Economy Of Sri Lanka

The mixed economy of Sri Lanka was valued at LKR 29.89 trillion, which was approximately equivalent to US$99 billion by gross domestic product (GDP) in 2024. When measured by purchasing power parity (PPP), the valuation of Sri Lanka’s economy was significantly higher, reaching US$342.6 billion. This disparity between nominal GDP and PPP reflects the relatively lower cost of living and price levels in Sri Lanka compared to developed economies, allowing for greater domestic purchasing power despite a more modest nominal GDP figure. The economy’s composition combined elements of agriculture, manufacturing, and services, with a notable emphasis on export-oriented industries such as textiles, tea, and tourism, alongside a growing technology sector. This economic structure allowed Sri Lanka to maintain a diversified base, which contributed to its resilience and capacity for recovery. In 2024, Sri Lanka experienced an economic expansion of 5.0%, marking a robust recovery following the severe economic crisis it had endured in 2022. This growth rate was significant in the context of the country’s recent challenges, including fiscal instability, foreign exchange shortages, and a collapse in key revenue-generating sectors. The rebound was driven by a combination of factors, including stabilization efforts by the government, renewed investor confidence, and the resumption of tourism activities which had been severely curtailed during the crisis. Additionally, structural reforms and external financial assistance played a crucial role in restoring macroeconomic stability and encouraging economic activities across various sectors. The 5.0% growth rate underscored the country’s ability to rebound from adversity and set a foundation for sustainable development in the coming years. Sri Lanka had previously demonstrated considerable success in meeting international development targets, notably achieving the Millennium Development Goal (MDG) of halving extreme poverty well ahead of the 2015 deadline. This accomplishment was part of a broader trend in which Sri Lanka outperformed many of its South Asian neighbors in social and economic indicators. The country’s progress was attributed to sustained investments in health, education, and social welfare programs, which contributed to improved living standards and human development indices. Access to primary education became nearly universal, and healthcare improvements led to reductions in infant mortality and increases in life expectancy. These achievements positioned Sri Lanka as a regional leader in development, with a strong foundation for pursuing the subsequent Sustainable Development Goals (SDGs). By 2016, the poverty headcount index in Sri Lanka had declined to 4.1%, reflecting the country’s significant progress in poverty alleviation over previous decades. This low poverty rate was remarkable given Sri Lanka’s status as a lower-middle-income country and was indicative of effective social policies and economic growth that translated into tangible improvements in household incomes. The reduction in poverty was also supported by rural development programs, microfinance initiatives, and targeted subsidies that helped vulnerable populations. Despite this progress, disparities remained between urban and rural areas, as well as among different ethnic groups, necessitating ongoing efforts to ensure inclusive growth. Nonetheless, the 4.1% poverty rate represented a milestone achievement in the nation’s development trajectory. The conclusion of the Sri Lankan Civil War in 2009, which had lasted for nearly three decades, marked a turning point for the country’s economic and social landscape. Following the cessation of hostilities, the government prioritized addressing long-term strategic and structural development challenges that had been exacerbated by the conflict. These challenges included rebuilding infrastructure in war-affected regions, fostering reconciliation and social cohesion, and promoting equitable economic opportunities across all provinces. To this end, Sri Lanka financed multiple infrastructure projects aimed at enhancing connectivity, energy supply, and urban development. Investments were made in road networks, ports, airports, and power generation facilities, which were intended to stimulate economic activity and attract foreign direct investment. The post-war period thus represented a critical phase of reconstruction and modernization aimed at integrating the previously marginalized areas into the national economy. Despite these developmental strides, Sri Lanka faced significant economic difficulties in the years leading up to 2022. The country grappled with high levels of foreign debt, which constrained fiscal space and increased vulnerability to external shocks. Economic mismanagement under the administrations of Gotabhaya Rajapaksa and Mahinda Rajapaksa contributed to deteriorating macroeconomic fundamentals, including large budget deficits, unsustainable borrowing, and weakened public finances. Additionally, the decline in tourism revenue, exacerbated by the global COVID-19 pandemic and domestic instability, severely impacted a sector that had been a vital source of foreign exchange and employment. These factors, combined with dwindling foreign reserves and difficulties in accessing international capital markets, culminated in Sri Lanka defaulting on its sovereign debt in April 2022. This default was the first in the country’s history and triggered a severe economic crisis marked by shortages of essential goods, inflation, and social unrest. The economic crisis of 2022 had profound effects on the Sri Lankan population and overall economic performance. The country’s GDP contracted by 7.8% during that year, reflecting the sharp downturn in economic activities across multiple sectors. The contraction was driven by disruptions in supply chains, declining investment, and reduced consumer spending amid rising prices and uncertainty. Concurrently, the proportion of the population living on less than US$3.65 per day doubled to approximately 25%, indicating a significant increase in poverty and economic hardship. This surge in poverty reversed many of the gains achieved in previous years and highlighted the vulnerability of large segments of the population to economic shocks. The crisis also strained public services and social safety nets, underscoring the urgent need for comprehensive economic reforms and external support. In response to the economic crisis and sovereign default, the International Monetary Fund (IMF) intervened to assist Sri Lanka in stabilizing its economy and restoring growth. On March 20, 2023, the IMF approved a loan of US$3 billion to Sri Lanka as part of a 48-month debt relief program designed to support the country’s economic recovery. This program aimed to provide fiscal space for Sri Lanka to implement necessary structural reforms, improve public financial management, and strengthen governance frameworks. The loan facility also sought to help rebuild foreign exchange reserves, stabilize the currency, and restore investor confidence. The IMF’s involvement was critical in facilitating negotiations with other creditors and international partners, providing a framework for debt restructuring and sustainable economic management. This financial assistance marked a pivotal step toward overcoming the crisis and setting Sri Lanka on a path toward renewed stability and growth.

In 2019, the services sector constituted a dominant portion of Sri Lanka’s economy, accounting for 58.2% of the gross domestic product (GDP). This figure represented a notable increase from 54.6% in 2010, reflecting significant growth and expansion within the sector over the course of the decade. The rising contribution of services underscored the country’s gradual transition from a primarily agrarian and industrial economy toward a more diversified and service-oriented economic structure. This shift was driven by the expansion of various sub-sectors, including transportation, finance, information technology, and tourism, which collectively bolstered the sector’s share of economic output. Parallel to the growth in services, the industrial sector also experienced moderate expansion, comprising 27.4% of the economy in 2019, up from 26.4% a decade earlier. This gradual increase highlighted the steady development of manufacturing, construction, and related industrial activities. The industrial sector’s growth was supported by investments in infrastructure and manufacturing capabilities, which contributed to enhanced production capacity and employment opportunities. Despite challenges such as fluctuating global demand and competition, the industrial sector maintained its role as a crucial driver of economic activity and export earnings. Agriculture accounted for 7.4% of Sri Lanka’s economy, reflecting a relatively smaller share compared to services and industry. The agricultural sector was characterized by a competitive export-oriented segment, which included commodities such as tea, rubber, and spices, renowned for their quality and global demand. However, the domestic agricultural sector remained largely protected and faced slow adoption of technological advancements. This dichotomy between the export agricultural segment and the protected domestic sector indicated structural challenges, including limited mechanization, traditional farming practices, and regulatory constraints that hindered productivity improvements and modernization efforts. Sri Lanka gained international recognition as the largest manufacturing center globally for solid and industrial tyres, a distinction that underscored the country’s specialized industrial capabilities. The tyre manufacturing industry played a significant role in the industrial sector, contributing to export revenues and employment. This specialization was supported by a combination of skilled labor, technological know-how, and strategic investments, enabling Sri Lanka to capture a substantial share of the global market for these products. The prominence of tyre manufacturing also highlighted the country’s potential for niche industrial production and value-added manufacturing. The apparel sector in Sri Lanka demonstrated progressive movement up the value chain, focusing on enhancing product quality and improving market positioning. This evolution involved shifting from basic garment manufacturing to producing higher-value, design-intensive apparel that catered to premium international markets. Efforts to upgrade skills, adopt advanced technologies, and comply with stringent international standards contributed to the sector’s competitiveness. The apparel industry’s strategic emphasis on quality and innovation helped solidify Sri Lanka’s reputation as a reliable supplier in the global textile and garment market, supporting export growth and economic diversification. Despite these advancements across various sectors, rising trade protectionism over the past decade raised concerns about a potential resurgence of inward-looking economic policies. Increased tariffs, import restrictions, and regulatory barriers threatened to undermine the country’s integration into global markets and its attractiveness to foreign investment. Such protectionist tendencies risked reversing gains made through trade liberalization and economic openness, potentially stifling competition, innovation, and efficiency. Policymakers faced the challenge of balancing domestic economic interests with the need to maintain an outward-oriented, competitive economy. Within the services sector, ports and airports emerged as significant contributors to income generation, underpinning Sri Lanka’s growing status as a regional hub for shipping and aviation. The strategic geographic location of the country facilitated its role as a key transshipment and logistics center, linking major maritime routes between Asia, the Middle East, and Europe. Investments in port infrastructure and airport modernization enhanced capacity and efficiency, attracting increased cargo volumes and passenger traffic. These developments not only generated revenue but also stimulated ancillary industries such as logistics, warehousing, and tourism, reinforcing the services sector’s economic importance. The Port of Colombo stood out as the largest transshipment hub in South Asia, underscoring its strategic importance in maritime trade and regional connectivity. Its deep-water harbor, modern container terminals, and efficient handling facilities positioned it as a preferred transshipment point for shipping lines operating in the Indian Ocean. The port’s capacity to accommodate large vessels and its connectivity to hinterland transportation networks enabled it to capture a significant share of transshipment cargo, facilitating trade flows across the region. The prominence of the Port of Colombo contributed to Sri Lanka’s economic resilience and integration into global supply chains. The software and information technology (IT) sector in Sri Lanka exhibited growth and increasing competitiveness, reflecting diversification within the services domain. The sector’s openness to global competition fostered innovation, skill development, and export-oriented services such as software development, IT-enabled services, and business process outsourcing. Government initiatives and private sector investments aimed at enhancing digital infrastructure, promoting entrepreneurship, and attracting foreign clients supported the sector’s expansion. The growing IT industry contributed to employment generation, technology transfer, and improved productivity, aligning with broader economic modernization objectives. Tourism emerged as a rapidly expanding sector in Sri Lanka, benefiting from the country’s natural beauty, cultural heritage, and improved infrastructure. In 2019, the travel guide publisher Lonely Planet named Sri Lanka the best destination to visit, while Travel+Leisure recognized it as the best island destination. These accolades boosted international visibility and tourist arrivals, generating foreign exchange earnings and supporting local economies. The tourism sector’s growth stimulated investments in hospitality, transportation, and related services, creating employment and fostering regional development. Sustainable tourism practices and diversification of offerings remained priorities to ensure long-term sector viability. Sri Lanka’s top export destinations included the United States, the United Kingdom, and India, highlighting key international trade relationships that shaped the country’s external economic engagement. These markets absorbed a significant portion of Sri Lanka’s export products, particularly in textiles, apparel, tea, and rubber. The trade ties with these countries reflected historical connections, preferential trade agreements, and complementary demand patterns. Maintaining and expanding access to these markets remained critical for sustaining export growth and economic stability. Conversely, the main import partners for Sri Lanka were China, India, and the United Arab Emirates (UAE), indicating significant regional trade connections and dependence on these countries for essential goods and inputs. Imports from these partners included machinery, petroleum products, consumer goods, and raw materials necessary for industrial and domestic consumption. The trade relationships underscored Sri Lanka’s integration into regional supply chains and the importance of maintaining stable diplomatic and economic ties with these countries to ensure uninterrupted trade flows. The onset of the COVID-19 pandemic exacerbated existing concerns regarding Sri Lanka’s slowing economic growth, excessive money printing, and rising government debt. The pandemic-induced disruptions intensified fiscal pressures, leading to multiple sovereign credit rating downgrades by international agencies. These downgrades reflected heightened risks associated with debt sustainability, macroeconomic stability, and the country’s ability to meet external obligations. The pandemic’s impact exposed vulnerabilities in the economic framework, necessitating urgent policy responses to stabilize the economy and restore investor confidence. Following heightened monetary instability caused by debt monetization, Sri Lanka witnessed intensified import controls and import substitution policies aimed at reducing foreign exchange outflows and promoting domestic production. These measures included restrictions on non-essential imports, incentives for local manufacturing, and efforts to diversify the industrial base. While intended to address balance of payments challenges and preserve foreign reserves, such policies also raised concerns about potential inefficiencies, reduced consumer choice, and the risk of fostering protectionism. The government’s approach reflected the complex trade-offs involved in managing economic crises and structural reforms. Despite the economic challenges, Sri Lanka was recognized as one of the top 10 countries globally for its handling of the COVID-19 pandemic, reflecting effective public health management and timely interventions. The country implemented comprehensive testing, contact tracing, quarantine measures, and vaccination campaigns that helped contain the spread of the virus during critical periods. This success in pandemic response contributed to safeguarding human capital and minimizing disruptions to essential services, even as economic difficulties persisted. The public health achievements demonstrated the government’s capacity for coordinated crisis management. In 2021, the Sri Lankan government officially declared that the country was experiencing its worst economic crisis in 73 years, signaling the severity of fiscal, monetary, and external sector imbalances. The declaration acknowledged the cumulative impact of debt accumulation, currency depreciation, inflationary pressures, and declining foreign exchange reserves. The crisis manifested in shortages of essential goods, rising unemployment, and social unrest, prompting calls for comprehensive economic reforms and international assistance. This period marked a critical juncture in Sri Lanka’s economic trajectory, necessitating strategic policy interventions. On April 12, 2021, Sri Lanka announced the suspension of most foreign debt repayments after two years of extensive money printing aimed at supporting tax cuts and stimulating the economy. This decision ended the country’s previously unblemished record of debt servicing and represented a significant shift in fiscal policy amid mounting financial pressures. The suspension reflected the unsustainable nature of the debt burden and the constraints faced in meeting external obligations without exacerbating economic instability. The move triggered negotiations with creditors and international financial institutions to restructure debt and restore fiscal health.

