result in a marginal improvement in economic growth and even this growth cannot be sustained overtime without addressing the structural effects that reflect in highly irregular growth trends in major GDP
Sectors. .
Economic planning is currently
guided by the rolling five year investment plan. While this planning approach certainly has merits over the national planning approach, undertaken prior to 1977, the entire thrust on a particular planning technique may not necessarily result in obtaining dessired results. Under the rolling five year planning approach, there is increasing attention towards strengthening economic and physical assets and
infrastructure. -
"Unfortunately, what appears to be
lacking is the appropriate direction to translate the improvement in economic and physical infrastructure to higher production, more employment
and improved income. Planning involves both vertical and horizontal integration and one without the other makes the planning process less effec
tive and the targets and outputs that
result under such circumstances less thari optimum.
19

Page 22
TOURISM
Declining Tourist Arrivals and Loan Rescheduling Measures
Arrivals
Sri Lankas growing prominence as a leading tourist centre in the East was halted after 1982. At this stage the tourist industry had been the fourth leading source of foreign exchange only after tea, remittances from earnings abroad, and ready-made garments. Unfortunately for the industry tourist arrivals after 1982 dropped nearly 44 percent upto 1986 and this had adverse repercussions on the entire hotels and tourism sector in the country. An examination of the figures shows that there has been a continuous decline in the growth rate of tourist arrivals over the last four years between 1983 and 1986.
The decreases are evident not only in the tourist arrivals, but also in the number of guest nights, the room occupancy rate and earnings from the tourist sector over the period. The following table shows arrivals in Sri Lanka from 1978-1986.
It may be observed from the above statistics that total tourist arrivals in 1986 at 230, 106 was the lowest on record since 1978. The major contributory factor responsible for the decline in tourist arrivals had been the adverse publicity abroad regarding security and civil unrest in the country.
However, this C for the tourist sect. employment Oppor tor as well as busin dustry. The total n the tourist Sector estimated at aroun pared to 54,533 en vious year, indicati percent.
In 1986 the toul sed a further setba nings from tourism Table
GROWTH OF TO
Year Arrivals
1978 192,592 1979 250,164. 1980 321,78O 1981 370,742 1982 407,230 1983 337,530 1984 317,734 1985 257,456 1986 230, 106
Sources: Ceylon Tot Statistics Annual Report Centra 1986. mated at SDR 70 SDR 8 1 million in background of the ditions, while the traffic in 1986 dec
Table 1
RE SCHEDULING OF LOANS-TOURIST SECTOR
Name of Credit Re-schedulings Re-sc Institution completed unde No.of LOans NO.O Hotels Amount HO te
Rs.nnn
D.F.C.C. 25 132.69 N.D.B. 10 105.68 2 People's Bank 11 34.63 2C Bank of Ceylon 10 53.73 1 Hatton National Bank 5 3661 Commercial Bank 4. 4.94 Grindlays Bank Deutsche Bank 1 3.06 Banque lndo-suez Total 66 371.34 4
20
Source: Annual Report 1 986. Central Bank of Sri Lanka
 

isturbing situation ir has also affected
Iunities in the secess in the hotel inlimber employed in during 1986 was d 48,000 as comployed in the pre
ng a decrease of 12
ist industry witnesck when gross earin 1986 were esti
JRIST ARRIVALS
Growth Rate
25.3 29.9
28.6 i5.2 9.8 -9.6 -5.9 - 18.9
- 10.6
trist Board, Annual
'l Bank of Sri Lanka,
million, as against
1985. Against the
unfavourable coninflow of tourist :lined by 1 0.6 per
cent, the average spending by a tourist also decreased marginally from SDR 315 in 1985 to SDR 306 in 1986.
In addition, the capacity of the graded hotels accomodation declined from 143 units in 1985 to 127 in 1986. This was due to the closure Of 12 of the 13 graded hotel establishments on the East Coast,
It does not mean, however, that there was no new activity or growth in this sector; for instance, during the fourth quarter of 1986, approval was granted by the Tourist Board for the construction of a 50 roomed hotel at Wella watte, while preliminary clearance was given to a Thai Speciality Restaurant in Colombo and final approval to a “Chinese Speciality Restaurant in Negombo.
LOanS
In the slump situation the view of most hotel managements, however, has been that the industry was in serious financial difficulties and that relief should be provided in the form of concessional tax rates and a reduction in service charges such as electricity rates; and that repayment of financial facilities obtained through the Banks should be rescheduled. Representations had been made since 1984 by the Association of Hotel Owners that these concessions be introduced urgently. The Government therefore introduced a scheme for rescheduling of loan facilities granted to hotel pro
CUMULATIVE TOTAL AS AT DECEMBER 1986
hedulings Total r consideration f Loans Noof Loans Percentage ls Amount Hotels Amount
RSnan Rs.nnn
25 132.69 21.5 14.38 12 120.06 19.4 120.54 31 155.17 25.1
38.68 21 92.41 15.O 2.67 7 39.28 6.4 28.78 13 33.72 5.5 6.96 1 6.96 1.1 1 3.06 O.5 33.66 3 33.66 5.5
245.67 144 617.O1 1 OO
ECONOMIC REVIEW MAY, 1987.

Page 23
jects by commercial banks and other long term credit institutions. According to this scheme the Banking sector was advised to suspend the levy of penal rates of interest and the recovery of loans/interest upto 1987. Considering the continuing slump in tourism the moratorium of two years which was originally granted up to 1987, was extended until March 1989, with a further concession of 100 percent
scheduling as against 80 percent a
allowed earlier. In addition, interest free loan facilities were granted by the Government to meet the working capital needs of the effected hotels.
Table I I shows the rescheduling of loans that were made available through the banking system to the tourist seciter as at December 1986, and the percentage commitment of each financial institution. The total value of loans rescheduled by the end of 1986 amounted to Rs 371.34 million. The highest amount of rescheduling completed was carried out by the Development Finance Corporation of Ceylon amounting to Rs 132.69 million in respect of 25 hotel projects. The other reschedulings by institutions were Rs 105.68 million (National Development Bank); Rs. 53.73 million (Bank of Ceylon); Rs. 36.61 million (Commercial Bank); and Rs 34.63 million (People's Bank)
When considering both the amounts of rescheduling completed and the reschedulings under consideration the highest amount was Rs 155.17 million or 25.1 percent of the total (rescheduling completed and under consideration) from the People's Bank, which was about one fourth of the total tourist industry loans of the entire banking system. The other leading financial institutions where rescheduling
of loan facilities for the tourist sector was being carried out were the Deve
lopment Finance Corporation ( Rs 1 32.69 million or 21.5%); National Development Bank (Rs 120.06 million or 19.4%), and Bank of Ceylon (Rs 92.4 min or 15.0%). The average amount per hotel project granted by the four main lending institutions was
People's Bank Rs 5.0 mn per proejct;
D.F.C.C.. Rs 5.3 min, N.D.B. Rs 10.0 mn and Bank of Ceylon Rs 8.4 min.
M.J.
| ECONOMIC REVIEW MAY, 1987.
HEALTH
Rabies Controls In Rabies, recogn
health problem in early 1950's, had portions by the ea. however, it-appear der control with a anti-rabies measure the early 1980's.
From the 1950 ded low priority in due to the appa other communicab been prevalent in Ween 1963-1973 man deaths from 1 annually, amountin human death in ti hours. The numbe from rabies reache 377 in 1973, when of 75,386 dogs w rabies. In 1985 the
STATISTCS PER
Dogs
Year
1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 Saurces: Division of deaths had come di number of dogs v. 561. The rate of d of the population gressively over the 1973 to 0.5 in 19 tion was slightly a (See table).
Human mortalit garded as the mair sing the impact of gramme. There are tures in Sri Lanka” 1y, the vaccine av treatment till the year was the Se Tissue Vaccine der
animal brain, whic
 

