Sri Lanka is focusing on long-term strategic and structural development challenges as it strives to transition to an upper middle-income country. Key challenges include boosting investment, including in human capital, realigning public spending and policy with the needs of a middle-income country, enhancing the role of the private sector, including the provision of an appropriate environment for increasing productivity and exports, and ensuring that growth is inclusive.
Economic growth in Sri Lanka has been among the fastest in South Asia in recent years. Growth averaged 6.3 percent between 2002 and 2013, with Gross Domestic Product (GDP) per capita rising from US$859 in 2000 to US$3,256 in 2013. Preliminary indications are that GDP further increased by 7.8 percent in 2014.[1]
For most of the past decade, growth has been pro-poor, with consumption per capita of the bottom 40 percent growing at 3.3 percent a year, compared to 2.8 percent for the total population. Other human development indicators are also impressive by regional and lower middle income standards. Sri Lanka has surpassed most of the Millennium Development Goal (MDG) targets set for 2015, outperforming nearby country comparators on most MDGs.
Notwithstanding declining poverty, 13 districts comprising 36 percent of the total population remain below the national poverty headcount. In four conflict-affected border districts, poverty rates are at or above 20 percent. While the national unemployment level is low at 4.4 percent, 14 districts report unemployment rates higher than the national average. According to Department of Census and Statistics survey data of 2011, 76 percent of total unemployed are below 29 years of age.
Sri Lanka’s challenges going forward as a middle income country (MIC) differ from what it recently faced as a successfully developing lower income country emerging out of conflict. Growth in the last five years is in substantial part due to a ‘peace dividend’ which included significant reconstruction efforts. Going forward, economic growth will likely require structural changes in the economy, including a move away from agriculture which currently employs a third of the population, as well as greater diversification and productivity increases. Although Sri Lanka has excelled in overcoming human development challenges typical to a low-income country, its service delivery systems in education, health, and other areas must now adjust to face new and changing demands typical of a MIC.
Improving the quality of human capital through effective education and skills development is central to Sri Lanka’s economic growth and competitiveness. Continued growth will also depend largely on fostering private sector development and private investment, especially increased foreign direct investment (FDI). Sri Lanka’s economy depends on FDI to bring in innovation.
The import of FDI is further underscored by the country’s limited domestic savings rate, brought about largely by its demographic trends. Contrary to most economies in South Asia, Sri Lanka does not have a demographic dividend: by 2036, more than 22 percent of the population will be over 60, and there will be 61 dependents per 100 adults. Increases in the labor force, employment rates and productivity will be central to growth. Against the background of an aging society, efficient and well-targeted social assistance will also become more important.
Against this backdrop, Sri Lanka is in the midst of fundamental political change, following the election of Maithripala Sirisena as President of the country in January 2015. President Sirisena and his Government have committed to a rapid 100 day program focused largely on restructuring government after which Parliament is to be dissolved and general elections held. The winning coalition in these elections would be expected to form a long-term government with a corresponding economic policy direction.
The world is coming to Sri Lanka and the USA/China Capital Overlap is going to be one of the big events this decade in my opinion. This is very good news for MRF in my opinion!