Sri Lanka has historically served as a pivotal trading hub, owing largely to its strategic position at the crossroads of major east–west maritime trade routes. This advantageous location facilitated the island’s integration into extensive commercial networks connecting the Indian Ocean world, linking the markets of South Asia, Southeast Asia, and beyond. The development of sophisticated irrigated agriculture in the island’s interior further underpinned its economic vitality by supporting a stable agrarian base capable of sustaining dense populations and surplus production. Indigenous historical texts, alongside accounts from foreign travelers, consistently highlight Sri Lanka’s role as a center of trade and agriculture from ancient times, underscoring the symbiotic relationship between its geographic setting and economic activities. One of the most remarkable features of Sri Lanka’s early economic infrastructure was its elaborate system of irrigation reservoirs, commonly referred to as tanks. These tanks were engineered and constructed by early monarchs following the Indo-Aryan migration into the island, reflecting a high degree of hydraulic knowledge and state organization. The tanks functioned as water storage facilities, capturing monsoon rains and channeling water through a network of canals to irrigate paddy fields in the hinterland. Many of these ancient reservoirs remain extant today, testifying to their durable construction and ongoing utility. Over time, this traditional irrigation system was augmented by modern infrastructure, integrating the ancient tanks into a broader water management framework that continues to support Sri Lanka’s agricultural productivity. The Chinese Buddhist monk Faxian, also spelled Fa Hsien, traveled extensively through India and Sri Lanka around 400 AD, providing some of the earliest foreign documentation of the island’s economic and cultural landscape. His writings reveal awareness of pre-Indo-Aryan trade activities, describing legends that recounted interactions between foreign merchants and the indigenous tribal peoples inhabiting the island prior to the arrival of the Indo-Aryans. According to these accounts, the island was originally uninhabited by humans and was instead populated by spirits and naga serpent worshipers who engaged in commerce with visiting traders. This narrative not only reflects the mythological worldview of the time but also indicates the existence of long-standing trade relations predating the establishment of formal kingdoms. In Faxian’s seminal work, “A Record of Buddhistic Kingdoms,” Sri Lanka was noted for its abundant natural resources, particularly its precious stones and pearl fisheries. These commodities were highly prized in regional markets and contributed significantly to the island’s wealth. The king imposed a tax of 30% on these valuable goods, demonstrating the existence of an organized fiscal system designed to regulate and benefit from trade activities. This taxation underscores the economic importance of the gem and pearl industries and the role of the monarchy in controlling and profiting from these lucrative sectors. Faxian’s journey to Sri Lanka involved travel aboard a large merchant vessel originating from India, highlighting the interconnectedness of maritime trade routes in the Indian Ocean. On his return voyage to China, he sailed on a merchant ship carrying over 200 men, indicating the scale and commercial significance of these trading expeditions. During the return journey, the ship encountered a severe storm that forced the merchants to jettison cargo to maintain buoyancy and safety. Despite this setback, the vessel successfully reached Java-dvipa, the region corresponding to modern-day Indonesia. This episode illustrates Sri Lanka’s active participation not only in coastal trade but also in long-distance maritime commerce that linked South Asia with Southeast Asia and East Asia, thereby reinforcing its position within a vast network of seaborne exchange. Another important early visitor was Cosmas Indicopleustes, a 6th-century merchant and monk from Alexandria, Egypt, who traveled to the Indian subcontinent and documented his observations in the work “Christian Topography.” Cosmas referred to Sri Lanka by the names Taprobane and Sieladiba, reflecting the island’s recognition in contemporary geographical and commercial knowledge. His accounts emphasize Sri Lanka’s prominence as a commercial center during this period, highlighting its central geographic location as a magnet for ships arriving from diverse regions including India, Persia, and Ethiopia. This convergence of maritime traffic underscores the island’s role as a nexus in the Indian Ocean trade networks. Cosmas further described the variety of goods that Sri Lanka received from distant trading partners, including silk, aloes, cloves, sandalwood, and other exotic products. These imports originated from far-flung regions such as Tzinista, identified with China, as well as other locations across Asia and possibly Africa. Sri Lanka functioned as a redistribution point, channeling these commodities onward to markets on the Indian subcontinent, including Male (interpreted as Malabar on the southwest coast of India) and Calliana (likely Kalyana). This intermediary role not only facilitated the flow of luxury goods but also enhanced the island’s economic importance within regional trade circuits. Cosmas underscored Sri Lanka’s status as a major commercial hub, centrally situated within the Indies and renowned particularly for its trade in hyacinths, a term commonly associated with sapphires. The island’s reputation for precious stones attracted merchants from various regions, reinforcing its image as a source of valuable commodities. Sri Lanka’s dual function as both an importer and exporter within regional and long-distance trade networks highlights the complexity and dynamism of its early economy. The island’s ability to integrate diverse products and markets contributed to its sustained economic prominence in the ancient world.

At the time Sri Lanka gained independence from British colonial rule in 1948, the country exhibited economic and social indicators that were notably advanced, comparable to those of Japan and ahead of many other Asian nations. This favorable position was reflected in various dimensions of development, including health, education, and economic stability. Sri Lanka’s social indicators were considered exceptionally high for the region; for instance, literacy rates had reached 21.7% by the late nineteenth century, a remarkable achievement given the broader context of colonial-era education in Asia. This early emphasis on education laid a foundation for subsequent social progress after independence. Public health initiatives also contributed to improving social conditions. A significant milestone was the implementation of a malaria eradication policy beginning in 1946, which effectively reduced the death rate from 20 per thousand in that year to 14 per thousand by 1947. This reduction in mortality was a critical factor in enhancing overall life expectancy and population health. At the time of independence in 1948, life expectancy at birth in Sri Lanka stood at 54 years, a figure slightly below Japan’s 57.5 years but still indicative of relatively advanced health outcomes for a newly independent Asian country. Infant mortality rates further illustrated the country’s comparative advantage in health: in 1950, Sri Lanka recorded 82 deaths per thousand live births, a rate lower than Malaysia’s 91 and the Philippines’ 102, underscoring the effectiveness of its healthcare infrastructure relative to its regional peers. Sri Lanka’s strategic location in the Indian Ocean positioned it advantageously for rapid economic growth following independence. Its geographic significance as a maritime hub fostered expectations that the country would become one of the most promising new nations in Asia, capable of leveraging trade and investment opportunities. However, by 1960, the initial optimism surrounding Sri Lanka’s economic trajectory had diminished considerably due to poor economic policies and mismanagement. The country’s inability to capitalize fully on its potential was attributed to policy decisions that failed to sustain growth momentum, leading to economic stagnation and challenges in maintaining fiscal and monetary stability. Education continued to be a priority in the post-independence period. In 1950, Sri Lanka’s unadjusted school enrollment ratio for the age group 5 to 19 years was 54%, which was substantially higher than India’s 19% and Korea’s 43%, though slightly lower than the Philippines’ 59%. This relatively high enrollment rate reflected ongoing government efforts to expand access to education and improve human capital. By 1979, Sri Lanka’s school enrollment rate had increased to 74%, demonstrating progress in educational attainment over the decades. Nevertheless, this improvement was outpaced by other countries in the region; the Philippines reached an enrollment rate of 85%, while Korea achieved an even higher rate of 94%, highlighting the competitive challenges Sri Lanka faced in human capital development. At independence, Sri Lanka inherited a stable macroeconomic environment characterized by established financial institutions and international economic integration. The country had founded its central bank, the Central Bank of Ceylon, which played a pivotal role in monetary policy and financial regulation. Additionally, Sri Lanka became a member of the International Monetary Fund (IMF) and entered the Bretton Woods system of fixed currency exchange rates on August 29, 1950. This system facilitated currency stability and international trade by pegging the Sri Lankan rupee to major currencies, thereby fostering investor confidence and economic predictability. However, the government soon introduced tighter exchange controls to manage the economy more closely. In 1953, new legislation was enacted to strengthen these controls, reflecting concerns about foreign exchange reserves and balance of payments stability. These measures aimed to regulate capital flows and protect the domestic economy from external shocks but also limited economic flexibility. The early 1960s saw further intensification of economic controls and restrictions, particularly between 1961 and 1964, as the government responded to recurring foreign exchange crises. These crises underscored vulnerabilities in the country’s economic management and prompted a cautious approach to liberalization. From 1965 to 1970, a period of partial liberalization occurred, during which some controls were relaxed to stimulate economic activity and attract investment. Nevertheless, the 1967 Sterling Crisis—a significant devaluation of the British pound—triggered a currency devaluation in Sri Lanka as well, though the government maintained many of its controls to safeguard the economy. Between 1970 and 1977, economic controls were further tightened amid the collapse of the Bretton Woods system, which had provided a stable international monetary framework. The breakdown of this system introduced volatility and uncertainty, compelling Sri Lanka to maintain stringent trade and currency regulations. Economist Saman Kelegama has characterized this era as one marked by cycles of tightening, partial relaxation, and re-tightening of trade regimes and related policies. These shifts were largely driven by perceived foreign exchange crises, which repeatedly influenced the government’s approach to economic management. The oscillation between restrictive and permissive policies reflected the challenges Sri Lanka faced in balancing the need for economic openness with concerns about external vulnerabilities and domestic stability. In the early 1960s, Sri Lanka adopted a strategy of gradual economic isolation from external markets. This approach involved initiating a standard import-substitution industrialization (ISI) regime, which sought to reduce dependence on imports by promoting domestic production through protective tariffs, quotas, and other trade restrictions. The ISI strategy was accompanied by extensive controls and restrictions on foreign exchange and trade, aiming to nurture nascent industries and achieve self-sufficiency. Alongside these economic policies, the period witnessed widespread expropriation and increased state intervention in economic activities, reflecting a broader ideological shift toward socialism and state-led development. Economic indicators from this period illustrate Sri Lanka’s relative position within Asia. In 1960, the country’s per capita GDP was 152 US dollars, closely comparable to Korea’s 153 and Taiwan’s 149. However, Sri Lanka lagged behind Malaysia and the Philippines, which recorded per capita GDPs of 280 and 254 dollars respectively. Thailand and Indonesia had lower figures at 95 and 62 dollars, indicating a mixed regional landscape of economic development. By 1978, Sri Lanka’s per capita GDP had increased to 226 dollars, showing moderate growth over nearly two decades. Nevertheless, this growth was significantly outpaced by other Asian economies; Malaysia’s per capita GDP had risen to 588 dollars, Indonesia’s to 370 dollars, and Taiwan’s to 505 dollars, underscoring Sri Lanka’s relative economic underperformance during this period. The 1970s were also marked by significant political unrest, which had profound implications for the country’s economic and social stability. The Janatha Vimukthi Peramuna (JVP) insurrection in the southern regions represented a major challenge to state authority and disrupted economic activities. Simultaneously, the roots of a protracted civil war began to emerge in the northern and eastern regions, fueled by ethnic tensions and demands for autonomy. These conflicts contributed to an environment of uncertainty and instability that further complicated efforts to achieve sustained economic growth and development during the decade.

In 1977, the government of Sri Lanka, led by the United National Party (UNP), undertook a decisive shift in economic policy by abandoning the statist economic framework and the import substitution industrialization strategy that had dominated the preceding decades. This marked a transition towards market-oriented policies and an export-oriented trade regime aimed at integrating Sri Lanka more fully into the global economy. The shift facilitated the emergence of dynamic industries such as food processing, textiles and apparel, food and beverages, telecommunications, insurance, and banking, which became key drivers of economic growth. The liberalization measures included deregulation, reduction of tariffs, and encouragement of foreign investment, which collectively enabled these sectors to expand rapidly and diversify the country’s industrial base beyond traditional agriculture and plantation crops. During the 1970s, Sri Lanka experienced significant socio-economic changes, notably an increase in the share of the middle class within the population. This expansion of the middle class reflected broader improvements in education, urbanization, and employment opportunities, which laid the groundwork for the subsequent economic reforms. The growth of this demographic segment contributed to rising domestic demand and a more diversified economic structure, factors that complemented the government’s later emphasis on export-led growth and market liberalization. Between 1977 and 1994, under the leadership of President J.R. Jayewardene and the UNP government, Sri Lanka systematically moved away from its previously socialist-oriented policies. The administration implemented a series of deregulatory reforms, privatized numerous state-owned enterprises, and opened the economy to international competition. These measures were designed to stimulate private sector activity, attract foreign direct investment, and enhance economic efficiency. The liberalization process also included reforms in trade policy, financial markets, and industrial regulation, which collectively transformed the economic landscape and contributed to higher growth rates during this period. However, by 2001, Sri Lanka faced a severe financial crisis characterized by a public debt burden that had escalated to 101% of the country’s gross domestic product (GDP), placing the nation on the brink of bankruptcy. The crisis was precipitated by a combination of fiscal mismanagement, external shocks, and the ongoing costs associated with the protracted civil conflict. The government averted economic collapse through a ceasefire agreement with the Liberation Tigers of Tamil Eelam (LTTE), which temporarily reduced conflict-related expenditures, and by securing substantial foreign loans from international financial institutions and bilateral partners. These interventions provided critical fiscal relief and helped stabilize the economy during this tumultuous period. Following the 2004 parliamentary elections, the United People’s Freedom Alliance (UPFA) government shifted the economic focus towards mass production of goods for domestic consumption, particularly emphasizing staple agricultural products such as rice and grain. This policy orientation aimed to achieve greater self-sufficiency in food production and reduce reliance on imports, reflecting a more protectionist and state-led approach compared to the previous export-oriented liberalization. The government invested in agricultural infrastructure and support programs to boost productivity and ensure food security for the population. The prolonged civil war, which lasted for twenty-five years, had a profound impact on Sri Lanka’s economic development. The conflict significantly slowed economic growth, hindered diversification efforts, and constrained the liberalization process. The war disrupted trade, deterred investment, and diverted government resources towards defense expenditures. Concurrently, the Janatha Vimukthi Peramuna (JVP) uprisings, particularly the second insurrection in the early 1980s, caused widespread social and political upheaval, further destabilizing the country. These internal conflicts created an environment of uncertainty that impeded sustained economic progress and complicated policy implementation. After the suppression of the JVP insurrection, the government intensified its commitment to economic reforms, including increased privatization and an emphasis on export-oriented growth. These policies contributed to improved economic performance, with GDP growth reaching 7% in 1993, one of the highest rates recorded in the country’s post-independence history. The reforms facilitated greater integration into the global economy and stimulated private sector development, particularly in manufacturing and services. By 1996, there was a marked structural shift in Sri Lanka’s export sector. Plantation crops, which had historically dominated exports, accounted for only 20% of the total export value, a steep decline from 93% in 1970. This transition reflected the successful expansion of the textiles and garments industry, which by 1996 represented 63% of exports. The growth of the apparel sector was driven by favorable trade agreements, such as the Multi-Fibre Arrangement, and competitive labor costs, positioning Sri Lanka as a significant player in the global garment market. This diversification reduced the economy’s vulnerability to fluctuations in commodity prices and enhanced export earnings. Throughout the 1990s, Sri Lanka’s GDP grew at an average annual rate of 5.5%, demonstrating steady economic expansion despite ongoing internal conflicts and external challenges. However, growth slowed to 3.8% in 1996 due to adverse weather conditions, including drought, and deteriorating security conditions related to the civil war. These factors negatively affected agricultural output and investor confidence, leading to a temporary economic slowdown. The economy rebounded in the late 1990s, with growth rates of 6.4% in 1997 and 4.7% in 1998, supported by improved agricultural production, increased industrial activity, and a relatively stable macroeconomic environment. Nevertheless, growth decelerated again to 3.7% in 1999, reflecting persistent security concerns and external economic pressures. The fluctuations in growth during this period underscored the vulnerability of the economy to both domestic instability and global economic trends. In response to these challenges, the Central Bank of Sri Lanka recommended further economic reforms aimed at deepening market mechanisms and enhancing competition. Key recommendations included expanding market-oriented approaches in non-plantation agriculture to improve productivity and efficiency, dismantling the government’s monopoly on wheat imports to encourage competitive pricing and supply, and promoting competition within the financial sector to increase access to credit and financial services. These reforms were intended to stimulate private sector development and foster a more resilient economic structure. Between 1991 and 2000, Sri Lanka’s economic growth averaged 5.2% annually, reflecting a period of moderate expansion despite significant challenges. Growth during this decade was uneven, influenced by a range of global and domestic economic and political factors, including fluctuations in commodity prices, security-related disruptions, and shifts in government policy. The unevenness of growth highlighted the need for sustained structural reforms and conflict resolution to achieve more consistent economic progress. In 2001, Sri Lanka experienced a contraction of 1.4% in GDP, marking the first instance of negative economic growth since independence. This downturn was caused by a combination of global economic difficulties, such as the slowdown in major trading partners, and domestic problems, including terrorist attacks both within Sri Lanka and in the United States, which undermined investor confidence and disrupted economic activity. The contraction underscored the fragility of the economy in the face of external shocks and internal instability. The 2001 economic crisis exposed fundamental policy failures and structural imbalances within Sri Lanka’s economy, emphasizing the urgent need for comprehensive reforms. The crisis revealed weaknesses in fiscal management, debt sustainability, and the effectiveness of economic institutions. It also highlighted the adverse impact of prolonged conflict on economic stability and growth prospects, reinforcing calls for peace and structural adjustment. Parliamentary elections held in December 2001 resulted in the United National Party winning a majority of parliamentary seats, while the Sri Lanka Freedom Party retained the presidency. This political configuration created a cohabitation government, which influenced policy directions and complicated governance. The electoral outcomes reflected the electorate’s desire for change and economic recovery, setting the stage for a renewed peace process and economic reforms. During the brief peace process from 2002 to 2004, the Sri Lankan economy experienced several positive developments. Lower interest rates contributed to improved borrowing conditions, while recovery in domestic demand stimulated economic activity. Tourist arrivals increased significantly, bolstering foreign exchange earnings and service sector growth. The stock exchange revived, reflecting renewed investor confidence, and foreign direct investment inflows rose, supporting capital formation and industrial expansion. These factors collectively contributed to a more favorable economic environment during the ceasefire period. In 2002, economic growth reached 4%, driven primarily by strong expansion in the service sector and a partial recovery in agriculture following years of conflict-related disruption. The service sector benefited from increased tourism, telecommunications, and financial services, while agriculture saw improvements due to better security and government support. Total foreign direct investment inflows amounted to approximately $246 million, indicating renewed investor interest and confidence in the country’s economic prospects. The government led by Mahinda Rajapaksa, which came to power in 2005, reversed many of the previous privatization efforts. It halted ongoing privatizations, launched new state-owned enterprises, and re-nationalized several previously privatized companies. Courts declared some privatization deals null and void, reflecting a political and ideological shift towards greater state involvement in the economy. This policy reversal aimed to assert greater government control over key sectors and protect domestic industries from foreign competition. During this period, several state-owned corporations became overstaffed and inefficient, suffering from operational inefficiencies and financial losses. These enterprises experienced uncovered frauds and rising nepotism, which further eroded their performance and fiscal sustainability. The inefficiencies in the public sector contributed to fiscal pressures and undermined the overall economic environment, highlighting challenges in governance and institutional capacity. In response to concerns over human rights violations, the European Union revoked Sri Lanka’s Generalized Scheme of Preferences Plus (GSP Plus) preferential tariff status. This decision resulted in an estimated annual loss of US$500 million in export earnings, significantly impacting the country’s trade competitiveness. The withdrawal of preferential access to European markets underscored the interplay between economic policies and international political considerations, affecting Sri Lanka’s export-oriented industries. The resumption of the civil war in 2005 led to a steep increase in defense expenditures as the government intensified military operations against the LTTE. This escalation strained public finances and diverted resources from development priorities. Additionally, some donor countries reduced aid due to concerns over escalating violence and deteriorating law and order, further constraining fiscal space and development assistance. The renewed conflict created an adverse environment for economic growth and investment. Simultaneously, a sharp rise in global petroleum prices exacerbated economic challenges by increasing the cost of imports and fueling inflationary pressures. Combined with the economic impact of the civil war, inflation in Sri Lanka peaked at 20%, eroding purchasing power and creating difficulties for households and businesses. The high inflation rate reflected both external shocks and domestic instability, complicating macroeconomic management and policy responses during this period.