ensified
Sed as a public Sri Lanka from the eached serious proly 1970’s. By 1986 d to be coming unseries of intensified introduced during
s rabies was accorhealth programmes ent dangers from e diseases that have the country. Bethe number of huabies averaged 3 15 g to as much as one le island every 20
r of human deaths
d a peak figure of in that year a total
ere vaccinated for number of hurian
from risk of infection. This type of Vaccine has been discontinued in almost all the developed countries for some time and the same trend has been followed here. Today Sri Lanka is the only country in Squth Asia which is importing a complication free Cell Culture Vaccine for post- exposure treatment of humans, though it is costing the country a large amount. Another important factor is that unlike in the cost of most other ailments in rabies ayurvedic treatment has not proved effective, and health education programs are alerting the public towards this aspect, according to the Director of the MRI.
Secondly, Sri Lanka is the only country in South East Asia which has an infrastructure for Rabies Control as recommended in a Technical Report Series of the WHO Expert Committee. Furthermore, the Veterinary Public Health Unit has gained sufficient ex
CAINING TO RABIES CONTROL ACTIVITIES IN SRI LANKA
i Vacci-Dogs Elimi- Animal Human Rate per 100,000 d nated Rabies Deaths Population
75,386 3,128 6O1 377 2.90 31,617 312 442 347 2.60 42,252 1,610 456 288; } ); 2.13 60,932 2,235 389 257 - 1.87 85,798 3031 401 312 2.24 111,299 7,986 412 242 1.7 127,070 22,434 512 265 1.8 120,143 36,845 42O 153 O. 11 135,266 37,733 292 136 0.92 189600 48,354 315 135 O.90 194,046 42,237 368 118 0.75 197,470 62,862 41 O 93 0.06 268,561 56.238 --- 82 O5 216,243 73,749 awang 98 :06
Medical Statistics, Ministry of Health; Registrar Generalos Dept.
Own to 82 and the ccinated was 268, eaths per 100,000 had dropped proyears from 2.90 in 35. The 1986 posiove that of 1985.
| from rabies is reindicator is assesthe anti-rabies promany unique feaprogramme. Firstailable for human
beginning of this
mple Type Nerve
Ved from the adult
is not totally free
perience in the field of Canine rabies control.
Thirdly, the Arab Gulf Funded UN Programme (AGFUND) has selected Sri Lanka from among one of the three countries in the world to implement a human canine rabies programme. The AGFUND Programme has selected seven districts, Kurunegala, Gampaha, Colombo, Kalutara, Galle, Matara and Hambantota - where the immediate objectives are to reduce human deaths to Zero level, at the end of the programme and also undertake a dog ecology study in Sri Lanka. The growing intersification of rabies con
trol activites in Sri Lanka may be obಙ್ಗಲಿಗೆ from the Statistics in the above
2O,
KG
21

Page 24
FoREIGN News REVIE
Indonesia urged to change production policies
The World Bank has warned Indonesia that its yawning debt service ratio and fragile balance of payments situation will constrain the economy for several years’. The Bank estimates that the ratio of total debt payments to gross exports which reached 37 percent in 1986 would peak to 41 percent in 1988. Extracts from the Bank’s confidential report on the Indonesian economy, reproduced in a May issue of the Asian Wall Street Journal, calls for a "sweeping review of government agricultural policies, and urges a move away from the country's increasingly costly emphasis on rice production and toward deversified cash crops.
“Indonesia adjusted quickly to the collapse of world oil prices in 1986, but still faces several difficult years of budget austerity, sluggish growth and swelling debt payments, the World Bank says. It adds that “Jakarta must continue on its path of regulatory reform while maintaining strict control of fiscal and monetary policy'. To stimulate the economy and raise exports in the face of a prolonged slump in oil prices, the Bank repeats calls from past reports for Jakarta to continue dismantling trade and industrial monopolicies that fetter manufacturers and limit export potential'.
Indonesia is the Bank's largest
client after India. The Bank has com
mitted about $ 10 billion to Indonesia over the past two decades, with annual aid currently about $ 1 billion. The World Bank recommends that the Inter Governmental Group of Indonesia (IGGIN) provide $ 2.5 billion in assistance in the 1987-88 fiscal year
that began on April
The Bank says til been reacting well world oil prices sir says the government collapse of oil prices budget austerity, a rupiah and relaxatio sing restrictions -wa balanced.
The Bank says “th been correct to slash get despite the trade nomic growth. It c budget austerity and limited funds. Rat new projects, the B.
government needs ti
maintaining roads structure in danger O. Impact of Yen's Rise
The Bank says mu
in the debt-Service ra
side the control of Besides the sharp fall bank blames the de dollar against the y currencies for raising burden. A third of debt is in yen.
With rising debt clouded outlook for nesia will be hard p its balance of paym Bank says. Non-oil but not enough to term. Imports have but without resulting port barriers.
Barriers, such as trols, would suggest is “faltering’ in its
WORLD BANKS BIGGEST 5 BORROWERS (up to June 30, 1986)
BoffOWyer IBRD Loan IDA Credits ro No. Amount No. Amount No. Απη sm I ndia 97 10.692 || 170 3828 267 2. Brazi! 149 13,085 - 149 13 Indonesia 箕 9,123 46 932 157 O Mexico 94. 8,818 -- --- 94 3 Korea Rep.of 82 6,431 6 111 88 6 Sub total 755 63 110 other Countries 3,527 102
Source: World Bank Annual Report, 1986.
 
 

hat Indonesia had to the decline in ce the 1980s. It 's response to the in 1986-including evaluation of the
in of import licenS 'rapid and well
te government has its national bud-off of slower ecoalls for continue | improved use of her than starting ank says that the O Spend more on and other infraf deteriorating.
ch Of the increase tios has been out
the government. 1 in oil prices, the
preciation of the
en and European Indonesia's debt the government's
payments and a oil exports, Indoressed to protect ints position, the xports are rising, help in the nearto be contained,
; in additionalim
Ligh duties or conthe government commitment to
US$ million)
al
ount
维 %
520 085 8 055 818 5 542 臺 002 38
919 62
wards creating a more open economy. The brunt of import restraints should fall on capital goods, the Bank sug. gests, rather than consumer goods.
Increasing non-oil exports through continued deregulation of the manufacturing sector is vital, the bank says, both for stimulating growth during the doldrums in the oil market and for creating jobs. “Without strong measures to promote economic recovery, unemployment could reach serious proportions" the Bank warns. The Bank report calls on the government to focus public expenditures on labour intensive projects and to be lenient toward street vendors, pedicab drivers and other informal businesses that absorb labour. Agricultural growth essential
The Bank says that continued
growth in the agriculture sector is essential for economic recovery and for creating jobs. About 75 perceńt of the country's 165 million people live and work in the countryside. Government policies aimed at raising rice production have to be re-examined now that the country has reached self-sufficiency in rice and because of budgetary constraints, the Bank says, Indonesia became self-sufficient in rice production in 1984 after years of being the world's largest rice importer. Stop Subsidies
The Bank says the government
can't continue the huge' subsidies for
fertiliser and pesticides that helped produce a surplus of rice, which has
little export potential. It says the
country also needs to diversify crops according to market demand rather than government targets. It particularly criticizes huge government outlays to raise sugar production when Indonesia has no comparative advantage in growing sugar. Sugar imports are restricted, forcing consumers to pay double the World market price.
The Bank says Indonesia needs to encourage private investment in tree
- crops such as rubber and palm oil, and
it says state plantations are inefficient. It also suggests that the country's National Logistics Board, or Bulog, should have less control over the na
tional and international marketing of
wheat, corn and soyabeans and that more agricultural trade be turned over to private companies.
ECONOMIC REVIEW MAY, 1987.

Page 25
Agreement over Thai Purchases of Sri Lanka's Geudas
The trade in geudas between Sri Lanka and Thailand is to be formally controlled in terms of an agreement signed between the two governments. The controls will be operated through a system of special passports and visas issued to Thai geuda traders coming into Sri Lanka. Also, the period of
stay in Sri Lanka for such traders
would be limited; and they would have to remit a stipulated amount of foreign exchange to Sri Lanka prior to receiving visas in Bangkok. Furthermore, all purchases of geudas are expected to be made by them only at a Trading Floor located in the city of Ratnapura. The trade protocol has also agreed to abolish the black list of Thai traders presently maintained by Sri Lankan Immigration Authorities.
Prior to around 1978 the geuda stone, which is essentially the immature state of the blue saphire, had little value placed on it. The ready availability of this stone in the Ratnapura area came to the notice of Thai traders around this time. The Thai traders had prefected a system of heat treatment for this stone and giving it the value of a blue Saphire. Very soon the geuda began to increase in value and after some time was fetching almost as much as a blue saphire. This made geudas very popular in the Ratnapura district and brought in hundreds of Thai traders who began to dominate the business. In terms of government regulations any foreign national engaged in business in Sri Lanka had to obtain prior authority; in the case of Thai nationals engaged in the geuda business however, they violated this authority as well as the rules pertaining to visas. They often came as tourists or pilgrims and continue with
their unauthorize almost ten years silent and been i except for a Among the instit be concerned we poration, the I ment and the Poli
Leading gem country registere this open floutin Sri Lanka Genm " the Sri Lanka Je the Gem Mercha. the organised bo Over the Thai inwd trade. These proti
gal immigration o
rised involvement illegal buying of uncut gems in the gall export and sm gem stones. It w, that though they million rupees w money they brou generally around these issues were Economic Review There was also mu litical level over geudas. Some pol tion to curb this dera, while other action. Finally, a years of debate or trade it was decid this agreement. In sman for the gem was resorted to or you cannot defe: them.
For purpose of “geuda” condition stones in the corun
TA BİLE 1. SRI LANKAS GEM EXPORTS TO THAIL
Year SGC Private 1982 46 9.4 1983 O.7 43 O. 1984 O.8 箕4.4 1985 - 10.1 1986 |- 20.5
* State Gem Corporation
ECONOMIC REVIEW MAY, 1987.
 
 

business here. For officials have kept active on this issue, aw rare occasions. tions who needed to e the State Gem Cormmigration Depart:e Department.
merchants in the strong protests of of authority. The rader's Association, weller's Federation, ts Federation Were dies who protested lvement in the Gem eStS covered the ille* Thais and unauthoin business activities; gems or keeping of ir possession and illeuggling out of these as also pointed out purchased several forth of gems the ght in was limited, US$ 300. (Some of highlighted in the of April 1985). ch debate at the pothe illegal trade of iticans were for acsctivity by Thai tras were against any fter nearly 5 to 6 how to control this ed to Work to Out the view of a spoketrade an agreement the principle that if if them then join
this agreement, the would refer only to ium family.“Geuda”
TABLE 2
Sri Lanka's Gem Exports - 1986
Japan 329。7 USA 934 Hongkong 63.0 Switzerland 45.9 West Germany 23.9 Indonesia 23.6 Singapore 21.O UK 7.7 Australia 3.5 Malaysia 2。售 South Arabia 12 Belgium 1.5 Parae! 1.1
is a local term applicable to a condition seen in certain types of Gemstones. Generally gem-stones containing Geuda, display a smoky, miliky or murky appearance. This phenomenon is caused by the presence of excessive, often microscopic mineral inclusions within the stone. As a result, this impairs the passage of light through the stone to some extent. Geuda in a gem stone could occur throughout the stone concerned or could be confined only to certain areas. It could vary greatly in appearance depending on the nature and the amount of inclusions present. While "Geuda' could be seen in any gem-stone variety, it is most abundantly seen in the corundum family followed by the stones of the chrysoberyl group. It could be found in other stones as well, although in a lesser degree. Scientifically the corundum with a genda condition should contain titanium.
Further, in terms of the agreement the term “Geuda' will bear meaning and significance only to that portion of the gem stone that displays this phenomenon. For example, a Corundum may have geuda confiend only to a particualr area of the stone, while the rest of the Stone would be free. This would mean that a portion of the stone is fashioned or could be cut encabochon to display a star or fashioned in any other form. Simply, by virtue of the fact that corundum bears a certain amount of geuda which is localised the whole stone would not be classified as a Geuda. It would therefore be necessary to seperate the geuda portion from the rest of the stone, and only the seperated portion will be classed as geuda.
23.

Page 26
Overview. - -
It is necessary to consider, in the
light of past experience and prevailing activities, how far this new agreement could provide relief against undue Thai influence and illegal practices in the local gem trade. A significant provision in the agreement is that the sale and
purchase of geudas should take place
only at a trading floor and such sales should be managed and operated by the State Gem Corporation. At present there are several hundred Thai traders who buy geudas mainly in a location called Batugedera close to Ratnapura town. There are a host of agents, brokers, the owner's of premises operating sales stalls, houseowners, transport agents and other intermediaries all connected with this business and they work closely with the Thai traders and have strong interests in this type of informal trading. It is difficult to say whether once the Thai buyers are brought to the Trading floor that pri
vate buying will not operate.
Another requirement in the agree
ment is that payment by authorised Thai traders for geudas should be only in the form of bank drafts or certified cheques. Also, that if in the opinion of the State Gem Corporation there has been undervaluation of geudas to be exported, the Corporation Would purchase such stones at the declared price. Maintaining only the official price may be difficult as there can be tendencies or attempts to depress trading floor
prices.
It is apparent that the authority to
monitor the entire business is vested in the Gem Corporation and therefore it is on the efficiency and intergrity of those who operate the scheme that the success of the scheme would depend. It may be necessary to operate an incentive system to attract the gemmers and middlemen to the trading floor, possibly granting them some compensatory payment or exchange allowance to purchase at the duty free shop. Even income tax exemptions on cer
tain levels of earnings from this trade
may be an advantage.
In the meantime, it is very necessary that official encouragement be given to perfect a heat treatment process for producing blue saphires from geudas and adopting these techniques for further innovation in the gem industry.
24
W.G.S.
Sri Lanka’
The four big mills Which encC cial problems by and found diffic newly liberalised the corner by 1980 all four m da, Veyangoda a a loss aggregatin management of ted and local anc management an tion introduced efficiency impro of the four 1 amounting to R One ran Out at a In 1986 all four Rs 175 million.
Over this pe proved to be cli industrial ventu their own des posed by qualit The liberalisatio vember 1977 he were starved of tiles, to meet t This new policy siderable quantit coming into the cal textile indu severe marketing with these text ket.
Meanwhile, raised regarding tain public secto they could be vernment. Their being related to tions and conti flexibility in dec
Table 1
| 1. Thulhiriya 2. Pugova 3. Mattegam 4. Veyangod
--—
Source: Min
 
 
 

Textile Industry Back from the Brink
public sector textile untered Serious finanthe end of the 1970's ult to compete in the market had all turned the end of 1986. In lls - Thulihiriya, Pugond Mattegama - ran at g Rs 88 million. The the mills were restrucforeign private Sector i technical colloborathereafter Production ved and by 1985 three mills showed profits is 105 million, while loss of Rs 31 million. made profits totalling
riod these mills have assic examples of how res could stand on pite the competition y imported products. in of imports in No
plped consumers, who
a free choice of texheir pentup demand. also resulted in a COny of imported textiles local market. The loLstry therefore faced problems upto 1979 les flooding the mar
uestions were being the efficiency of cerventures and how far subsidised by the gopoor performance was government intervenOls and the lack of ision making regarding
investment, location, pricing and recruitment policies. Public enterprises were told by the Government that they would have to rely on their own funds and bank borrowings rather than the Treasury, and efficiency must be improved. In the case of the textile mills, management contracts were entered into with leading international firms and this step provided positive results.
By 1980 the estimated (medium) demand for textiles was about 170 mn. meters per year and a total of about 1 15 mln. meters was being producted locally. Locally manufactured textiles were categorised under cottons and synthetics, with the cottons being produced largely under the public sector and synthetics under the private SeCtOT.
The milled cotton textiles produced by the public sector were from the four major mills at Veyangoda, Thulhiriya, Pugoda and Mattegama. The first three mills manufacture the yarın as well as textiles while the forth manufactures only yarn. The first three were the main suppliers of textiles to the country when import controls prevailed upto 1977. After 1977, how: ever, these mills had problems as a result of the liberalisation of imports. The textiles produced in these mills lost a major share of their market to the imported product, mainly because their quality was low compared to the imported textiles. As a result both the private and public sector textile manufactures were being edged out of the market and faced liquidity problems.
At this stage the government invited international textile consultant firms to enter into management con
CURNOVER OF 4TEXTILES MILLS (RS MILLION)
1982 1983 1984. 1985 1986.
2555 312.2 432.8 48O.O 4O6.O
97.O 161-0 245.2 335. O 398.0
720 55.3 71.5 105.0 29.0. ܚ a 22.0 16O.O 1850 281,4 3.08.0
Stry of Textile Industries
ECONOMIC REVIEW MAY, 1987.