Prior to 2009, Sri Lanka’s economy was significantly hampered by the protracted civil war between the Government of Sri Lanka and the Liberation Tigers of Tamil Eelam (LTTE). This conflict, which had persisted for nearly three decades, cast a persistent cloud of uncertainty over economic activities throughout the country, particularly in the northern and eastern regions where hostilities were most intense. The ongoing violence disrupted trade routes, deterred foreign investment, and diverted government resources toward military expenditures rather than development projects. Infrastructure damage and population displacements further constrained economic productivity, while the pervasive insecurity undermined confidence among both domestic and international economic actors. The civil war reached its decisive conclusion on 19 May 2009, when the Sri Lankan armed forces succeeded in completely eliminating the LTTE. This milestone marked a significant turning point for the nation’s stability and economic prospects, ending a period of violent conflict that had stifled growth and development. The cessation of hostilities opened the door for reconstruction efforts, resettlement of displaced populations, and renewed investor confidence. The government quickly sought to capitalize on the newfound peace by initiating policies aimed at revitalizing the economy and integrating the war-affected regions into the national economic framework. In the immediate aftermath of the war, Sri Lanka’s economy experienced a robust expansion. The gross domestic product (GDP) grew by 8.0% in 2010, reflecting the initial surge in economic activity as reconstruction and development projects gained momentum. This growth trajectory continued, with GDP further accelerating to 9.1% in 2012. The rapid expansion was largely driven by a boom in non-tradable sectors, including construction, real estate, and services, which benefited from increased government spending and private sector investment. Urban development projects and infrastructure improvements also contributed to this growth, while the restoration of security encouraged domestic consumption and business confidence. Despite the promising start to the post-war economic revival, growth rates began to slow considerably after 2012. In 2013, GDP growth declined sharply to 3.4%, signaling a deceleration from the earlier boom years. The slowdown was attributed to a combination of factors including tightening fiscal policies, external economic pressures, and structural challenges within the economy. Although there was a modest recovery in 2014, with GDP growth reaching 4.5%, the pace remained subdued compared to the immediate post-war period. This moderation underscored the need for sustained reforms and diversification to maintain long-term economic momentum. During this period, the government, under the leadership of Prime Minister and Minister of National Policy and Economic Affairs Ranil Wickremesinghe, pursued a range of policies and economic reforms aimed at stimulating growth and modernizing the economy. Central to these efforts was the creation of the Western Region Megapolis, an ambitious urban and economic development initiative focused on the western province, which includes Colombo, the commercial capital. The Megapolis project was envisioned as a major hub to attract investment, enhance infrastructure, and promote industrial and service sector growth. It sought to improve connectivity, urban planning, and environmental sustainability while fostering innovation and competitiveness. Complementing the Megapolis initiative, the government also planned to establish multiple specialized business and technology development zones across the island. These zones were designed to attract foreign direct investment, facilitate technology transfer, and create employment opportunities in high-value sectors. Additionally, designated tourism zones were proposed to diversify the economy by capitalizing on Sri Lanka’s rich cultural heritage, natural beauty, and strategic location. These zones aimed to enhance infrastructure, improve service quality, and promote sustainable tourism development, thereby strengthening the country’s economic base and reducing reliance on traditional sectors. However, in the mid to late 2010s, Sri Lanka encountered significant economic challenges that undermined earlier gains. Rising debt levels became a critical concern, fueled by increased borrowing to finance infrastructure projects and budget deficits. This mounting debt burden, coupled with a political crisis marked by instability and governance issues, led to downgrades in the country’s sovereign debt ratings by international credit agencies. These downgrades increased borrowing costs and constrained access to international capital markets, exacerbating fiscal pressures and dampening investor confidence. In 2016, amid these challenges, the government achieved a notable success by lifting a European Union ban on Sri Lankan fish products. The ban had been imposed due to concerns over food safety and quality standards. Its removal resulted in a dramatic 200% increase in fish exports to the EU, signaling improvements in trade relations and compliance with international standards. This development provided a much-needed boost to the fisheries sector and foreign exchange earnings, illustrating the potential benefits of targeted reforms and international cooperation. By 2017, further progress in human rights conditions prompted the European Commission to propose restoring the Generalized Scheme of Preferences Plus (GSP+) trade facility to Sri Lanka. The GSP+ status, which grants preferential access to the EU market, had previously been suspended due to concerns over human rights and labor rights violations. The proposed reinstatement reflected recognition of Sri Lanka’s efforts to address these issues and held the potential to significantly boost exports by enhancing the competitiveness of Sri Lankan goods in European markets. This development was viewed as a positive signal for the country’s integration into global trade networks and its commitment to international norms. Fiscal policy reforms during this period also yielded measurable improvements. Tax revenue as a percentage of GDP increased from a low of 10% in 2014—the lowest level recorded in nearly two decades—to 12.3% in 2015. This increase reflected concerted efforts by the government to enhance tax collection efficiency, broaden the tax base, and improve fiscal stability. Strengthening public finances was critical for reducing budget deficits, managing debt levels, and creating fiscal space for development spending. Despite these positive steps, challenges remained in achieving sustainable fiscal consolidation and balancing growth with social equity. Nonetheless, Sri Lanka’s economic vulnerabilities persisted, as highlighted by Bloomberg’s classification of the country among those with the highest investment risk during this period. The assessment underscored ongoing concerns related to political uncertainty, fiscal imbalances, external debt sustainability, and structural weaknesses in the economy. These factors collectively contributed to a cautious investment climate, limiting the inflow of foreign capital necessary for sustained growth and development. Economic growth continued to decelerate in the late 2010s, with GDP expanding by only 3.3% in 2018 and further slowing to 2.3% in 2019. This prolonged slowdown reflected a combination of domestic and external factors, including subdued global demand, tightening monetary conditions, and internal policy constraints. The deceleration highlighted the challenges Sri Lanka faced in transitioning from a post-conflict recovery phase to a stable, diversified, and resilient growth trajectory. During this period, the Sri Lankan Rupee experienced significant depreciation against the US dollar, weakening from an exchange rate of 131 to 182 between 2015 and 2019. This sharp decline in the currency’s value exacerbated the burden of foreign-denominated debt, increasing debt servicing costs and fiscal pressures. The depreciation also dampened domestic consumption by raising the cost of imported goods and fueling inflationary pressures. The currency instability effectively ended a period of relative economic stability and underscored the need for prudent macroeconomic management and structural reforms. Over the past decade, China emerged as Sri Lanka’s top creditor, surpassing traditional lenders such as Japan and the World Bank. This shift reflected changing geopolitical and financial dynamics, with China providing substantial loans and investments, particularly for infrastructure projects under the Belt and Road Initiative. While Chinese financing contributed to the development of key assets such as ports, highways, and power plants, it also raised concerns about debt sustainability and the strategic implications of increased reliance on a single creditor. The evolving creditor landscape influenced Sri Lanka’s economic policy choices and external relations. Sri Lanka’s economy remained diversified, with key sectors including tourism, tea exports, apparel and textile manufacturing, rice production, and other agricultural products playing substantial roles in contributing to GDP. Tourism capitalized on the country’s natural and cultural attractions, generating foreign exchange and employment. Tea exports, a historic pillar of the economy, continued to be a significant source of revenue, while the apparel and textile industry served as a major employer and export earner. Rice and other agricultural products supported rural livelihoods and food security, maintaining their importance within the broader economic structure. Overseas employment also played a critical role in generating foreign exchange earnings for Sri Lanka. Remittances from Sri Lankan workers abroad, particularly in the Middle East and other Asian countries, provided a steady inflow of foreign currency that supported household incomes and national reserves. These remittances helped to offset trade deficits and contributed to economic stability, underscoring the importance of the diaspora in the country’s economic framework. In early 2022, Sri Lankan government bonds exhibited a spike in yields accompanied by an inverted yield curve across maturities including 15-year, 10-year, 5-year, 1-year, and 6-month bonds. This inversion signaled heightened investor concerns about the country’s economic stability and the sustainability of its fiscal position. An inverted yield curve typically reflects expectations of economic downturns and increased risk, indicating a loss of confidence among bondholders and a potential tightening of financial conditions. Simultaneously, the Sri Lankan Rupee began rapidly depreciating against the US dollar in early March 2022, intensifying currency instability. The accelerated decline in the exchange rate further strained the economy by increasing the cost of imports, fueling inflation, and exacerbating the foreign debt burden. This currency crisis compounded existing economic vulnerabilities and heightened uncertainty about the country’s financial outlook. By the early 2020s, Sri Lanka was engulfed in a severe economic crisis characterized by prolonged shortages of essential goods such as food, fuel, and electricity. These shortages severely affected the population, leading to widespread hardship and social unrest. The crisis was driven by a combination of fiscal mismanagement, external shocks, and structural weaknesses, which collectively undermined the country’s ability to meet basic needs and maintain economic stability. Official inflation data indicated a peak inflation rate of 57% during the crisis period, reflecting extreme price volatility and economic distress. Such hyperinflation eroded purchasing power, disproportionately impacting low- and middle-income households and complicating efforts to stabilize the economy. The surge in prices underscored the severity of the economic collapse and the urgent need for comprehensive policy responses. In April 2022, Sri Lanka officially declared a sovereign default on its debt obligations, marking a historic financial collapse. This default represented the first time in the country’s history that it failed to meet its external debt payments, signaling a critical juncture in its economic trajectory. The default had profound implications for Sri Lanka’s access to international capital markets, creditworthiness, and economic recovery prospects. In June 2022, Prime Minister Ranil Wickremesinghe publicly acknowledged in parliament the total collapse of the Sri Lankan economy. He stated that the country was unable to finance essential imports and services, highlighting the depth of the crisis and the challenges facing policymakers. This candid admission underscored the urgency of implementing reforms, securing international assistance, and restoring economic stability to alleviate the hardships faced by the population.