Page 27
Table 2 PROFIT SITUATION OF 4 TEXTILE MILLS
1980 1985 (Rs mn) (Rs min)
Thulhiriya - (26.2) 56.0 Pugoda - (20.4) 34.0 Mattegama - (O3.2) 15.O Veyangoda - (38.2) - (31.0)
Source: Ministry of Textile Industries
tracts with the government mills in order to assist in improving the quality of the textiles produced. As stated at the outset the mills were run at very heavy losses at this time as seen in table 2. Barely two years after the operation of these mills were let out to foreign managements the production of yarn and textiles increased sharply. (See table 1).
Following on the changes and developments introduced Thulhiriya mill showed a profit of Rs 1.7 mn in 1983 and Rs 6.0 mn in 1984; while by 1985 the situation in the first three mills had turned towards profits, and at the end of 1986 all four mills reflected a profit situation. See table 2.
What is significant in this situation is that profits were finally achieved despite continuous input cost increases. The cost of raw cotton Went up from Rs 33.47 per kg in 1980 to Rs. 4118 per kg in 1983. The cost of power and also fuel went up similarly; while interest rates on bank loans taken by these mills also went up considerably. Meanwhile, wages of workers increased on an average from about Rs 700 a month to about Rs 1,200 per month between 1981 and 1984.
Furthermore, a severe threat was posed to the local industry in the form of smuggled textiles, and fabrics imported for the export industry leaked on to the local market.
Today the output of these mills is similar in most respects to the imported textiles. With growing demand for the textiles from these in ills the export of cotton textiles for tenale has been stopped for the last few years. Salu Sala, the sole importer of textiles for resale and also the government's textile distributor, today sold mainly the textiles produced by these mills.
ECONOMIC REVIEW MAY, 1987.
The Ministry o reported that the both in the public had improved co 1986 the export industry was using for their exports
Authoritative s nance Ministry ha vatisation of the possible time, as agreements were government, since nies shared profit provision to split ted that at Pugoda titled to 35 percen there is no provisio Powerloom Projec
A privatisation in other categories tOir Apart tile mills there wi projects and six tex under the public s the Department o (DTI). By 1981 as 12 powerloom pro to the private sect projects ran into quent to the 198: also due to the from the mills. Th projects retained b Galle and Anuradh ty of the Departim resources of these t provided beneficial work on the six tex was completed by and action was tak of these finishing p sector, although th for finishing plants lic and private secto Handlooms
The handloom be the most effecte
 

1986 (Rs mn)
60.0 7 O.O 38.0 07.0
f Textile Industries quality of products and private sectors insiderably and in oriented garment more local material than ever before.
ources said the Fiid recommended primills in the shortest the management unfavourable to the the foreign compa3 but there was no losses. It was reporthe company is enit of the profits but n for loss sharing. tS
policy was persued of the textiles secfrom the large texere 12 powerloom tile finishing plants ector, operated by f Textile Industry many as 10 of the jects had been sold Cor. Some of these difficulties conse3 disturbances and severe competition Le two powerloom y the DTI, were at pura and the abilient to concentrate WO loOms Only, had results. Meanwhile, tile finishing plants the DTI in 1983 En in 1984 to Sel 1 4 lants to the private tre was big demand poth from the pub
.
jector appeared to
d after the liberali
sation of imports and faced considerable problems in the early 1980’s. Steps were taken to revive this sector but in . a climate of severe competition from the powerlooms and mills the growth of the handlooms sector was understandably slow. By 1983 the value of export of handlooms had gone up to Rs. 8.5 mn from Rs 6.0 min the previous year and the Department of Textille Industries was providing handloom material to the private sector for conversion and export. By 1984 the Department launched a programme to set up three handloom centres afresh in each electorate where handloom weal ving could be done. By 1986 a total of 303 centres had been opened in terms of this programme. An incentive package for handloom weavers was also initiated for those centres where marketable products were produced. Also, with a view to promoting handlooms, manufacturers were allowed to import yarn of high quality and maintain buffer stocks in order that they could meeturgent export orders. It has been found that handloom products have very good export potential in some of the European countries. One of the advantages of handlooms in the export market is that there is no quota restriction; which has been imposed by many foreign countries on milled products. Natural silk being produced from mulberry cultivation at Pallekale also has good potential in the export market. Silk weaving has been given emphasis in some of the handloom centres and a greater availability of silk yarn locally is expected to further promote silk weaving. Private Sector
The ownership of the synthetic textiles in the country is in the hands of the private sector. From the late: 1950's the management of the cotton textile industry was assigned to the public sector while the synthetic textiles sector was opened to the private sector, and as a result the manufacture of synthetic textiles was confined to the private sector all along. Today there are more than 10 private owned synthetic textile mills performing well despite the threat of the foreign synthetic textiles coming into the market.
Most of these mills ran at a loss after 1977 as the market was flooded with foreign materials. The foreign
25

Page 28
made textiles came into the market in three ways, namely: legal imports for re-sale, Smuggled textilee, and leaked textiles imported for ready-made gar(ment export factories.
Legal imports was not a big problem for the local textile producers as they were controlled by a state organisation, namely Salu Sala. The smuggled textiles posed the biggest problem and was an uncontrollable obstacle for the local inclustry. Various types of fabrics mainly synthetics flooded the market after 1977; and some of these textiles of fairly high quality were sold in the local market at very cheap prices. Sarees, suiting and shirting are the major items among these imports. Even today a large part of the sarees sold in the market are from these ille
gal channels. Although at times the
Customs uncovered big consignments of illegal imports this has not helped to stop the illegal inflow of foreign textiles.
The other form of entry of foreign textiles into the local market is through leakages from the readymade garments export Sector. As the export of garments has become a major foreign exchange earner for the country, various concessions have been granted to the garment industry and one of them was the waiving of import duties. Some of these manufacturers who do not pay the usual duty on their textile imports which are meant for the export market sell these fabrics illegally in the local market A large amount of shirtings and dress materials available in the market came into the market in this way.
Despite these obstacles the private sector has reached standards of pro
Table 4 TOT
Year
1978 1979 1980 1981 1982 1983 1984 1985 1986
Source: Ministry of 1
duction more or le the imported mate that some material day sold in the op traders, under the Data relating to synthetic textiles f is given in table 3.
It is evident fro installed capacity synthetic mills has lly after 1979 al
grave marketing p
this sector has b production to a However, a draw in this situation i production is well capacity. Actual synthetic textiles 47.8% of install compared with should be noted capacity has incre illegal imports still market although well equipped wit machinery to su needs.
Table 3 MANUFACTURE OF SYNTHETICTEXTILES IN PR
(MILLION METRES)
Year Rated Annual Actual
Capacity Production
1978. 22.84 14.03 1979 23.00 14.58 1980 24.84 1797 1981 34.65 24.94 1982 45.OO 28.81 1983 46.00 25.75 1984 46.00 28.57 1985 60.00 28.66 1986 60.00 28.66
Source: Ministry of Textile Industries
26

AL PRODUCTION OF TEXTILES (MN METRES)
Rated annuale i Cottons Synthetics Total Capacity
Capacity Utilisation
248.08 85.16 30.71 115.87 46.7 248.10 78-72 27.00 105.72 42.6 248.30 62.73 • 27.27 90.00 36.2 267.50 66.72 31.19 97.91 36.6 270.54 80.85 34:11 114.96 42.5 257.84 59.64 31.87 91.51 35.5 245.84 84.50 34.66 119.16 48.5 243.83 95.54 34.85 130.39 53.5 256.56 97.94 42.73 140.67 54.8
extile Industries
Ss similar to some of rials. It can be seen is (eg. suiting) are toen market, by retail label of imported. the manufacture of or the last five years
m this table that the of the private sector 3 grown tremendousthough there were roblems, and to day een able to increase
considerable level. back that has arisen S that actual annual
behind the installed
production of the
in 1986 was only ed annual capacity 72.3% in 1980. It that installed annual ased by 262.7%; and dominated the local the local industry is th very sophisticated pply all most local
VATE MILLS
Capacity Utilization
61.4 63.4 723 72.0 64.O. 60.3 62.1 47.8 47.8
Overall Situation
The overall situation of the textile industry is somewhat different when compared with the individual sectors of the industry. For instance, in the cotton sector production has gone up tremendously although installed capacity has come down. Considering the private sector, installed annual capacity has increased heavily while the actual production has increased only marginally. In the case of the overall situation (or that of the whole industry) there is a very slight increase in the rated annual capacity as seen in table 4.
However, the actual production of the industry has shown an increase from 46.7 million meters to 54.8 million meters. Therefore, the overall capacity utilisation has gone up from 46.7% to 54.8%. Table 4 gives the position relating to the overall situation of the textile industry. The fact that total local textile production has moved up consistantly after 1983 and was supplying almost 75 percent of local requirements through the mills sector proves that the industry has been rrevived and placed on a stable footing over the last seven years.
Another significant development is, that textiles and garment exports reached an all time high of Rs.9,629.2 min. This figure stands in marked contrast to the Rs.400.0 m. earned in 1978.
There is no doubt however garment exporters should endeavour to increase the nett earning content which stands at anything between 25%–30% today, This nett earning increase has to be achieved systematically, just as the volume increase was achieved over a span of five to six years in textiles.
W.G.S.
ECONOMIC REVIEW MAY, 1987.

Page 29
ܠ¬
FEATURES
Fiscal Policies for Agriculture and Supporting Ag
N.Manoranian
duty' and turnover tax.
This paper, presented by N.Manoranjan as Adviser, Fiscal Polic, and Planning at a seminar on 'Newly Emerging Agro Industries, fiscal policies for agriculture and supporting agro industries. Alth timed after the Budget 1985, the significance of the paper is that it e behind the fiscal measures such as taxation, subsidies and duties. Th cally with non-traditional agriculture, that is, cultivation of crops O coconut and paddy', and with industries for the processing of these fiscal policy, special attention is paid to three main subjects firstly sions, secondly the area of subsidies; and finally, the operation of
Initial Investment
We first examine the fiscal measures which assist the initial investment in the agricultural and agroindustry sectors. The initial cost of investment in approved companies is reduced through the grant of a deduction from the income of the investor for tax purposes; for the amount of the investment made by him. A person who purchases ordinary shares in a company
approved by the Minister of Finance
and Planning for the purposes of the grant of investment relief, could deduct from his income the full amount of the investment subject to an upper limit of one third this income. With effect from April 1985, a 1imit of Rs.500,000 per year also applied to
persons, other than companies, who
approved investments.
The effect of the grant of this relief on the initial cost of an investment made by a company within the limit of one-third of its income is to reduce the cost of the investment by one-half. Assuming that the company pays income tax at 50% of its profits, it would in effect pay only Rs.5 for a RS 10 Share. The balance RS. 5 is met out of the income tax otherwise payable by it. This is a substantial incentive for investment in shares of approved companies. Similar relief applies to individuals who purchase ordinary shares
in approved companies.
Companies are approved on a case
by case basis by the Minister of Finance and Planning for the purposes of this relief. In general, the policy has been to approvic for investment relief purposes companies that qualify for tax holidays.
ECONOMIC REVIEW MAY, 1987.
Deduction of Cap In an agricult
gest item of cal normally, the ex the opening up of Such expenditure land, filling up a land, constructing irrigation canals, planting and cost diture on the m: ture areas until bearing state wou of capital expendi Our income ta son, in calculating agricultural ventu his receipts the e1 capital expenditu. in replanting the a different crop in computing pro!
The effect of that the profits o' ture will not be until the entire c. opening up the la been recouped. O. cial accounting, would have been ten Off from recej years and any bá year would have
come of that year.
The governmer for the planting O fied agricultural II reduce the initial ( ment of am agricu our taxation laws not treated as inco entire cost of pl;
 
 

O Industry
Ministry of Finance in 1985, focuses on ough his analysis is plains the rationale paper deals specifiher than tea, rubber rops. In the area of incorpae tax concesraport duty, export
tal Expenditure ral venture, the larital expenditure is, enditure incurred in land for cultivation. includes clearing the nd draining marshy fences, constructing reparing the land for of the plants. Expenintenance of immathe plants reach the |d also constitite part ture. x law permits a perthe profits from an lire, to deduct from tire amount of such re. Expenses incurred and with the same Or are also deductable its.
these provisions is an agricultural ven
iable to income tax
pital expenditure in td for cultivation has dinarily in commer
such expenditure capitalised and writits Over a number of lance profits for an been treated as in
il also pays subsidies
replanting of speciroducts in Order to apital cost of investtural venture. Under
these subsidies are me even though the nting or replanting
are deducted from the receipts of the venture in calculating the profits liable to income tax. This double concession that is the payment of a subsidy and its exclusion from income for tax purposes, is provided as a special incentive for agricultural development.
27

Page 30
Payment of Subsidies
Subsidies are paid by the Department of Minor Export Crops for the new planting or replanting of cardamoms, cinnamon and cocoa and for the new planting of cloves, nutmeg, pepper and coffee. The Department of Agriculture operates a subsidy scheme for the initial cultivation of fruit varieties such as passion fruit. mango, and citrus fruits.
Tax Holidays
A tax holiday increases the return from a venture which is retained for the use of the owner. A tax holiday is thus a major incentive for investment as the owner's real concern is with his after tax rate of return.
As a matter of policy, tax holidays o are now restircted largely to the nontraditional export sector. In the agricultural sector, cultivation of sugar cane qualifies for a tax holiday. A tax holiday is also available to a company which is set up for the production, from the agricultural produce of Sri Lanka, of specified commodities. Thus, selected agrobased industries could qualify for a tax holiday. Where the product of non-traditional agriculture or agroindustry is exported, liberal tax holidays are available in our tax system.
Any business organisation, whether it is a proprietory concern, partnership or a company, is entitled to a five year tax holiday on its profits from non-traditional exports from 1st April 1984 to 31st March 1989. It is not necessary for a business to be specifically approved for the purposes of this tax holiday. The manner in which this tax holiday is structured gives the largest
benefit to a business which enters the export field early. A business which commenced exports on or prior to 1st April 1984 could enjoy the full five year tax holiday. A company which commences exports in, say April 1986 will obtain only a three year tax holiday. The tax holiday was so structured to encourage business to commence exports as early as possible.
A five year tax holiday from the date of commencement of exports is available to companies which engage in the manufacture and export of non
28
traditional export holiday is granted (1) (b) of the Inlan has to be approved Finance & Planning basis. Companies v rated to carry on eX based industries co tax holiday.
The third catego for export underta ced in the Budget 1 form of a ten year h is available to a com exports of non-tr; where the net fore nings is more than value of the export foreign exchange ea tained by non-trad products including based industrial prc panies too have to Minister of Financ case-by-case basis.
The tax holiday sector is also restr companies and is f years from the date pany commenced to In the case of all t cept the ten year export profits, th allowed to flow company to the dends declared by its tax holiday pro riod of the tax ho year thereafter will come tax in the holder. Provision exempt in the har shareholder a divic company out of ta received by it.
Export Production
The fiscal ince1 village level develc sarily to be differe vided to encourag large-scale agricult order to take the villages a new fo has been set up ca. duction village co production village rated under the C share-holders of th village level produc