According to data compiled by the International Monetary Fund (IMF), Sri Lanka’s gross domestic product (GDP) at market prices, measured in millions of Sri Lankan Rupees, exhibited a consistent and substantial increase over the four decades from 1980 to 2020. In 1980, the GDP stood at 66,167 million Sri Lankan Rupees, which expanded dramatically to 14,601,600 million Sri Lankan Rupees by 2020. This period also witnessed a significant depreciation of the Sri Lankan Rupee against the US Dollar; the exchange rate moved from 16.53 Sri Lankan Rupees per US Dollar in 1980 to 189.00 Sri Lankan Rupees per US Dollar in 2020. Such a depreciation reflects both inflationary pressures within Sri Lanka and changes in the external value of the currency, impacting the nominal valuation of the economy in US Dollar terms. For the purpose of purchasing power parity (PPP) comparisons, which adjust for differences in price levels across countries to provide a more accurate measure of economic output and living standards, the US Dollar is exchanged at a fixed rate of 113.4 Sri Lankan Rupees. This fixed PPP exchange rate differs markedly from the nominal exchange rates observed over the years, highlighting the divergence between market exchange rates and the relative domestic purchasing power of the Sri Lankan Rupee. PPP adjustments are critical for cross-country economic comparisons, as they neutralize distortions caused by fluctuating nominal exchange rates and provide a clearer picture of real economic size and income. In 1980, Sri Lanka’s economy was valued at 16.58 billion US Dollars in PPP terms, while the nominal GDP was considerably lower at 4.02 billion US Dollars. The GDP per capita, which measures average income per person, was 1,135 US Dollars (PPP) and 267 US Dollars (nominal), indicating the relatively low income levels prevailing at that time. The real GDP growth rate for the year was a robust 5.8%, reflecting a period of economic expansion. However, inflation was notably high at 26.1%, signaling significant price increases within the domestic economy. Government debt was substantial, amounting to 78% of GDP, suggesting considerable fiscal burdens that could constrain future economic policy options. By 1985, Sri Lanka’s GDP had increased to 27.43 billion US Dollars (PPP) and 5.97 billion US Dollars (nominal), demonstrating continued economic growth. The GDP per capita rose to 1,772 US Dollars (PPP) and 369 US Dollars (nominal), reflecting improvements in average income levels. The real GDP growth rate slowed slightly to 5.0%, indicating a modest deceleration in economic expansion. Inflation experienced a dramatic reduction to 1.5%, marking a significant stabilization of prices compared to the earlier period. However, government debt rose to 95% of GDP, indicating increased fiscal pressures despite the economic growth and low inflation. In 1990, the economy expanded further, with GDP reaching 37.74 billion US Dollars (PPP) and 8.03 billion US Dollars (nominal). The GDP per capita increased to 2,320 US Dollars (PPP) and 463 US Dollars (nominal), continuing the trend of rising average incomes. The real GDP growth rate improved to 6.2%, signaling a period of relatively strong economic performance. Inflation, however, increased substantially to 21.5%, reflecting renewed price pressures within the economy. Government debt decreased to 82% of GDP, indicating some fiscal consolidation or improved debt management during this period. By 1995, Sri Lanka’s GDP had grown to 56.28 billion US Dollars (PPP) and 13.03 billion US Dollars (nominal), with GDP per capita reaching 3,257 US Dollars (PPP) and 714 US Dollars (nominal). The real GDP growth rate remained steady at 6.1%, suggesting sustained economic expansion. Inflation had moderated to 7.7%, reflecting improved price stability compared to the previous decade. Government debt was recorded at 80% of GDP, showing a slight reduction from earlier years but still representing a significant fiscal burden. In 2000, the GDP further increased to 83.03 billion US Dollars (PPP) and 16.33 billion US Dollars (nominal), with GDP per capita rising to 4,496 US Dollars (PPP) and 869 US Dollars (nominal). The real GDP growth rate accelerated to 8.4%, marking a period of strong economic growth. Inflation was relatively low at 6.2%, indicating a stable price environment. Government debt remained steady at 82% of GDP, suggesting persistent fiscal challenges despite the economic expansion. By 2005, the GDP had climbed to 112.59 billion US Dollars (PPP) and 24.41 billion US Dollars (nominal), with GDP per capita at 5,739 US Dollars (PPP) and 1,248 US Dollars (nominal). The real GDP growth rate was 6.2%, reflecting continued economic development. Inflation increased to 11.0%, indicating a resurgence of price pressures. Government debt slightly decreased to 79% of GDP, suggesting some fiscal improvement amid the economic growth. In 2006, the economy expanded to 124.94 billion US Dollars (PPP) and 28.28 billion US Dollars (nominal), while GDP per capita rose to 6,319 US Dollars (PPP) and 1,435 US Dollars (nominal). The real GDP growth rate increased to 7.7%, highlighting a period of accelerated economic performance. Inflation decreased to 10.0%, showing a slight improvement in price stability. Government debt further declined to 77% of GDP, indicating ongoing fiscal consolidation efforts. The year 2007 saw GDP reach 136.99 billion US Dollars (PPP) and 32.35 billion US Dollars (nominal), with GDP per capita at 6,874 US Dollars (PPP) and 1,630 US Dollars (nominal). The real GDP growth rate was 6.8%, maintaining a strong growth trajectory. Inflation increased to 15.8%, reflecting rising price pressures. Government debt dropped to 74% of GDP, continuing the trend of fiscal improvement. In 2008, GDP increased to 147.99 billion US Dollars (PPP) and 40.71 billion US Dollars (nominal), while GDP per capita reached 7,309 US Dollars (PPP) and 2,037 US Dollars (nominal). The real GDP growth rate was 6.0%, indicating sustained economic expansion. Inflation decreased to 9.6%, signaling improved price stability. Government debt was recorded at 71% of GDP, marking further fiscal consolidation. The 2009 figures show GDP at 154.39 billion US Dollars (PPP) and 42.07 billion US Dollars (nominal), with GDP per capita at 7,540 US Dollars (PPP) and 2,090 US Dollars (nominal). The real GDP growth rate slowed to 3.5%, reflecting the impact of global economic conditions and domestic challenges. Inflation dropped significantly to 3.4%, indicating a period of price stability. Government debt increased slightly to 75% of GDP, suggesting some fiscal pressures amid slower growth. In 2010, Sri Lanka’s GDP rose to 168.80 billion US Dollars (PPP) and 56.73 billion US Dollars (nominal), with GDP per capita increasing to 8,164 US Dollars (PPP) and 2,799 US Dollars (nominal). The real GDP growth rate rebounded strongly to 8.0%, reflecting a recovery from the previous year’s slowdown. Inflation rose to 6.3%, indicating moderate price increases. Government debt decreased to 72% of GDP, signaling improved fiscal management. By 2011, GDP further increased to 186.76 billion US Dollars (PPP) and 65.29 billion US Dollars (nominal), with GDP per capita at 8,949 US Dollars (PPP) and 3,200 US Dollars (nominal). The real GDP growth rate was 8.4%, maintaining strong economic momentum. Inflation increased slightly to 6.7%, reflecting moderate inflationary pressures. Government debt remained stable at 71% of GDP. In 2012, GDP rose to 207.60 billion US Dollars (PPP) and 68.43 billion US Dollars (nominal), with GDP per capita reaching 10,164 US Dollars (PPP) and 3,350 US Dollars (nominal). The real GDP growth rate increased to 9.1%, marking one of the highest growth rates in the period. Inflation rose to 7.5%, indicating elevated price pressures. Government debt decreased marginally to 70% of GDP, reflecting ongoing fiscal efforts. The year 2013 saw GDP at 218.11 billion US Dollars (PPP) and 74.32 billion US Dollars (nominal), with GDP per capita at 10,599 US Dollars (PPP) and 3,610 US Dollars (nominal). The real GDP growth rate slowed significantly to 3.4%, indicating a marked deceleration in economic expansion. Inflation decreased to 6.9%, suggesting some easing of price pressures. Government debt increased slightly to 72% of GDP, reflecting a modest deterioration in fiscal balance. In 2014, GDP increased to 233.01 billion US Dollars (PPP) and 79.36 billion US Dollars (nominal), with GDP per capita at 11,220 US Dollars (PPP) and 3,819 US Dollars (nominal). The real GDP growth rate rose to 5.0%, indicating a moderate recovery in economic growth. Inflation dropped significantly to 2.8%, reflecting improved price stability. Government debt remained steady at 72% of GDP. By 2015, GDP reached 247.37 billion US Dollars (PPP) and 80.60 billion US Dollars (nominal), with GDP per capita at 11,798 US Dollars (PPP) and 3,843 US Dollars (nominal). The real GDP growth rate remained steady at 5.0%, maintaining moderate economic expansion. Inflation further decreased to 2.2%, indicating a continued period of low inflation. Government debt increased to 78% of GDP, reflecting a rise in fiscal obligations. In 2016, GDP was recorded at 261.72 billion US Dollars (PPP) and 82.40 billion US Dollars (nominal), with GDP per capita rising to 12,343 US Dollars (PPP) and 3,886 US Dollars (nominal). The real GDP growth rate slowed to 4.5%, indicating a deceleration in economic activity. Inflation increased to 4.0%, signaling a modest rise in price levels. Government debt rose to 80% of GDP, highlighting growing fiscal pressures. The year 2017 saw GDP at 274.72 billion US Dollars (PPP) and 87.42 billion US Dollars (nominal), with GDP per capita at 12,811 US Dollars (PPP) and 4,076 US Dollars (nominal). The real GDP growth rate declined further to 3.1%, reflecting a slowdown in economic growth. Inflation increased to 6.5%, indicating rising price pressures. Government debt slightly decreased to 79% of GDP, suggesting marginal fiscal improvement. In 2018, GDP increased to 285.37 billion US Dollars (PPP) and 87.95 billion US Dollars (nominal), with GDP per capita at 13,169 US Dollars (PPP) and 4,058 US Dollars (nominal). The real GDP growth rate rose to 3.8%, marking a modest recovery. Inflation decreased to 3.8%, indicating improved price stability. Government debt increased to 84% of GDP, reflecting growing fiscal challenges. By 2019, GDP reached 297.01 billion US Dollars (PPP) and 83.98 billion US Dollars (nominal), with GDP per capita at 13,622 US Dollars (PPP) and 3,851 US Dollars (nominal). The real GDP growth rate was 4.1%, indicating moderate economic growth. Inflation dropped to 2.7%, reflecting a period of low inflation. Government debt rose to 87% of GDP, signaling increasing fiscal pressures. In 2020, Sri Lanka’s GDP experienced a slight decline to 289.88 billion US Dollars (PPP) and 80.71 billion US Dollars (nominal), with GDP per capita decreasing to 13,225 US Dollars (PPP) and 3,682 US Dollars (nominal). The real GDP growth rate contracted by -2.4%, reflecting the adverse economic impact of global and domestic challenges during the year. Inflation increased to 3.4%, indicating a mild rise in price levels. Government debt surged significantly to 101% of GDP, marking a critical fiscal challenge as the debt burden exceeded the total annual economic output.

In 2016, Sri Lanka’s trade statistics revealed that the country’s export revenue from merchandise and services reached a total of $13.7 billion. During the same year, imports amounted to $19.1 billion, indicating a significant trade deficit where the value of goods and services brought into the country exceeded those sent abroad by $5.4 billion. This imbalance reflected ongoing challenges in balancing domestic demand with export capacity, as well as the structure of Sri Lanka’s economy, which relied heavily on imported raw materials and intermediate goods for its manufacturing and consumption needs. The trade deficit underscored the importance of export diversification and competitiveness in global markets to reduce reliance on imports and improve the country’s balance of payments. The following year, 2017, saw an increase in both export and import values, with export revenue rising to $15.0 billion. This growth represented an approximate 9.5% increase from the previous year, driven by a combination of factors including improved global commodity prices, enhanced trade agreements, and expansion in key sectors such as textiles, tea, and tourism-related services. Imports also rose during 2017, reaching $20.9 billion, which was an increase of nearly 9.4% compared to 2016. The rise in imports was largely attributed to increased demand for capital goods, fuel, and consumer products, reflecting ongoing economic development and infrastructure projects within the country. Despite the growth in exports, the trade deficit persisted, with imports exceeding exports by $5.9 billion, highlighting the continued need for export-led growth strategies. In 2018, Sri Lanka experienced further expansion in its trade volumes, with export revenue climbing to $15.9 billion. This represented a steady increase of 6% from the previous year and was supported by sustained demand for traditional export commodities such as garments, tea, rubber, and spices, alongside growth in emerging sectors like information technology and financial services. Imports also increased during 2018, reaching $22.2 billion, marking a 6.2% rise from 2017. The increase in imports was driven by higher consumption of petroleum products, machinery, and transport equipment, which were essential for both industrial production and transportation infrastructure. The widening gap between exports and imports, with a trade deficit of $6.3 billion, indicated ongoing structural challenges in achieving a more balanced trade position, despite the positive export growth. In 2019, export revenue experienced a slight decline, falling to $15.8 billion, a marginal decrease of approximately 0.6% compared to 2018. This dip was influenced by a combination of factors including global economic uncertainties, fluctuating commodity prices, and disruptions in key export markets. Despite the small reduction in exports, imports saw a more pronounced decline, dropping to $19.9 billion, which was a significant decrease of 10.4% from the previous year. The reduction in imports was partly due to lower demand for fuel and capital goods amid slowing economic growth and a tightening of fiscal policies aimed at controlling the trade deficit. Consequently, the trade deficit narrowed substantially to $4.1 billion in 2019, reflecting a more cautious approach to import expenditure and efforts to stabilize the external sector. The year 2020 was marked by a notable reduction in both exports and imports, largely attributable to the global economic disruptions caused by the COVID-19 pandemic. Export revenue fell sharply to $12.8 billion, representing a decline of nearly 19% from 2019. This contraction was driven by reduced global demand, supply chain interruptions, and the suspension of key economic activities, including tourism and manufacturing. Imports also decreased significantly, falling to $15.5 billion, a reduction of approximately 22% compared to the previous year. The decline in imports was influenced by decreased domestic consumption, lower fuel requirements due to restricted transportation, and a general slowdown in industrial activity. The narrowing of trade flows in 2020 reflected the profound impact of the pandemic on Sri Lanka’s external trade, with the trade deficit reducing to $2.7 billion as both export and import values contracted sharply. In 2021, Sri Lanka’s export revenue demonstrated a recovery, rebounding to $15.1 billion, which was an increase of 18% from the previous year. This resurgence was supported by the gradual reopening of global markets, renewed demand for apparel and tea exports, and a partial revival of the tourism sector. The improvement in exports also reflected government efforts to promote export-oriented industries and diversify product offerings. Imports similarly increased in 2021, rising to $20.6 billion, an increase of 33% compared to 2020. The growth in imports was driven by higher demand for fuel, machinery, and consumer goods as economic activities resumed and infrastructure projects gained momentum. Despite the recovery in trade volumes, the trade deficit widened again to $5.5 billion, indicating that import growth outpaced export gains during the post-pandemic recovery phase. In 2022, export revenue experienced a slight decrease, falling to $14.8 billion, which was a decline of approximately 2% from 2021. This marginal reduction was influenced by global economic uncertainties, including inflationary pressures, supply chain disruptions, and geopolitical tensions that affected key export markets. Imports also declined during 2022, dropping to $18.2 billion, a decrease of nearly 12% compared to the previous year. The reduction in imports was partly due to efforts to manage foreign exchange reserves and control the trade deficit amid economic challenges. The narrowing of the trade deficit to $3.4 billion in 2022 reflected a cautious approach to external trade, with both exports and imports adjusting to evolving global and domestic economic conditions. Data for 2023 is not provided in the available statistics, leaving a gap in the continuous tracking of Sri Lanka’s trade performance for that year. The absence of official figures limits the ability to analyze recent trends and assess the immediate impact of ongoing economic policies or external factors on the country’s trade balance. However, the available historical data up to 2022 provides a comprehensive overview of the fluctuations and structural characteristics of Sri Lanka’s trade over recent years. Forecast or reported figures for 2024 indicate that Sri Lanka’s export revenue is expected to reach $16.17 billion, reflecting a projected increase that suggests continued recovery and growth in export sectors. This anticipated growth may be driven by enhanced trade agreements, diversification of export products, and improvements in global demand. Imports are forecasted to total $18.84 billion in 2024, indicating a moderate rise compared to 2022 but still below the peak levels observed in previous years. The projected trade deficit for 2024, therefore, is expected to narrow relative to earlier years, signaling potential stabilization in the external trade balance as the country navigates economic challenges and opportunities in the global marketplace. These projections highlight the ongoing importance of trade as a critical component of Sri Lanka’s economic development and the need for policies that support sustainable export growth and prudent import management.