roducts. This tax under section 20
Revenue Act and by the Minister of on a case-by-case hich are incorpoport oriented agrold apply for this
cy of tax holidays ings was announ85. This takes the alf tax holiday and pany which makes ditional products ign exchange ear75% of the F.O.B. 3. This level of net "nings could be obtional agricultural
particularly agroducts. These compe approved by the è & Planning on a
for the non-export icted to approved or a period of five On which the comcarry on business. he tax holidays exhalf tax holiday on e tax holiday is through from the shareholder. Divia company out of fits, during the peiday or within one be exempt from inands of the shareis also made to ds of the ultimate end declared by a holiday dividends
Village Companies
tives provided for pment have necesnt from those pro
the setting up of ural ventures. In xport effort to the m of organisation, ed the export pro1pany. The export ompany is incorpoDmpanies Act. The S Company are the rs. The Export De
velopment Board provides assistance to these companies by way of capital participation and management and marketing assistance.
The shareholders sell their products to the Export Production Village Company which, in turn, sells these products to export concerns. Thus, for the first time, direct export effort has been organised at the village level. The products exported are mainly fruits and vegetables. -
The Export Production Village Company is granted a five year tax holiday on its profits. Dividends declared by the company out of its exempt profits are also exempt from income tax in the hands of the shareholders.
In addition, as an initial incentive for the growth of the Export Produc
tion Village Company form of organi
sation, the Export Development Board pays them a cash grant of 2% of their sales. Export concerns which purchase commodities from the Export Production Village Companies also receive from the Export Development Board a cash grant of 2% of the value of such purchases.
10 Year Tax Holiday and 100% Investment Relief
The Inland Revenue Act contained provision earlier which enabled the grant of a 10 year tax holiday to approved companies engaged in large agricultural activities. These companies had to be quoted public companies with a minimum issued share capital of at least Rs. 100 million. The Company could engage in the cultivation of non-traditional agricultural products or in the cultivation and processing of such products. Companies approved for this tax holiday included three companies set up for the large scale cultivation and processing of sugar
Cae.
Where the total capital of the company was Rs. 500 million or more, investors in shares of the company were granted 100% relief from their income for the investment made by them. They could deduct from their income the full amount of the investment.
These liberal tax concessions were granted to encourage the formation of companies which would engage in large Scale agricultural Ventures. As a
ECONOMIC REVIEW MAY, 1987.

Page 31
policy measure, it was considered necessary to encourage the establishment of such companies side by side with the encouragement of production in the medium scale enterprises and at the village level.
Fiscal concessions of this nature
cannot be continued for long without giving rise to serious problems of equity in taxation. They are granted to attract large scale pioneering ventures. Once a few firms are established it would not be necessary to continue to grant to all firms in the industry the same tax concesions.
Export Grants
Export grants are used as instruments of fiscal policy to increase the return on investments and to induce investments in export industries.
The operation of a scheme of grants involves the determination of the area in which grants should be made and the method of computing the amount of the grant. Measures should also be adopted to ensure that the grants are used for the purposes for which they were intended. An example of this type of assistance is provided by the
export development and investment .
support scheme of the Export Development Board.
To qualify for the grant, the net foreign exchange earning of the product exported should be more than 20% of its F.O.B. value. The export earnings of the business concern, measured in S.D.R. terms, should have also shown an improvement over the average export earnings of the three preceding years. The extent of the grant increases with the percentage of the net foreign exchange earning on the product. Thus, in the case of agricultural products, there is an inducement to increase the value of the products by processing.
Of the grant 25 percent is paid in cash, the balance is paid in Development Certificates issued by the Export Development Board. These certificates do not bear interest as it is intended to encourage early use of the certificates. The certificates are valid for five years
ECONOMIC REVIEW MAY, 1987.
and could be encas in export-oriented by the Export D. These grants are a income tax, thereb full amount of th for investment.
Import Duties
At present, impo protective function duties were used as ment revenue. Witl of the turnover tax port, this tax took function of import (
The tariff structu the Budget 1985 p. duties ranging from the majority of loc,
cultural commoditi
products. These pro vided a considerabl tion against competi The grant of reason protection encoura, tion in areas where duction is possible.
While tariff prot for these commod duties on machinery and on raw materia reduced to keep dow tion. A low rate of d on machinery impor port duty or turnov of import is levied ported for use in an least 40% of the out number of essential ture are allowed to b duty. These includ large variety of cher culture.
A relief measur along with import d
Heads of Revenue
Taxes on production an of which;
General sales and t Selective sales taxe import levies Export levies
fea Rubber Coconut Other Other i tems Of Reve
total Revenue
Source: General Treasury, (a) Figures of revenue for
 

led for investment projects approved
velopment Board. to exempted from
ensuring that the grant is available
rt duty performs a Earlier, import source of governthe introduction at the point of imOver the revenue uties. re introduced with rovided protective 60% to 100% for illy produced agries and agro-based ducts are thus proe level of protection from imports. tably high rates of ges local produc
expansion of pro
ection is provided lities, the import used in industry inputs have been in costs of producuty of 5% is levied ts. Further, no imær tax at the point on machinery im
industry where at put is exported. A
inputs in agricule imported free of : fertiliser and a nicals used in agri
which operates uties is the import
duty rebate scheme for exports of manufactured products. The principle of this scheme is to refund to the exporter the import duty paid on imported inputs used in the product which is exported. The Export Development Board, along with the Ministry of Finance & Planning operates this scheme. Each manufactured product which is exported is analysed to ascertain the import duty content of its cost; a rebate is then granted as a percentage of the FOB value of the export to cover the import duty borne by the product which is exported.
Export Duties
Export duties are a major source of govenment revenue. However, in order to encourage the export of non-traditional agricultural produce almost all these products are exported free of export duty. Even the products liable to export duty are taxed at very low rates. These include 5% for cinnamon chips and 10% for cinnamon quills.
Turnover Tax
The turnover tax is so structured that exports do not bear this tax. Undertakings for the export of commodities manufactured or processed in Sri Lanka are exempt from turnover tax on their export sales. Where an export undertaking purchases raw material inputs from other manufacturers, the export undertaking is entitled to a refund of the turnover tax paid by those manufacturers when sales of the raw materials were made by them. The same concession applies where an export undertaking purchases components, packing materials etc. The export undertaking which is entitled to a refund of the turnover tax paid by
REVENUE OF THE GOVERNMENT OF SRI LANKA(a)
Rs million 1978 1982 1984 1986 1987
Provisional Approved
Estiamtes expenditure 9,217.2 10,372.0 12,432.6 25,652.129,906.1 30,949.5
fNOVer sax62S 1,143.4 1640.1 4,051.4 8,143.5 10,052.3 10,920.0 1884.O 1877.6 2,273.1 5,787.4 4,476.2 5,056.2 1469.3 2,924.5 3,222.4 7945.4 10,014.3 11,540.3,
2,781.0 1920.3 1,443.9 1,768.3934.1 895.O. 1001-0 1386.5 753.4 1,009.0 306.8 520-0 344.9 213.2 1911 296.9 231.9 14OO 1092 113.2 95.1 1 OO.5 100.6 1250 է Ա Թ 2470.7 3,696.4 5,376.0 12,078.9 12,048.9 13,165.5 11,687.9 | 14.068.4 178O8.6 37,731.041.955.0 44,115.0
Dentral Bank of Sri Lanka.
78 to 1985 and 1986 (provisional) differ from the published figures, in the Government Accounts.
29

Page 32
those manufacturers when sales of the raw materials were made by them. The same concession applies where an export undertaking purchases components, packing materials etc. The export undertaking which is entitled to the refund could pass-on this benefit to the businesses from which it purchased the raw materials, components or packing materials.
Agroindustries which manufacture commodities for export are thus freed from turnover tax. Where a business has exports as well as local sales, the turnover tax exemption applies to its exports while the refund of turnover tax is related to the proportion of its inputs which are used in production for export.
A number of non-traditional agricultural products have been gazetted as exempted articles for purposes of turnover tax. The effect of declaring an article to be an “exempted article is that, businesses which sell such articles are not liable to pay turnover tax on those sales. These exempted articles include cardamoms, cinnamon, cloves, papain and pepper. This concession has been granted to facilitate the operation of the exemption from turnover tax of export products. Representations were made that most of these products go through a number of sales points before the final sale to the exporter. The exporter could claim a refund for only the turnover tax paid by the business which sold the product to him. If it were not for the declaration of these articles as exempted articles, the turnover tax paid at earlier sales points would go unrelieved. However, this concession could be granted only where a larger part of the commodity produced in Sri Lanka is exported and there are anumber of sales points in the chain of transactions from the producer to the exporter.
Summing up
Fiscal Policy has thus been used to reduce the cost of the initial investment through investment relief and Subsidies and to increase the rate of return to investments through tax holidays and grants. Import duties, export duties and turnover taxes have been kept neutral in so far as exports are concerned.
30
Å Note om Programme
Ariya Abey sing
The Soviet willingness to multi-national multi-purpose programme. T for the Acce gramme (AMP 2,250 million loan to fund ties. The AMP Swedish assis assisted Victo Randenigala ar dian assisted N stream develo Japan, USA, Netherlands, B Australia. The ganizations inc ADB, UNDP, l | FAD and OPE to the group C viet Union. Tr curred on the 1986 was Rs 3. Programme is f the final cost RS 50 bilion. the next five y mated at Rs about Rs 10 foreign assistar
Most of th AMP have bee ficient to irrig of new lands ment. Of this new lands hav, tled With farn under Kalaw Mahaveli Riigi Elahera; and Oya. At the e ha. of new lanc irrigation wat ha. of existing plemental irri tribution tow the country