In 2020, Sri Lanka’s international trade landscape was characterized by a total export value of approximately $10.3 billion, while its imports reached a significantly higher figure of around $14.9 billion. This imbalance underscored the country’s ongoing trade deficit and highlighted the importance of examining its key trading partners to understand the dynamics shaping its economy. The United States emerged as Sri Lanka’s largest trading partner in terms of total trade volume during this period. Sri Lanka exported goods worth $2,560 million to the United States, while imports from the U.S. were valued at $355 million. This substantial disparity resulted in a pronounced trade surplus of $2,205 million in favor of Sri Lanka, culminating in a total bilateral trade volume of $2,915 million. The dominance of the U.S. in Sri Lanka’s trade portfolio reflects longstanding economic ties and the demand for Sri Lankan exports such as textiles, apparel, and tea in the American market. Following the United States, the United Kingdom held the position of the second largest trading partner for Sri Lanka in 2020. Sri Lankan exports to the UK amounted to $793 million, whereas imports from the UK were considerably lower, at $167 million. This trade pattern yielded a surplus of $626 million for Sri Lanka, with the overall trade volume between the two countries reaching $960 million. The United Kingdom’s role as a significant trading partner is historically rooted in colonial ties and has evolved into a modern economic relationship, particularly centered around Sri Lanka’s garment industry, which caters extensively to British retailers. This trade surplus indicates a strong export orientation towards the UK market, reinforcing the importance of this bilateral relationship in Sri Lanka’s export economy. India ranked as the third largest trading partner with Sri Lanka, but unlike the United States and the United Kingdom, the trade relationship was characterized by a significant deficit. Exports from Sri Lanka to India were valued at $668 million, while imports from India were substantially higher at $3,220 million. This resulted in a trade deficit of $2,552 million for Sri Lanka, with a total trade volume of $3,888 million. The large import figure from India reflects Sri Lanka’s reliance on Indian goods, including petroleum products, machinery, and pharmaceuticals. The trade imbalance with India is a critical aspect of Sri Lanka’s economic relations, given the geographical proximity and the extensive bilateral agreements aimed at facilitating trade and investment. Despite the deficit, India remains a vital partner due to the volume of goods exchanged and the strategic importance of the relationship in the South Asian region. Germany was the fourth largest trading partner of Sri Lanka in 2020, with exports from Sri Lanka totaling $651 million and imports from Germany amounting to $269 million. This trade pattern resulted in a surplus of $382 million for Sri Lanka and a total bilateral trade volume of $978 million. Germany’s position as a key European trading partner reflects its demand for Sri Lankan export products, particularly in the apparel and tea sectors, while Sri Lanka imports machinery, vehicles, and chemical products from Germany. The trade surplus indicates that Sri Lanka’s exports to Germany outpaced its imports, reinforcing Germany’s role as a valuable market for Sri Lankan goods within the European Union. Italy occupied the fifth position among Sri Lanka’s trading partners, with exports reaching $432 million and imports standing at $246 million in 2020. This trade relationship produced a surplus of $186 million for Sri Lanka and a total trade volume of $678 million. Italy’s engagement with Sri Lanka includes the importation of textiles, garments, and spices, which are significant components of Sri Lanka’s export basket. Conversely, Sri Lanka imports machinery and industrial products from Italy. The positive trade balance with Italy highlights the country’s importance as a European market for Sri Lankan exports and reflects the diversification of Sri Lanka’s trade partnerships within Europe. The Netherlands ranked sixth among Sri Lanka’s trading partners, with exports valued at $305 million and imports at $90.9 million. This resulted in a trade surplus of $214.1 million for Sri Lanka and a total trade volume of $395.9 million. The Netherlands serves as a crucial gateway for Sri Lankan exports into the European market, with Rotterdam being a major port of entry for goods destined for the continent. Sri Lanka’s exports to the Netherlands primarily include tea, rubber, and apparel, while imports consist of machinery, chemicals, and food products. The substantial trade surplus reflects the Netherlands’ role as a key destination for Sri Lankan exports and an important partner in facilitating trade flows within Europe. Belgium was the seventh largest trading partner, with Sri Lankan exports amounting to $285 million and imports from Belgium at $37.7 million in 2020. This trade relationship yielded a significant trade surplus of $247.3 million for Sri Lanka and a total trade volume of $322.7 million. Belgium’s importance lies in its role as a hub for diamond trade and as a market for Sri Lankan apparel and tea exports. The relatively low import value from Belgium compared to exports contributed to the sizeable trade surplus, emphasizing Belgium’s role as a net importer of Sri Lankan goods within the European Union. This trade pattern underscores the diversity of Sri Lanka’s export markets and the strategic importance of Belgium in its trade network. China was the eighth largest trading partner of Sri Lanka in 2020, distinguished by the largest trade deficit recorded by Sri Lanka with any partner. Sri Lankan exports to China were valued at $256 million, while imports from China were significantly higher at $3,820 million. This imbalance resulted in a trade deficit of $3,564 million for Sri Lanka and a total trade volume of $4,076 million. The substantial trade deficit reflects Sri Lanka’s heavy dependence on Chinese manufactured goods, including electronics, machinery, and construction materials, which are vital for infrastructure development projects within the country. Despite the deficit, China’s role as a major trading partner is pivotal due to investments and bilateral cooperation in economic development, infrastructure, and trade facilitation. The trade imbalance with China remains a critical issue in Sri Lanka’s economic policy considerations. Canada ranked ninth among Sri Lanka’s trading partners, with exports valued at $225 million and imports at $177 million in 2020. This resulted in a trade surplus of $48 million for Sri Lanka and a total trade volume of $402 million. Canada’s trade relationship with Sri Lanka includes significant exports of apparel, tea, and spices, while imports from Canada consist mainly of machinery and agricultural products. The modest trade surplus indicates a balanced and mutually beneficial trading relationship, with Canada serving as a stable market for Sri Lankan exports. This partnership reflects the broader engagement between Sri Lanka and North American economies beyond the United States. Japan was the tenth largest trading partner of Sri Lanka in 2020, with exports from Sri Lanka amounting to $200 million and imports from Japan totaling $376 million. This trade pattern resulted in a trade deficit of $176 million for Sri Lanka and a total trade volume of $576 million. Japan’s exports to Sri Lanka primarily include automobiles, machinery, and electronic equipment, which are essential for various sectors of the Sri Lankan economy. Conversely, Sri Lanka’s exports to Japan are concentrated in textiles, rubber, and seafood products. The trade deficit with Japan highlights the country’s role as a supplier of high-value manufactured goods to Sri Lanka, while Sri Lanka continues to expand its export base to the Japanese market. The bilateral trade relationship reflects longstanding economic ties and ongoing efforts to enhance trade and investment cooperation between the two nations.

After enduring two years of economic strain, Sri Lanka resorted to unconventional fiscal and monetary policies aimed at stimulating its economy, which ultimately culminated in a sovereign debt crisis. During this period, the government implemented aggressive money printing measures alongside significant tax cuts, both intended to provide immediate fiscal and monetary stimulus in response to mounting economic challenges. These policies, however, exacerbated inflationary pressures and failed to generate sufficient foreign exchange reserves, placing immense strain on the country’s ability to service its external debt obligations. As a result, on April 12, 2022, Sri Lanka officially declared a ‘pre-emptive negotiated default’ on its foreign debt, signaling that it would not meet repayment schedules on the majority of its external borrowings. This declaration marked a critical turning point in Sri Lanka’s financial crisis, as the government openly acknowledged its inability to fulfill debt commitments amid dwindling reserves and a deteriorating economic environment. The term ‘pre-emptive negotiated default’ referred to Sri Lanka’s proactive approach in notifying creditors ahead of actual missed payments, with the intent to engage in restructuring talks rather than defaulting abruptly. Despite this attempt to manage the fallout, the announcement sent immediate shockwaves through international credit markets and rating agencies, which swiftly reassessed the country’s creditworthiness. The declaration explicitly stated that most of Sri Lanka’s foreign debt would not be repaid starting from the date of the announcement, April 12, 2022, underscoring the severity of the crisis and the government’s acknowledgment of its fiscal constraints. In the immediate aftermath of Sri Lanka’s default declaration, Fitch Ratings, a leading global credit rating agency, responded by downgrading the country’s sovereign credit rating from ‘CC’ to ‘C’. The downgrade reflected Fitch’s assessment that Sri Lanka’s credit profile had deteriorated significantly, with the ‘C’ rating indicating that the country was near or in default, with little prospect of timely debt service. Fitch further clarified that Sri Lanka’s rating would be downgraded to restricted default (RD) status once the country missed its first debt payment, a status that signals a temporary failure to meet financial obligations but with ongoing negotiations or partial payments expected. This move by Fitch underscored the agency’s view that Sri Lanka’s fiscal situation was precarious and that the government’s ability to meet its external debt commitments was severely impaired. Simultaneously, Standard and Poor’s (S&P), another major credit rating agency, also reacted decisively to Sri Lanka’s default announcement by downgrading the country’s sovereign rating to ‘CC’. This rating indicated a very high risk of default, with the country’s financial position deemed extremely weak and vulnerable to further deterioration. S&P’s downgrade was accompanied by a statement that Sri Lanka would be further downgraded to selective default (SD) status after missing a payment on its debt. Selective default status is assigned when a sovereign fails to meet some, but not all, of its debt obligations, often signaling partial payment defaults or restructuring agreements that do not cover the entirety of outstanding liabilities. The agency’s pronouncement highlighted the imminent risk of further credit rating deterioration as Sri Lanka’s debt servicing challenges intensified. The downgrades by Fitch and S&P reflected the broader international consensus regarding Sri Lanka’s sovereign credit crisis and its implications for the country’s economic stability. Both agencies emphasized that the pre-emptive nature of the default declaration was an indication of Sri Lanka’s dire fiscal position and the urgent need for comprehensive debt restructuring and economic reforms. The sovereign debt crisis underscored the cumulative impact of years of fiscal mismanagement, external shocks, and policy missteps, which had eroded investor confidence and strained the country’s access to international capital markets. The ratings actions served as a formal recognition of Sri Lanka’s deteriorating creditworthiness and foreshadowed the complex negotiations that would be necessary to restore fiscal sustainability and economic stability. Sri Lanka’s sovereign debt crisis in 2022 thus represented a critical juncture in the country’s economic history, characterized by a sharp contraction in foreign exchange reserves, escalating inflation, and widespread social unrest. The government’s decision to declare a pre-emptive negotiated default was unprecedented in its recent history and reflected the severity of the economic challenges confronting the nation. The subsequent downgrades by Fitch and S&P crystallized the international financial community’s concerns and set the stage for protracted debt restructuring discussions involving multilateral creditors, bilateral lenders, and private bondholders. The crisis highlighted the vulnerabilities inherent in Sri Lanka’s external debt profile and underscored the importance of prudent fiscal management and sustainable economic policies in maintaining sovereign creditworthiness.

Sri Lanka’s gross domestic product (GDP) contracted by 4% in 2020, a downturn largely attributed to the government’s stringent responses to the Coronavirus pandemic. This contraction was notably more severe than the previous economic decline recorded in 2001, marking the worst annual GDP performance in nearly two decades. The 2020 contraction followed several years characterized by slow economic growth and persistent currency depreciation, which had already placed considerable strain on the country’s economic stability. The pandemic-induced restrictions, including lockdowns and disruptions to trade and tourism, compounded pre-existing vulnerabilities, leading to a sharp economic downturn. The International Monetary Fund (IMF) initially projected an even steeper contraction of 4.6% for Sri Lanka’s GDP in 2020, underscoring the severity of the economic shock brought about by the global health crisis. This forecast reflected the widespread disruptions across key sectors such as tourism, manufacturing, and exports, which are vital components of the Sri Lankan economy. The IMF’s projection also highlighted the challenges faced by the country in managing the immediate economic fallout, including diminished foreign exchange earnings and increased fiscal pressures. During the second quarter of 2020, Sri Lanka’s GDP contracted by an estimated 16%, marking the largest quarterly decline on record in the country’s economic history. This unprecedented drop was largely driven by the imposition of strict lockdown measures and a near-total halt to economic activities during the early months of the pandemic. However, the economy showed signs of resilience in the subsequent quarter, expanding by 2% in the third quarter as restrictions eased and some sectors began to recover. Despite this rebound, the overall economic environment remained fragile, with many industries still struggling to regain pre-pandemic levels of output. For the first nine months of 2020, Sri Lanka’s GDP was estimated to have contracted by 5%, reflecting the sustained economic challenges throughout the year. This prolonged period of contraction indicated that the initial recovery observed in the third quarter was insufficient to offset the earlier losses, and the economy continued to face headwinds from both domestic and international factors. The persistence of the pandemic, coupled with structural weaknesses and external shocks, contributed to the subdued economic performance during this period. Prior to the onset of the pandemic, Sri Lanka’s economic growth rates exhibited a clear declining trend over several years. Growth slowed from 5.0% in 2015 to 4% in both 2016 and 2017, further decelerating to 3% in 2018 and 2% in 2019. This gradual slowdown reflected mounting economic challenges, including weakening investor confidence, fiscal deficits, and external vulnerabilities. The declining growth trajectory indicated that the economy was already under stress before the pandemic struck, which limited its capacity to absorb the shock and recover swiftly. Between 2016 and 2019, the Sri Lankan economy experienced multiple significant shocks that further undermined growth prospects. In 2016, the country faced a currency crisis that necessitated the implementation of an IMF-supported program aimed at stabilizing the exchange rate and restoring macroeconomic balance. This was followed by a period of political instability in 2018, which coincided with a second currency crisis that exacerbated economic uncertainties. Additionally, the Easter Sunday suicide bombings in April 2019, carried out by an Islamist extremist group, dealt a severe blow to the tourism sector and heightened security concerns, further dampening economic activity. These compounding shocks contributed to the fragile economic environment preceding the pandemic. Despite these challenges, Sri Lanka’s economy grew by 4% in 2021, demonstrating a degree of recovery amid ongoing difficulties. This growth occurred despite the adverse effects of excessive central bank financing, which had contributed to persistent balance of payments deficits and foreign exchange shortages. The reliance on central bank credit expansion to finance fiscal deficits and stimulate the economy raised concerns about the sustainability of the recovery, as it risked fueling inflationary pressures and undermining monetary stability. The IMF forecasted a 3% economic growth for Sri Lanka in 2022 but issued cautionary warnings about the predominantly downside risks facing the economy. The Fund highlighted the potential for economic implosion stemming from contractions in trade and monetary instability, which were exacerbated by continued money printing through central bank credit expansion. This warning reflected apprehensions about the country’s ability to manage its external imbalances and maintain investor confidence in the face of ongoing fiscal and monetary challenges. Independent economists expressed significant concerns over the government’s monetary policy approach, particularly criticizing the adoption of Modern Monetary Theory (MMT) principles and the associated practice of money printing. They warned that such policies could exacerbate economic instability by fueling inflation, eroding the value of the currency, and undermining fiscal discipline. These critiques underscored the risks of relying heavily on central bank financing without corresponding structural reforms and prudent fiscal management. In response to these concerns, the Central Bank of Sri Lanka stated that the economy was being managed through an alternative approach that differed from conventional monetary policies. This approach emphasized the use of innovative monetary tools and strategies aimed at supporting economic growth while attempting to mitigate inflationary pressures. However, the effectiveness and sustainability of this alternative framework remained subjects of debate among policymakers and analysts. The World Bank issued a warning that Sri Lanka’s public and publicly guaranteed debt could rise to 115% of GDP in 2021, signaling a significant escalation in the country’s debt burden. Such a high debt-to-GDP ratio raised alarms about the country’s fiscal sustainability and its capacity to service debt obligations without compromising essential public expenditures. The World Bank cautioned that this growing debt burden could lead to a worsening of poverty levels in Sri Lanka, as fiscal resources might be diverted away from social programs and development initiatives. Despite progress in managing the health impacts of the Coronavirus pandemic, external debt remained a significant challenge for Sri Lanka’s economy as of 2021. The accumulation of external liabilities constrained the government’s policy options and heightened vulnerability to external shocks, including fluctuations in global financial markets and commodity prices. Addressing the debt overhang and restoring macroeconomic stability were identified as critical priorities for ensuring sustainable economic growth and development in the post-pandemic period.