leveloping System “A” of
the Accelerated Mahaweli
nd Soviet Offers of Assistance
Jnion has indicated its be associated with the assisted river based project, the Mahaweli e Soviet commitment erated Mahaweli Prois reported to be Rs in the form of a state 2chno- economic activinas in the Head works, ed Kotmale, British ria, German assisted di Rantambe, and Canaladuru Oya. The downpment is assisted by Saudi Arabia, Kuwait, elgium, EEC, China and international donor or
ude the BRD and DA
JNFPA, UNICEF, WFP, EC. The latest addition f aid donors is the Sote total expenditure inAMP upto the end of 3.3 billion and when the ully completed by 1992 is estimated to be over Total expenditure over ears, 1987-1991, is esti19.4 billion of which illion is expected to be
CEe. e reservoirs under the completed and are sufte nearly 300.000 acres or agricultural developabout 140,000 acres of 2 been covered and setfamilies in System 'H' Awa; System C on the t Bank; System G under ystem B under Maduru d of 1986 over 41.000 had been provided with rs abd another 77,200 and was receiving Supation. The AMP's Conirds rice production in di risen to 8.2% of the
total in 1986, while it accounted for
nearly 6% of the country's cultivated
area under rice.
New towns have emerged in both the upstream and the downstream areas. They include Digana and Karaliyadde in the Kandy district; the new Kotmale township; Grandurukotte, Dehiattakandiya, Sandunpura in System C; Heengalkandiya, Dimbulagala, Welikanda, Aralaganwilla in System R; and Gainewa, Tambuttegama and Galkiriyagama in System H. New roads have also been built such as those linking Kandy via Gampola, Victoria Randenigala and Mahiyangana - Polonnaruwa which has reduced the time taken in travelling and transporting men, materials and goods. System 'A' whose development is to be assisted by the USSR is an integral part of the downstream development. In addition to a potential irrigable area of over 30,000 ha to be developed here on both banks of the Mahaweli, is also the other potential. The CECB has prepared engineering designs for the Headworks of Kandakadu, and some other studies have already been done on this project.
The Setting
System. A lies in three Districts: Trincomalle, Batticaloa and Polonnaruwa. In the north it is bordered by Koddiyar Bay, in the West by irrigation System D of the Mahaweli and in the South by System B of the Mahaweli. In the East it is bordered by a line approximately parallel to, and 5 km from the coast line. Thus, System A which is located on the lowest reach of the Mahaweli Ganga extends some 70 km from Kandakadu to the river mouth in Koddiyyar Bay south of Trincomalee. It covers 45,300 ha as follows:
Unit 1 consits of flood protected low lands north of Verugal Aru and comprises the existing Allai Scheme.
Unit 11 is the Western Part of Sys
ECONOMIC REVIEW MAY, 1987,

Page 33
tem A with a gross area of 12,900 ha,
of which 9,700 ha are irrigated. Pre
sently the area is prone to floods and a
greater part of it is in jungle.
Unit 111 is the South Western part of System A. The gross area is 11,000 ha. of which 2,200 can be irrigated. Climate
System A is located in the Dry Zone of Sri Lanka with an average rainfall of less than 1,900 mm. The average for Allai Tank is 1,750 mm. The wet season, Maha, associated with the north-east monsoon, lasts from October to January. The period from May to September is usually dry, with February - April being a variable transi. tion period.
The hottest months are July-August with daily maximum temperature averaging 37°è dropping to 25°c by night. January is the coolest month with an average daily range from 29°è down to 20°c. Relative humidity is highest in December 89-83% at 08.30 and 173O hours. The average daily wind velocity is highest in the south west monsoon, Yala season, ranging from 1 1.0 km/hr during May to September. It is lowest from November to April ranging from 4.8 km/hr to 5.7 km/hr. Average daily
sunshine ranges from 5.5 hours in De
cember to 8.8 hours in May. Pan evaporation reaches its highest at 8.0 mm/ day in August dropping to 3.6 mm/ day in December. Geology
The area is characterised in the East and South East by a range of Pre Cambrian rocks of the “Vijayan Series“. To the West lie the “Higland Series' of the Pre Cambrian origin which extends from the Central Massif of the island North Eastwards to Trin comalee. Between them is the Transi. tion one'. In the central part of system A the rocks are mantled by the alluvial filling of the flood plain of the Mahavveli river and the Veruga Aru. in some places along the coast are marine deposits.
Soils and Drainage
The soils of System A are (a) Fringing the Western boundary - Soils developed on pre-Cambrian rocks of the
ECONOMIC REVIEW MAY, 1987.
MNNERYA-GRITAtE NATURE RESERVE
Victoric Reservoir
Randenigato Reservoic Y,A
VICTORA -HANDENGAL. A-R SANCARy = یحیححجخb
Transition Zone. Th brown medium textu These soils are well tern - Western soil fi soils. The drainage (c) Alluvial flood plai heavier textured mair material. (d) Sandy ches and dunes along
are well drained. Land Use
With the exceptio
ha of irrigated pada scheme and 1,460 ha ture lands, the area loped. Levee cultiva chena is carried out o 10% of the total area. underdevelopment in
 
 
 
 
 

RESERVE
−
MINIPE
A、
a マー/
w
[ܠ AN TEMBER 2 Is baile of GAL
ey are red and red resiliual soils. drained, (b) Easow-coarse sanry ! is imperfect.
in soils which are
hly silty and clay soils of the beathe coast. They
n of some 8,000 dy in the Allai of improved pasis poorly devetion and illicit in approximately The reasons for this area are:
۔۔۔ وہ خوست۔۔۔ء خح&"*
eKANTALA
TRI KONAMADU NATURE
ESERVE.
Maduru Oya Reservoir
Senanayoke Somu dro
NடGALஇழ்Net::: CORRDORN
(i) Unreliable rainfall distribution (ii) Lack of irrigation facilities (iii) Flooding during the Maha season (iv) Forest reserve of 26,000 ha.
(v) Somawathie Chaitiya Sanctuary of 22,000 ha.
Unit 1. - 21,400ha.
Unit 11 - 12,900 ha.
Unit 1 1 1. - 1 1,000 ha.
45,300
About 35,000 ha of soil along the coast is of marginal use for agricultural
development.
The land use pattern at present is: (1) Permanent AgricultureRiver Irrigated Rice (Two crops)