In 2019, Sri Lanka’s budget deficit was initially reported at -6.8% of gross domestic product (GDP), but this figure was subsequently revised upward to 9.4%, reflecting a significant deterioration in fiscal balance. The following year, 2020, saw an even larger fiscal shortfall, with the deficit initially reported as 11.1% of GDP before being revised to 14%, underscoring the severe economic challenges faced amid the global Coronavirus pandemic. The forecast for 2021 anticipated a budget deficit of -9.4% of GDP, adjusted downward from earlier projections due to a revision in nominal output estimates that took into account the pandemic’s adverse economic impact in 2020. The budget initially submitted to parliament for 2021 had anticipated an 8.9% deficit, a figure that reflected slowed economic growth caused by the pandemic and was further compounded by tax cuts implemented to stimulate economic activity. Concerns were raised by analysts and credit rating agencies regarding the 2021 deficit targets, with many considering them overly optimistic given the ongoing uncertainties stemming from the Coronavirus pandemic and broader global economic weaknesses. Fitch Ratings, for example, projected a higher deficit of 11.5%, highlighting the risks associated with the government’s fiscal assumptions. In response, the Finance Ministry emphasized factors that could bolster economic activity and improve state finances, including a lower interest bill resulting from debt management efforts, a gradual economic recovery anticipated in 2021, and increased foreign direct investment (FDI) into the Colombo Port City development project. These elements were expected to strengthen revenue streams and reduce fiscal pressures. The Treasury also expressed intentions to increase domestic borrowing rather than relying heavily on foreign loans, aiming to manage debt sustainability and reduce vulnerabilities to external shocks. Sri Lanka’s national debt had been rising steadily amid weak economic growth and policy deadlock, with central government debt reaching 101% of GDP following the sharp deficit increase in 2020. This marked a significant escalation from the debt-to-GDP ratio of 77.9% recorded in 2017, which had already increased to 86.8% by 2019, reflecting worsening fiscal conditions over the preceding years. In 2020, the Ministry of Finance altered its cash-basis accounting method by charging some payment arrears to the previous year, which resulted in a reported 2020 deficit of 11.1% of GDP and a revised 2019 deficit of 9.6%, up from the earlier figure of 6.8%. This accounting adjustment sparked controversy, with the main opposition party accusing the Ministry of Finance of accounting fraud, arguing that under the country’s established cash-basis accounting convention, arrears should be charged to the year in which they were actually paid, not reallocated retrospectively. The actual fiscal deficit financed in 2020 was 14.0% of GDP, highlighting discrepancies between reported figures and the underlying fiscal reality. FactCheck.lk, a Sri Lanka-based fact-checking portal, stated that the reallocation of deficit figures to 2019 “cannot be validated by an accounting standard,” casting doubt on the legitimacy of the Ministry’s revised accounting approach. This controversy underscored challenges in fiscal transparency and the difficulties Sri Lanka faced in managing its public finances during a period of economic stress. Sri Lanka’s engagement with international credit rating agencies began in 2005 following the election of Mahinda Rajapaksa as president, as the government sought to facilitate borrowing from international capital markets. Standard and Poor’s (S&P) assigned Sri Lanka a speculative “B+” rating, which was four levels below investment grade, while Fitch Ratings assigned a “BB−” rating, three grades below investment grade. S&P cited a range of constraints affecting Sri Lanka’s creditworthiness, including widespread subsidies that strained public finances, an oversized public sector, transfers to loss-making state enterprises, and high local and international interest burdens. The agency estimated public sector debt at 95% of GDP, a figure higher than the Central Intelligence Agency’s (CIA) estimate of 89% of GDP, reflecting differing methodologies and data sources. By mid-2007, Sri Lanka sought to borrow $500 million from international markets to stabilize its deteriorating exchange rate and reduce pressure on domestic debt repayments. This move was met with criticism from political opposition, notably Ranil Wickremasinghe, leader of the United National Party (UNP), who warned that such intense borrowing was unsustainable and cautioned that loans would not be repaid if his party assumed power. The country’s credit rating was progressively downgraded over subsequent years, reflecting multiple currency crises and economic shocks. Fitch downgraded Sri Lanka to a “B” rating in December 2018 and further to “B−” in April 2020 amid the global Coronavirus pandemic. Moody’s downgraded Sri Lanka to “Caa1” in September 2020, a move disputed by the Finance Ministry, which protested the agency’s assessment. In November 2020, Fitch Ratings further downgraded Sri Lanka to “CCC,” citing fiscal and external vulnerabilities, while Standard and Poor’s followed suit in December 2020 by lowering the rating to “CCC+,” referencing high fiscal deficits and excessive domestic liquidity. This downgrade was also protested by the Finance Ministry, which argued that the ratings did not fully reflect the government’s fiscal management efforts. Sri Lanka’s investment-to-GDP ratio stood at approximately 31%, composed of about 24% private investment and 5% public investment. The private savings rate was around 24%, while the government was a net dis-saver, resulting in a domestic savings-investment gap of approximately 7% of GDP. This gap indicated that the country relied on foreign capital inflows to finance investment, exposing it to external vulnerabilities. In 2019, investment fell to 27.4% of GDP from 30.4% in 2018, accompanied by a decline in the domestic savings rate to 21.3% from 23%. The government’s revenue deficit, representing government dis-saving, increased from 1.2% to 2.7% of GDP in 2019, which further undermined the overall savings rate and fiscal sustainability. Efforts were underway to improve Sri Lanka’s ranking on the Ease of Doing Business index, where it stood at 111 in 2018, down from 85th in 2014. These efforts included reforms aimed at streamlining regulatory processes and enhancing the business environment to attract investment. Additionally, Sri Lanka’s overall tariff structure was being addressed to improve economic competitiveness by reducing trade barriers and encouraging greater integration with global markets. In terms of export performance, Sri Lanka’s position lagged behind regional peers despite growth over the decades. In 1992, Sri Lanka’s exports were roughly comparable to those of Vietnam and Bangladesh, each at approximately US$2 billion. However, by the end of 2017, Sri Lanka’s exports had grown to US$12 billion, a significant increase but still far behind Vietnam’s US$214 billion and Bangladesh’s US$36 billion in the same year. This disparity reflected differences in economic diversification, industrial policy, and integration into global value chains among these countries.

Inflation in Sri Lanka, as measured by the Colombo Consumer Price Index (CPI), stood at 4.2% for the year ending December 2020, reflecting a moderate inflationary environment during that period. This rate experienced a slight decline to 3.9% by April 2021, indicating a temporary easing of price pressures in the early months of 2021. However, this downward trend was short-lived, as inflation began to rise again in the subsequent months. By August 2021, the Colombo CPI inflation rate had increased to 6.0% over the preceding 12 months, up from 5.7% recorded in July 2021. This upward movement signaled a resurgence of inflationary pressures in mid-2021, raising concerns about the sustainability of price stability in the country. Looking back to 2019, Sri Lanka’s inflation rate was recorded at 4.8%, which serves as a baseline for understanding the inflationary trajectory over the following years. The moderate inflation rate in 2019 suggested a relatively stable macroeconomic environment prior to the disruptions caused by the COVID-19 pandemic. The subsequent years, particularly 2020 and 2021, witnessed fluctuations in inflation driven by a combination of domestic and external factors, including pandemic-induced economic shocks and policy responses aimed at mitigating their impact. The Department of Census and Statistics of Sri Lanka compiles the National Consumer Price Index (NCPI), which provides a broader measure of inflation across the country. The NCPI is released with a delay compared to the Colombo CPI, which focuses specifically on the capital city and is available on a more timely basis. This distinction is important as the NCPI captures inflation trends in a wider geographic and demographic context, offering a more comprehensive picture of price changes affecting the general population. In July 2021, inflation measured by the NCPI rose to 6.8%, up from 6.1% in June 2021, reflecting an acceleration in inflationary pressures nationwide. Notably, this rate surpassed the inflation target set by the Central Bank of Sri Lanka, highlighting the challenges faced by policymakers in maintaining price stability. The Central Bank of Sri Lanka had targeted an inflation range of 4-6% for the year 2021, aiming to strike a balance between containing inflation and supporting economic growth. To achieve this, the Central Bank maintained a loose or accommodative monetary policy stance throughout much of the year, designed to stimulate economic activity in the aftermath of the pandemic-induced downturn. In January 2021, Central Bank Governor W. D. Lakshman emphasized the necessity of continued monetary and fiscal support to bolster the economy amid challenging domestic and global macroeconomic conditions. He underscored the importance of sustaining accommodative policies to facilitate recovery while remaining mindful of inflation dynamics. Governor Lakshman further articulated that the Central Bank would maintain an accommodative monetary policy throughout 2021 to support economic recovery, while remaining vigilant to ensure that inflation remained within the targeted 4-6% range over the medium term. This approach reflected a cautious balancing act, as policymakers sought to nurture growth without allowing inflation to spiral out of control. Despite these initial accommodative policies, the Central Bank was compelled to adjust its stance in response to evolving economic conditions. In August 2021, faced with worsening balance of payments issues and rising inflation, the Central Bank raised interest rates and increased the statutory reserve ratio. These tightening measures aimed to curb inflationary pressures and stabilize the external sector, signaling a shift from the earlier expansionary policy stance. Until at least 2019, Sri Lanka employed a ‘flexible inflation targeting’ framework for its monetary policy. This framework sought to balance the dual objectives of controlling inflation and fostering economic growth by allowing some flexibility around the inflation target to accommodate economic shocks and structural changes. However, the onset of the COVID-19 pandemic in 2020 prompted a recalibration of priorities. The Central Bank shifted its focus more explicitly towards supporting economic growth to counteract the adverse effects of the pandemic, as articulated by Governor Lakshman. This shift involved maintaining lower interest rates and implementing monetary easing measures to stimulate demand and cushion the economy from the pandemic-induced contraction. Concurrently, Sri Lanka experienced a significant balance of payments deficit amounting to US$3.2 billion in 2020. This deficit reflected the strain on the country’s external accounts, driven by reduced export earnings, declining remittances, and disruptions to tourism, which is a key foreign exchange earner. The balance of payments challenges occurred alongside the monetary easing policies aimed at supporting the economy during the pandemic, creating a complex policy environment. The combination of a sizable external deficit and accommodative monetary policy heightened vulnerabilities, necessitating careful monitoring and eventual policy adjustments to restore macroeconomic stability.

Between April 2017 and mid-2018, the Central Bank of Sri Lanka (CBSL) undertook a significant reduction in its holdings of Treasury bills (T bills), marking a deliberate reversal of earlier monetary stimulus policies that had contributed to inflationary pressures within the economy. Prior to this period, the CBSL had accumulated substantial amounts of T bills as part of expansionary monetary measures aimed at supporting economic growth; however, these interventions had inadvertently fueled inflation by increasing liquidity beyond natural market demand. The systematic unwinding of these holdings effectively withdrew excess liquidity from the financial system, thereby steering monetary conditions back toward equilibrium. This recalibration of the CBSL’s balance sheet played a pivotal role in normalizing liquidity levels within the money market, which by mid-2018 more accurately reflected underlying market forces rather than the artificial conditions induced by central bank interventions a year earlier. The normalization of liquidity conditions was evident in the behavior of interest rates across the banking sector as of June 2018. With the money market no longer distorted by excessive central bank purchases of government securities, interest rates adjusted to levels that better represented the genuine supply and demand for funds. This shift towards more realistic interest rates indicated an improved alignment between monetary policy and market dynamics, facilitating more efficient credit allocation and financial intermediation. The banking sector’s lending and deposit rates, which had previously been influenced by policy-driven liquidity surges, now exhibited greater stability and responsiveness to economic fundamentals. This environment fostered a more predictable cost of borrowing for businesses and consumers alike, underpinning healthier credit market conditions. Concurrently, private sector credit growth in Sri Lanka experienced a marked deceleration. After peaking at an annual growth rate of 29% year-on-year (YoY) in July 2016, private credit expansion slowed to approximately 15% YoY by the first quarter of 2018 (1Q2018). This moderation reflected a combination of factors, including the CBSL’s monetary tightening and evolving credit demand patterns within the economy. Notably, the composition of private sector credit shifted during this period, with increased emphasis on retail lending as opposed to corporate or industrial borrowing. This transition in credit allocation was influenced by changing consumer behavior and financial institutions’ strategic adjustments in response to market conditions. The deceleration in credit growth signaled a cooling of previously overheated credit markets, aligning with broader efforts to contain inflation and maintain financial stability. The CBSL’s decision to reduce its policy interest rate in April 2018 introduced additional complexity to the credit growth trajectory. By lowering the policy rate, the central bank aimed to stimulate borrowing and economic activity amid concerns of slowing growth. This policy adjustment, combined with the ongoing shift toward retail lending, suggested that private sector credit growth might stabilize near the 15% mark or potentially decline modestly in the near term. The interplay between a more accommodative policy stance and evolving credit demand dynamics underscored the nuanced challenges faced by monetary authorities in balancing growth objectives with inflation control. The anticipated stabilization or slight contraction in credit growth reflected cautious optimism about the economy’s capacity to sustain moderate expansion without reigniting inflationary pressures. Looking ahead, several factors were expected to influence credit market behavior and interest rates. Near-term inflationary pressures, coupled with a likely reduction in disposable income among households, were projected to dampen consumption-led borrowing. As inflation erodes purchasing power and disposable income contracts, consumer demand for credit typically diminishes, leading to a moderation or horizontal movement in overall credit growth. This anticipated reduction in consumption-driven credit demand was viewed as a mitigating factor against excessive increases in interest rates, contributing to a more balanced credit environment. The moderation in credit expansion was therefore not only a reflection of monetary policy but also of underlying economic realities affecting borrowers’ capacity and willingness to take on new debt. These evolving dynamics were not expected to exert significant upward pressure on interest rates during the second half of 2018 (2H2018). In particular, yields on 12-month Treasury bills were projected to experience a slight decline, moving from 9.4% in June 2018 to approximately 9% by the end of the year. This forecast was based on the assumption that the normalization of liquidity conditions, combined with moderated credit demand and the CBSL’s accommodative policy stance, would collectively ease upward pressures on short-term government borrowing costs. The anticipated modest decline in T bill yields reflected improved market confidence and a more stable macroeconomic environment, signaling that the government’s short-term financing costs would remain manageable in the near term. However, the outlook for interest rates beyond 2018 indicated potential challenges arising from external debt obligations. Beginning in 2019, Sri Lanka faced International Sovereign Bond (ISB) bullet payments exceeding US$3 billion annually, representing a substantial external debt servicing burden. These large-scale repayments were expected to create upward pressure on domestic interest rates as the government sought to mobilize sufficient resources to meet its obligations. The increased demand for funds to service external debt was likely to tighten liquidity conditions and elevate borrowing costs in the domestic market. Consequently, 12-month Treasury bill yields were projected to rise to at least 10% by 30 June 2019, reflecting the market’s anticipation of heightened financing needs and associated risk premiums. This forecast underscored the interplay between external debt dynamics and domestic monetary conditions, highlighting the challenges faced by Sri Lanka in managing its fiscal and monetary policies amid significant external financing requirements.