Page 34
(a) Allai Paddy Scheme-8,000 ha.
Mean Yield 3,000 kg/ha/Crop Size of holding - l. 2 ha - l. 6 ha Problems-Scarcity of water in Yala
Scarcity of farm power –Tank Irrigated Maha Rice (a) Kadumurivu Paddy Scheme-320 ha tank fed 160 ha upland paddy Problems: Scarcity of water (b) Minor Tanks - 1050 ha.
(11) Low intensity Agriculture
Upland Rice - Maha season -Chena Cultivation- Field Crops -Levee farming-Tobacco cultivation in Yala
-Homesteads - Field crops, vegetables
(111) Grasslands - Livestock farms at Kandakadu and Tirikumaimadu - 1460 ha
(IV) Villus - Natural grasslands - 8 months flooded after Maha rains (V). Abandoned Clearings - (Damanas)
Sonhe Development Possibilities
1. Traditional Crops - rice, soya, Sugar, maize, tobacco, pulses, oil seeds, onions 2. New crops - commercial cultivation of sugar cane, soya, maize, green gram, onions Tree crops - Cashew along the coast, Tarmarind in the Forest Programme Coconut in suitable areas on a commercial scale. - Jute in boggy soils including cane and Ibamboo cultivation
-Horticulture commercial farms - Ba
nana on a commercial scale -rrifated Guava, mango, pineapple 3. Livestock - Large scale development of draught animal programme 4. Aquaculture - Commercial scale in
and fisheries programme Possible Agro-Industries -Modernised rice milling packetting —Sugar milling -Tobacco Processing -Soya Bean oil and Meat . -Livestock feed mili
-Jute weaving -Cashew decortication -Fruit processing and packetting -Milk based products
- 32
PROTOTY
Britain leads
David Wirader
Staff writer of Monitor, in Lona
Britain, home Wimbledon, a dom, now has tion that is dira: The new att found on a co is privatization to describe the assets to privat Yet Britain, nearly 40 perc private enterpr not the only Some 1 00 ot China to Cub. Bangladesh - ha rolling back the Even the Sc gid centrally pl ting with cap went into effec of Soviet citize in small family What makes other countrie country that h systematic prog “We are fa We were the fi built on the e: Treasury sourc
So far 16
nies, including
as Jaguar and
-Dried fish, if of inland marir
Another fac ping System "A is the availabi Trinconnaee hi
an export out airport could ports of fresh Systems 'H'. 'E minal markets Singapore, Má East.

PE FOR PRIVATIZATION
the global race to turn state assets into private enterprise
SLSSSLS
f The Christian Science lon -
I of Buckingham Palace,
ld the Tower of Lonan added tourist attracwing foreign officials. raction, which can't be nventional tourist map, ... That's the word used 2 handling over of state e enterprise.
which has handed over ent of its state sector to ise in the last 8 years is country to privatize. her countries - from a, and from Brazil to ave begun the process of 2 frontiers of the state. Dviet Union, with its rilanned economy, is fliritalism. A law, which at May 1, lets thousands
ens work for themselves
businesses.
Britain the model for s is that it is the only as embarked on such a tram of privatization.
and away the leader. rst to start it, and we've kpertise", says a British
state-controlled compasuch household names British Airways, have
sh meal and processing le products. stor in favour of develo\' on a commercial scale lity of direct access to arbour which could be let and the China Bay be developed for exMahaweli produce from B'.'G'.'C'. and "A" to terincluding Hong Kong, ldives and the Middle.
been taken over by private enterprises. This has brought 600,000 workers into the private sector, of whom over 400,000 have taken out shares in their companies on highly favourable terms. Another 1 million former tenants in public housing now own their homes. And dozens of city and town councils have contracted out their public services, such as refuse collecting and school and hospital cleaning to private firms.
According to Maidsen Pirie, president of the Adam Smith Institute in London, a free enterprise think tank, representatives from as many as 50 countries have visited his London
I office to see how privatization works.
Other stops on what Dr. Pirie dubs the “Cook's Tour of Privatization' include the British Treasury, banks, local privatizing councils (authorities
that have privatized essential services),
and the National Freight Consortium in Bedford, England. The NFC became privatized in 1982 under a management employee buy out.(See accompanying story in Box).
Pirie says privatization is spreading like a brushfire world-wide.
The Scots-born economist who sports a bow tie, speaks as fast as an express train, and is a leading member of Mensa, the high I.Q. society, sees the `
transfer of power from the govern
ment to the people as representing a social revolution.
“It’s the biggest story of the 20th century. Bigger even than the collapse of Keynesianism. It marks the reversal of 100 years of collectivism’ says Pirie.
He says the world is now heading full speed ahead in the opposite direction. Both France and Japan have had huge sales of state assets, while privatization is growing apace in the third world. Even communist China and Cuba allow some tenants to buy their own homes.
Countries that have turned to privatization do so for different motives. Some, like socialist Tanzania, feel excessive state control has stifled incentis 'ves to produce. Others, like oil-produ
ECONOMIC REVIEW MAY, 1987.

Page 35
cing Malaysia and Nigeria, are pushed for cash because of the fall in oil prices. ܫ
But the road to privatization has plenty of bumps.
Last month nearly 1 million workers in Bangladesh shut down banks and industries in both public and private Sectors across the country in a one-day strike intending to force the government to repeal its policy of returning nationalized industries and banks for private ownership.
In what has been seen in many quarters here in Britain as the greedy (and therefore unacceptable) face of capitalism, a Conservative member of Parliament was forced to stand down when it was found he was guilty of
making multiple applications for Bri
tish Telecom shares.
Opponents of privatization in Britain charge that the government is giving away some £ 4 to 5 billion in national assets every year to bankroll tax cuts in an effort to win voters. And Some Say the government has not effectively curbed the market dominance of newly-privatized monopoly utilities. The government defends priVatization, saying it spurs competition and eliminates sluggish, state subsidized enterprises that are a drain on public funds. It also maintains that commercial decisions are no longer subject to political considerations.
The Thatcher government also has
ideological objectives: to turn Britain
into"a property-and share-owning de
mocracy. Thatcher makes no secret of her desire to “bury socialism’.
There is some evidence to suggest
that Thatcher's free enterprise ideology is catching on. Between 1979 and
1987, the number of people owning shares in Britain almost trebled from 7 percent of the adult population to 20 percent. Many came aboard with the privatization of Such giant utilities as British Telecom and British Gas and were induced to buy because a minimal number Of Shares could be purchased in installments.
In the view of the Treasury source, the reason SO many countries are starting to follow Britain's lead is that, by and large, people were finding that the state is not the best employer. “Running a country and industry is incompatible, he says.
EconoM1C REVIEW MAY, 1987.
Not Surprisingly
matizes the ideolc
tain between the vatives and the SOc Party and its trad According to Jo trade and industry often tipped as L. privatization has m tics than economic “First, it satisf tion of Conservati State. Secondly, it and thirdly, its irre my, he said in in of Commons.
Yet Thatcheris altered the politic bour no longer ca. nationalizations as in the past.
As an America
 

, privatization dragical divide in Brifree market Conseralist-leaning Labour e union Supporters. hn Smith, Labour's sopkesman who is abour's next leader, hore to do with poli
S. ies the basic intenves to dismantle the finances tax cuts, -levant to the econoterview at the House
m has SO radically :al climate that Lalls for wholesale re
it would have done
n diplomat put it:
“The Labour Party is in a position of electoral ambiguity'.
One straw in the political wind was provided during the recent flotation of British Telecom Stock. The trade union movement urged British Telecom workers not to buy shares, but as many as 96 percent of the work force chose to ignore their union's advice.
The end of privatization is not yet in sight. Other potential areas include forestry, prisons, the steel and coal industries, and the post office. Pirie of the Adam Smith Institute goes so far as to say he could even foreSee the government selling off the derelict land it owns. With a potential price tag of £ 200 billion, selling off government wasteland could keep the privatization business going, at the current annual rate of around f 5 billion, for another 40 years.

Page 36
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Felicitation Volume to commemorate the 10th SUCCಣ್ಣve Budget
O " م. Hon. Ronnie de Mel
Minister of Finance and Planning
Containing learned articles by
eminent authors
Covering 314 pages
The Articles
onnie de Mel The Lord Roll of Ipsden istorical Background Prof. K.M. de Silva international Relations Dr.V.L.B.Mendis iscal Policy Sri Lanka Dr. P. B.Jayasundera he Balance of Payments Terrence Savundranayagam Changes in Monetary Policy Ranee Jayamaha growth and Expansion of Banking Dr. W. Hettiarachchi 'attern of Industrialisation trategies and Response Dr. Upananda Vidanapathirana
Development Planning and Investment Dr S.S.Colombage & S.A. Karu naratne 'erformance in the Agricultural Sector H.A.Chandrapala Employment Policies Dr. Indrajith Coomaraswamy ocial Development Dr. Gamini Abeysekera )bstacles to South - outh Co-operation Dr. Gamini Corea