In recent years, the Sri Lankan government placed considerable emphasis on addressing the country’s external economic imbalances, with a particular focus on mitigating the persistently high trade deficit. As of 2012, Sri Lanka’s trade deficit stood at approximately 15% of its gross domestic product (GDP), signaling a substantial gap between the value of imports and exports that exerted pressure on the nation’s external accounts. This sizable deficit reflected underlying structural challenges in the economy, including heavy dependence on imported goods and limited diversification in export products. Recognizing the critical need to restore external sustainability, policymakers prioritized strategies aimed at narrowing this deficit, which had implications for foreign exchange reserves, debt servicing, and overall economic stability. Central to the government’s approach was aligning Sri Lanka’s trade dynamics with the Marshall–Lerner condition, an economic principle that stipulates the requisite responsiveness of trade volumes to changes in exchange rates for currency depreciation to effectively improve the trade balance. Specifically, the Marshall–Lerner condition requires that the combined price elasticities of demand for exports and imports exceed unity—meaning that the percentage change in quantity demanded in response to price changes must be sufficiently large. If this condition is met, a depreciation of the domestic currency would make exports cheaper and imports more expensive in foreign currency terms, thereby boosting export revenues and reducing import expenditures to improve the trade deficit. However, if the sum of these elasticities is less than one, currency depreciation may fail to correct the imbalance, potentially exacerbating external vulnerabilities. A significant factor complicating Sri Lanka’s trade account was the composition of its imports, particularly the substantial share of oil imports, which accounted for an estimated 27% of the country’s total import bill. Oil imports represented a critical and inelastic component of the import basket, as the demand for petroleum products was relatively unresponsive to price changes in the short to medium term due to their essential role in transportation, industry, and energy generation. This inelasticity meant that even sharp increases in oil prices or currency depreciation would not substantially reduce the volume of oil imports, thereby limiting the ability of exchange rate adjustments to improve the trade balance through reduced import demand. The heavy reliance on oil imports thus posed a structural challenge to external sector management. In addition to oil, pro-growth economic policies implemented by the government contributed to a rise in imports of investment goods, which constituted approximately 24% of total imports. These investment goods, including machinery, equipment, and capital goods necessary for infrastructure development and industrial expansion, also exhibited inelastic demand characteristics. Since these goods were crucial for sustaining economic growth and development projects, their import volumes remained relatively stable despite fluctuations in prices or exchange rates. The prominence of investment goods imports further constrained the flexibility of the trade account to respond to currency movements, as reducing imports of such goods could potentially undermine ongoing development initiatives. The combined effect of these factors was reflected in the aggregate price elasticity of export and import goods in Sri Lanka, which totaled less than one. This indicated that the country did not satisfy the Marshall–Lerner condition, thereby limiting the effectiveness of currency depreciation as a policy tool for correcting the trade deficit. In practical terms, this meant that attempts to devalue the Sri Lankan rupee would not necessarily lead to a sufficient increase in export volumes or a commensurate decrease in import volumes to improve the trade balance. Instead, such depreciation risked increasing the cost of imports, particularly essential and inelastic items like oil and investment goods, thereby worsening the trade deficit and exerting inflationary pressures on the domestic economy. To address these entrenched trade account issues, the government proposed several measures aimed at reducing import dependence and enhancing export competitiveness. One of the key strategies involved promoting import substitution for both investment goods and consumer goods. By encouraging domestic production of these goods, the government sought to decrease reliance on imports, thereby reducing the vulnerability of the trade account to external shocks and exchange rate fluctuations. Import substitution policies included incentivizing local manufacturing, improving infrastructure, and fostering technological capabilities to produce goods that were previously imported, with the goal of creating a more self-reliant and resilient economy. In tandem with import substitution, the government advocated for the provision of tax concessions to stimulate value-added exports. These concessions aimed to lower the cost of production for export-oriented industries, thereby enhancing their competitiveness in international markets. By encouraging the production and export of higher value-added goods rather than raw or minimally processed commodities, Sri Lanka aimed to increase export revenues and diversify its export base. This strategy was intended to generate more foreign exchange earnings, improve the trade balance, and support sustainable economic growth by integrating the country more effectively into global value chains. Recognizing the fiscal pressures imposed by the large oil import bill, the government also recommended negotiations to secure longer credit periods for oil imports. Extending credit terms would alleviate the immediate financial burden associated with high oil import costs by deferring payments and improving liquidity management. This measure was seen as a pragmatic approach to managing external payments and stabilizing foreign exchange reserves, especially given the inelastic nature of oil demand and the volatility of global oil prices. Longer credit arrangements could provide the government and importers with greater flexibility in managing cash flows and mitigating short-term external shocks. Another significant proposal involved transitioning towards a more flexible exchange rate regime by allowing the external value of the Sri Lankan currency to be determined primarily by market forces, with minimal intervention from the Central Bank. This approach aimed to foster a more responsive and efficient foreign exchange market, enabling the currency to adjust in line with underlying economic fundamentals such as trade flows, capital movements, and inflation differentials. A market-determined exchange rate was expected to improve the allocation of resources, enhance export competitiveness, and reduce the need for costly and potentially distorting central bank interventions. However, such a regime would also require robust monetary and fiscal policies to manage volatility and maintain macroeconomic stability. Collectively, these measures represented a comprehensive strategy to address the structural and cyclical challenges affecting Sri Lanka’s trade account. By focusing on reducing import dependence through import substitution, enhancing export performance via tax incentives, managing external financing terms for critical imports like oil, and adopting a more flexible exchange rate system, the government sought to create a more balanced and sustainable external sector. These efforts were crucial for improving the country’s external economic position, supporting growth, and maintaining financial stability in the face of global economic uncertainties.

Within Sri Lanka’s capital account, borrowings have historically constituted a significant proportion relative to Foreign Direct Investments (FDIs), underscoring the country’s reliance on debt financing rather than equity inflows. This pattern reflects the broader economic strategy and financial environment in which the government and private sector have often turned to external loans, including sovereign bonds, bilateral and multilateral loans, and commercial borrowings, to meet development and fiscal financing needs. The predominance of borrowings in the capital account has implications for the country’s external debt profile, debt servicing obligations, and overall financial stability, as debt must be repaid with interest, potentially placing pressure on future fiscal budgets. In contrast, FDIs represent long-term equity investments by foreign entities, which do not require repayment and can bring technology transfer, management expertise, and market access, but in Sri Lanka’s case, these inflows have been comparatively modest in size. During the fiscal year 2012, Foreign Direct Investments in Sri Lanka were estimated to be approximately US$800 million, a figure that provides insight into the scale of equity capital entering the country at that time. This level of FDI inflow indicated a moderate degree of foreign investor confidence and interest in Sri Lanka’s economic sectors, such as manufacturing, services, tourism, and infrastructure development. However, when juxtaposed with the volume of borrowings recorded in the capital account, the relatively lower magnitude of FDIs highlighted the challenges Sri Lanka faced in attracting sustained and substantial equity investments. Factors influencing FDI levels included the country’s post-conflict recovery phase, regulatory environment, political stability, and global economic conditions. The US$800 million figure, while significant, suggested that Sri Lanka’s capital account was still predominantly shaped by debt-related transactions, which carried different economic implications compared to equity inflows. The reliance on borrowings over FDIs within the capital account has been a critical aspect of Sri Lanka’s external financing strategy, impacting the composition and dynamics of its balance of payments. While borrowings can provide immediate liquidity and support infrastructure projects or budgetary needs, they also increase the country’s external liabilities and vulnerability to exchange rate fluctuations and global financial market conditions. Conversely, FDIs contribute to sustainable economic growth by enhancing productive capacity and generating employment without adding to debt burdens. The interplay between these two components of the capital account continues to influence Sri Lanka’s economic policy decisions, with ongoing efforts to create a more favorable investment climate aimed at boosting FDI inflows and gradually reducing dependence on external debt.

The economy of Sri Lanka concluded the fiscal year 2012 with an overall positive balance of US$151 million, reflecting a notable recovery in the country’s balance of payments position. This outcome indicated that the total inflows of foreign exchange into the economy, including exports, remittances, and capital inflows, exceeded the total outflows such as imports, debt repayments, and other external payments. Achieving a positive overall balance was significant for Sri Lanka as it suggested improved external sector stability and enhanced confidence among international investors and creditors. The surplus also provided the government and monetary authorities with greater flexibility in managing foreign reserves and addressing external vulnerabilities. This positive balance in 2012 marked a significant improvement compared to the previous fiscal year 2011, which recorded an overall balance deficit of US$1,061 million. The large deficit in 2011 had placed considerable pressure on the country’s foreign exchange reserves and necessitated increased borrowing or use of reserves to finance the shortfall. The reversal from a substantial deficit to a modest surplus within a single fiscal year underscored the effectiveness of policy measures implemented to strengthen external accounts. These measures likely included efforts to boost export earnings, attract foreign direct investment, and control import expenditure, alongside prudent fiscal and monetary policies aimed at stabilizing the economy. The improvement in the overall balance from 2011 to 2012 also reflected broader macroeconomic adjustments and external factors influencing Sri Lanka’s trade and capital flows. Global economic conditions, commodity prices, and demand for Sri Lankan exports such as textiles, tea, and rubber may have contributed to the enhanced foreign exchange earnings. Additionally, remittances from the Sri Lankan diaspora, which constitute a significant source of foreign currency, might have increased during this period, further supporting the overall balance. On the capital account side, improved investor sentiment and relative political stability could have encouraged higher inflows of foreign direct investment and portfolio investments. The transition from a deficit of over one billion US dollars to a surplus of US$151 million within a year was a critical development in Sri Lanka’s external sector performance. It demonstrated the country’s capacity to adjust to external shocks and maintain external sustainability, which is essential for long-term economic growth and development. Maintaining a positive overall balance helps reduce reliance on external borrowing and mitigates the risk of balance of payments crises, thereby contributing to macroeconomic stability. The 2012 outcome thus represented a key milestone in Sri Lanka’s ongoing efforts to strengthen its external financial position and support sustainable economic progress.

The Central Bank of Sri Lanka, established in 1950, functions as the nation’s foremost monetary authority, entrusted with the critical role of formulating and implementing monetary policy to stabilize the economy. Its responsibilities extend beyond policy formulation to include the supervision and regulation of the entire financial system within the country, ensuring its soundness and efficiency. The bank’s mandate encompasses controlling inflation, managing currency issuance, and maintaining financial stability, which are essential for fostering sustainable economic growth. Over the decades, the Central Bank has played a pivotal role in navigating Sri Lanka through various economic challenges, adapting its strategies to evolving domestic and global financial landscapes. The Colombo Stock Exchange (CSE) stands as Sri Lanka’s principal securities market and is widely regarded as one of the most modern stock exchanges in South Asia. It operates a fully automated trading platform that facilitates the efficient buying and selling of securities, enhancing transparency and accessibility for investors. This technological advancement has positioned the CSE as a competitive and reliable marketplace within the regional financial ecosystem. The exchange’s infrastructure supports a diverse range of financial instruments, including equities, bonds, and derivatives, catering to the varied needs of both domestic and international investors. Its modernization efforts reflect a broader commitment to integrate Sri Lanka’s capital markets with global standards. The vision of the Colombo Stock Exchange centers on its contribution to the nation’s wealth creation by generating value through the securities markets. This vision underscores the exchange’s strategic role in promoting economic development by mobilizing savings and channeling them into productive investments. By providing a platform for companies to raise capital and for investors to participate in corporate growth, the CSE facilitates the efficient allocation of resources within the economy. The exchange also emphasizes corporate governance and transparency, which are vital for building investor confidence and sustaining long-term market development. Through these efforts, the CSE aims to support the broader objectives of national economic progress and financial inclusion. Since 1995, the headquarters of the Colombo Stock Exchange have been situated at the World Trade Center Towers in Colombo, a location that symbolizes the exchange’s stature and accessibility within the country’s commercial capital. This central positioning has enabled the CSE to maintain close proximity to key financial institutions, regulatory bodies, and corporate entities. In addition to its main office, the exchange has expanded its physical presence by establishing branches in several other major cities, including Kandy, Matara, Kurunegala, Negombo, and Jaffna. These regional branches serve to decentralize access to the securities market, allowing investors across Sri Lanka to engage more readily with the exchange’s services. This network supports the development of a more inclusive financial market by reaching beyond the capital to engage a broader base of participants. The year 2009 marked a significant milestone for the Colombo Stock Exchange when it was recognized as the best performing stock exchange globally. This accolade came in the aftermath of the conclusion of Sri Lanka’s 30-year civil war, a conflict that had profoundly affected the country’s economic and social fabric. The CSE’s outstanding performance during this period reflected a robust post-conflict economic recovery and a resurgence of investor confidence in the nation’s prospects. The recognition highlighted the exchange’s resilience and its critical role in signaling and supporting the broader economic revival. This period saw increased market activity, rising stock prices, and a renewed interest from both local and foreign investors, all of which contributed to the strengthening of Sri Lanka’s financial markets and overall economic stability.

Most cities and towns in Sri Lanka are interconnected through an extensive railway network operated by Sri Lanka Railways, the state-owned entity responsible for managing rail transport across the island. Established during the British colonial period, the railway system has historically played a crucial role in facilitating passenger and freight movement, linking major urban centers with rural areas. The network spans key routes from Colombo, the commercial capital, to other significant cities such as Kandy, Galle, and Jaffna, providing an affordable and reliable mode of transportation for millions of passengers annually. Despite challenges related to aging infrastructure and the need for modernization, Sri Lanka Railways continues to serve as a backbone for the country’s public transport system, supporting both commuter traffic and the movement of goods essential for economic activities. Complementing the rail network, the Sri Lanka Transport Board (SLTB) functions as the principal government agency responsible for operating public bus services throughout the nation. Established in the mid-20th century, the SLTB has been instrumental in providing accessible and affordable road transport to the general population, particularly in areas not served by rail. The bus network covers an extensive range of routes, connecting urban centers, suburban localities, and remote rural regions, thereby facilitating daily commuting, trade, and tourism. Over the decades, the SLTB has undergone various reforms and fleet expansions to meet growing demand, although it has faced operational challenges such as competition from private operators and financial constraints. Nevertheless, it remains a vital component of Sri Lanka’s public transportation infrastructure, ensuring mobility for a significant portion of the population. In recent years, the Sri Lankan government has embarked on ambitious highway construction projects aimed at bolstering the national economy and enhancing the country’s transport infrastructure. Among these initiatives, the Colombo-Katunayake Expressway stands out as a critical development, linking Colombo with the Bandaranaike International Airport in Katunayake. This expressway has significantly reduced travel time between the capital and the airport, facilitating smoother passenger and cargo movement and supporting tourism and trade. Additionally, the Colombo-Kandy (Kadugannawa) Expressway project is designed to improve connectivity between Colombo and the central highlands, particularly the city of Kandy, which is a major cultural and economic hub. The Colombo-Padeniya Expressway further extends the expressway network, aiming to connect the western region with the northern parts of the country, enhancing regional integration. To address the chronic traffic congestion in Colombo, the Outer Circular Highway has been developed as a strategic bypass route, diverting through-traffic away from the city center and improving urban mobility. These highway projects collectively represent a concerted effort by the government to modernize the transport infrastructure, stimulate economic growth, and improve the quality of life for citizens. The Road Development Authority (RDA), a government-sponsored organization, has played a pivotal role in the planning, construction, and maintenance of Sri Lanka’s road network. Tasked with overseeing large-scale road projects across the island, the RDA has implemented numerous initiatives aimed at expanding and upgrading highways, arterial roads, and rural connectors. Its work encompasses not only the construction of new roadways but also the rehabilitation and widening of existing routes to accommodate increasing traffic volumes. The RDA’s projects are integral to facilitating efficient transportation of goods and people, reducing travel times, and enhancing safety on the roads. By coordinating with other government agencies and international partners, the RDA has contributed to the development of a more robust and sustainable road infrastructure, which is essential for the country’s socio-economic advancement. Sri Lanka’s commercial and economic centers, primarily the capitals of the nine provinces, are linked by a network of “A-Grade” roads, which are systematically categorized and marked to promote efficient navigation and connectivity. These roads represent the highest classification within the national road hierarchy, designed to accommodate high traffic volumes and provide direct routes between major urban centers. The A-Grade roads are typically well-paved and maintained, featuring signage and markings that facilitate safe and orderly travel. By connecting provincial capitals such as Colombo, Kandy, Galle, Jaffna, and others, these roads support regional economic activities, enable access to markets, and foster inter-provincial trade and communication. Their strategic importance is underscored by their role in linking industrial zones, tourist destinations, and agricultural areas, thereby underpinning the broader economic framework of the country. Supporting the A-Grade roads, the “B-Grade” roads form a secondary network that connects district capitals within the provinces, further enhancing regional connectivity. These roads, which are also paved and marked, serve as vital links between smaller towns and administrative centers, facilitating the movement of people and goods at a more localized level. The B-Grade roads enable access to essential services such as education, healthcare, and markets, thus contributing to balanced regional development. By connecting district capitals to the primary A-Grade road network, they ensure that even less urbanized areas remain integrated into the national economy. The maintenance and improvement of B-Grade roads are critical for rural development, reducing isolation, and promoting equitable growth across the island. The combined total length of A, B, and E grade roads in Sri Lanka is estimated at 12,379.49 kilometers, reflecting the extensive reach of the country’s road infrastructure. This comprehensive network encompasses primary arterial routes (A-Grade), secondary district connectors (B-Grade), and other classified roads (E-Grade) that serve various local and regional transportation needs. The substantial length of these roads underscores the government’s commitment to developing a well-structured road system capable of supporting economic activities, social mobility, and national integration. The classification and systematic marking of these roads facilitate efficient traffic management, route planning, and maintenance prioritization. Continuous investments in expanding and upgrading this network are essential to accommodate increasing vehicular traffic, support logistics and trade, and improve overall accessibility across Sri Lanka’s diverse geographic regions.

The energy policy of Sri Lanka is directed and regulated by the Ministry of Power and Energy, which holds the primary responsibility for setting the strategic framework and overseeing the development of the country’s energy sector. This ministry formulates national policies, implements energy programs, and ensures that the sector aligns with broader economic and environmental goals. It also coordinates with various government agencies and stakeholders to promote sustainable energy development and security. Through its regulatory and administrative functions, the Ministry of Power and Energy plays a pivotal role in shaping the energy landscape of Sri Lanka, addressing challenges such as energy access, efficiency, and diversification. Electricity production and retailing in Sri Lanka are principally managed by the Ceylon Electricity Board (CEB), a state-owned enterprise established to oversee the generation, transmission, and distribution of electrical power across the island. The CEB operates as the dominant utility provider, responsible for maintaining the national grid and ensuring reliable electricity supply to both urban and rural consumers. It manages a portfolio of power plants, including hydroelectric, thermal, and renewable energy facilities, and is tasked with expanding infrastructure to meet growing demand. The CEB’s role extends beyond operational management to include tariff setting, customer service, and investment planning, making it central to the country’s energy sector functionality. Oversight of policy recommendations and regulatory planning within the energy sector falls under the jurisdiction of the Public Utilities Commission of Sri Lanka (PUCSL). Established as an independent regulatory authority, the PUCSL ensures compliance with established standards and guidelines while fostering transparency and accountability in the electricity market. It evaluates license applications, monitors service quality, and reviews tariff proposals submitted by the CEB and other power producers. The commission also plays a critical role in guiding sector development by facilitating competition, encouraging private sector participation, and promoting sustainable energy practices. Through these functions, the PUCSL contributes to the creation of a balanced regulatory environment that supports both consumer interests and industry growth. Hydroelectric power stations constitute the majority of Sri Lanka’s energy generation capacity, reflecting the country’s reliance on its abundant renewable water resources. These power stations are predominantly situated in the Central Province, an area characterized by mountainous terrain and significant river systems conducive to hydroelectric development. The utilization of hydroelectricity has historically been a cornerstone of Sri Lanka’s energy strategy, providing a clean and renewable source of electricity that reduces dependence on imported fossil fuels. Large-scale projects such as the Mahaweli Development program have harnessed river basins to generate substantial portions of the national electricity supply. Despite seasonal variability affecting water availability, hydroelectric power remains a vital component of the country’s energy mix, contributing to energy security and environmental sustainability. In addition to hydroelectric power, Sri Lanka has invested in other forms of renewable energy infrastructure to diversify its energy portfolio and reduce carbon emissions. Wind farms represent a significant example of this diversification, with several installations contributing to the national grid. These wind energy projects are strategically located in areas with favorable wind conditions, such as the southern coastal regions, to maximize generation potential. The integration of wind power alongside hydroelectric facilities enhances the resilience of the electricity system by providing complementary energy sources that can offset fluctuations in water flow. The development of wind farms is part of a broader governmental effort to increase the share of renewables in the energy sector, promote sustainable development, and meet international commitments on climate change mitigation.

Sri Lanka has developed a well-established education system that has played a pivotal role in producing a substantial pool of skilled labour within the country. This education framework encompasses a broad network of primary, secondary, and tertiary institutions that have consistently emphasized literacy and vocational training, thereby equipping the population with the necessary skills to meet the demands of various sectors in the economy. The government’s commitment to accessible education, combined with policies aimed at reducing barriers to schooling, has resulted in a workforce characterized by relatively high levels of educational attainment compared to other developing nations. This foundation has facilitated the growth of industries requiring skilled labour, such as information technology, manufacturing, and services, contributing to the overall economic development of Sri Lanka. The literacy rate in Sri Lanka stands at an impressive 92%, a figure that significantly surpasses the average literacy rates typically observed in developing countries. This high literacy rate reflects the success of the country’s educational policies and the widespread availability of schooling throughout both urban and rural areas. Literacy, defined as the ability to read and write with understanding, is a critical indicator of human capital and directly influences the employability and productivity of the labour force. The 92% literacy rate has enabled Sri Lanka to cultivate a population that is better prepared for skilled employment and capable of adapting to the evolving requirements of the modern economy. Sri Lanka’s literacy achievements are particularly notable within the regional context. It holds the distinction of having the highest literacy rate in South Asia, a region that includes populous countries such as India, Pakistan, Bangladesh, Nepal, Bhutan, and the Maldives. This regional leadership in literacy underscores the effectiveness of Sri Lanka’s education system relative to its neighbours. Furthermore, Sri Lanka ranks among the highest literacy rates across Asia as a whole, placing it in a competitive position in terms of human capital development. This status has implications for the country’s socio-economic progress, as higher literacy rates correlate with improved health outcomes, greater civic participation, and enhanced economic opportunities. In addition to general literacy, information technology (IT) literacy has become an increasingly important skill set in Sri Lanka, particularly within urban populations. Among urban residents, IT literacy is recorded at 39.9%, indicating that a significant portion of the urban workforce possesses the ability to use computers and digital technologies effectively. This level of IT literacy supports the growth of sectors such as software development, telecommunications, and digital services, which require employees to have basic to advanced competencies in technology. The expansion of IT literacy is also linked to the government’s initiatives to promote digital inclusion and the integration of technology into education curricula, thereby preparing future generations for participation in a technology-driven global economy. Job seekers throughout Sri Lanka have embraced the use of web-based job boards as a primary resource for finding skilled employment opportunities. These online platforms have supplemented traditional methods of job searching, such as advertisements in newspapers and listings in the government gazette, by providing more accessible, timely, and comprehensive information about available positions. The proliferation of internet access and mobile technology has facilitated this shift, enabling job seekers to search and apply for jobs more efficiently and to connect with employers across various industries. This trend reflects broader changes in the labour market and recruitment practices, as digital tools increasingly mediate the matching of skilled workers with appropriate employment opportunities. The working-age population in Sri Lanka is defined as all individuals aged 15 years and above, irrespective of gender. This inclusive definition encompasses a broad segment of the population that is potentially available for employment, education, or training. By considering both males and females from the age of 15, the labour force statistics capture the full scope of human resources that contribute to the economy. This demographic framework is essential for analysing labour market dynamics, including participation rates, employment levels, and unemployment trends, and for designing policies aimed at enhancing workforce productivity and inclusivity. In the fourth quarter of 2017, Sri Lanka’s unemployment rate was recorded at 4.2 percent. This figure represents the proportion of the labour force that was actively seeking employment but was unable to find work during that period. An unemployment rate of 4.2 percent is relatively low compared to many developing countries, indicating a relatively healthy labour market with a substantial proportion of the working-age population engaged in productive activities. Monitoring unemployment rates is crucial for assessing the economic well-being of the population and for identifying areas where labour market interventions may be necessary. Over the years leading up to 2017, Sri Lanka’s unemployment rate exhibited a gradual decline, reflecting improvements in economic conditions and labour market absorption. This downward trend suggests that the country’s efforts to generate employment opportunities, enhance skills development, and stimulate economic growth have had a positive impact on reducing joblessness. The steady decrease in unemployment also points to the effectiveness of policies aimed at fostering entrepreneurship, attracting investment, and supporting sectors with high labour demand. Continued attention to these factors is essential for sustaining employment growth and ensuring that the skilled labour force remains fully utilized in the evolving economic landscape.

Tourism has long constituted one of the primary industries in Sri Lanka, playing a pivotal role in the nation’s economy and cultural exchange. The island’s diverse attractions draw visitors from around the world, with its renowned beaches along the southern and eastern coasts serving as major highlights. These coastal areas are celebrated for their pristine sandy shores, clear turquoise waters, and vibrant marine life, making them popular destinations for sunbathing, surfing, and snorkeling. Beyond the coastal allure, Sri Lanka’s interior is rich with ancient heritage sites that reflect the country’s deep historical and religious roots. These include well-preserved ruins of ancient cities, stupas, and temples dating back thousands of years, which attract both scholars and tourists interested in archaeology and history. Complementing these cultural and coastal attractions are the resorts nestled in the mountainous regions, where cooler climates and scenic landscapes offer a contrasting experience. The hill country, with its tea plantations and mist-covered peaks, provides a tranquil retreat for visitors seeking relaxation and nature-based tourism. Among the notable tourist destinations within Sri Lanka is the city of Ratnapura, often referred to as the “City of Gems.” Located in the southwestern part of the island, Ratnapura and its surrounding areas have gained prominence due to the frequent discovery and mining of precious stones such as rubies and sapphires. This gem-rich region has attracted tourists interested not only in purchasing gemstones but also in witnessing the mining process firsthand. The gem industry in Ratnapura is deeply embedded in local culture and economy, with numerous workshops and markets where visitors can learn about the history, extraction, and craftsmanship associated with these valuable stones. The allure of Ratnapura as a tourist destination is thus intertwined with its unique geological significance and the cultural heritage surrounding gem mining. Tourist arrivals in Sri Lanka experienced significant fluctuations in the early 21st century, largely influenced by external and internal challenges. The devastating 2004 Indian Ocean Tsunami severely impacted the tourism sector, causing widespread damage to coastal infrastructure and a temporary decline in visitor numbers. Concurrently, the intensification of the civil war between the Sri Lankan government and Tamil Tiger separatists further deterred international tourists due to concerns over safety and stability. During a ceasefire in 2004, Sri Lanka recorded 566,202 foreign visitors; however, as the conflict escalated, arrivals declined to 447,890 by the war’s conclusion in 2009. This period was marked by reduced investment in tourism infrastructure and a general atmosphere of uncertainty, which constrained the industry’s growth potential. Following the end of the civil war in 2009, Sri Lanka witnessed a rapid resurgence in tourist arrivals, reflecting renewed confidence in the country’s stability and security. The post-war era saw concerted efforts by the government and private sector to revitalize tourism through infrastructure development, marketing campaigns, and diversification of tourist offerings. These initiatives contributed to a steady increase in visitor numbers, culminating in a peak of 2,333,796 arrivals in 2019. This growth underscored the industry’s recovery and its significance as a driver of economic development, employment, and foreign exchange earnings. However, the tourism sector faced another setback in 2019 due to the Easter Sunday bombings, a series of coordinated terrorist attacks targeting churches and hotels across Sri Lanka. These attacks resulted in a reduction of tourist arrivals to 1,913,702, as international travelers expressed heightened security concerns. In response, Sri Lankan authorities acted swiftly to apprehend the group responsible, implementing enhanced security measures to restore confidence among tourists and international partners. The effectiveness of these actions was reflected in the relaxation of travel advisories from key source markets, including the United Kingdom, which lifted restrictions as early as June 2019. This prompt response helped to stabilize the tourism industry and mitigate longer-term damage to the country’s reputation as a safe travel destination. In the same year, Sri Lanka garnered significant international recognition for its tourism appeal. The travel guide publisher Lonely Planet named Sri Lanka as the best destination to visit in 2019, highlighting its diverse attractions, cultural richness, and natural beauty. Additionally, Travel+Leisure magazine designated Sri Lanka as the best island, further elevating its profile on the global tourism stage. These accolades contributed to increased interest and visibility, attracting a broader range of tourists and reinforcing the country’s status as a premier travel destination. The onset of the COVID-19 pandemic in early 2020 dealt a severe blow to Sri Lanka’s tourism industry, as global travel restrictions and health concerns led to widespread cancellations and closures. The government closed airports in March 2020 to curb the spread of the virus, effectively halting international tourist arrivals. This disruption caused tourism revenues to plummet from an estimated US$3.6 billion in 2019 to approximately US$956 million in 2020. The downturn had profound socio-economic consequences, adversely affecting over 300,000 individuals connected to the sector, including those employed in hospitality, transportation, and ancillary services. The pandemic underscored the vulnerability of Sri Lanka’s tourism-dependent economy to global crises and highlighted the need for adaptive strategies. In response to the pandemic’s impact, the Sri Lankan government introduced several relief measures aimed at supporting the tourism industry and mitigating economic hardship. Among these was a debt moratorium, which provided temporary financial relief to businesses and workers affected by the downturn. Recognizing the ongoing challenges posed by the pandemic, authorities subsequently extended this moratorium to sustain the sector through prolonged periods of reduced activity. These interventions were part of broader efforts to stabilize the economy and preserve the capacity of the tourism industry to recover once conditions improved. Tourist arrivals in 2020 experienced a dramatic decline, falling by approximately 70 percent to 507,704 from 1,913,702 in 2019. The vast majority of these arrivals occurred before the airport closures in March, reflecting the abrupt cessation of international travel that followed. This sharp decrease not only impacted revenue but also disrupted the livelihoods of those dependent on tourism, exacerbating economic difficulties in regions heavily reliant on visitor spending. In December 2020, Sri Lanka initiated a tentative reopening of its tourism sector through a ‘pilot project’ that allowed the arrival of 393 package tourists on charter flights from Ukraine. This controlled approach aimed to test the feasibility of resuming tourism activities while managing health risks associated with the pandemic. The pilot project was carefully monitored to assess compliance with health protocols and to gather data that would inform broader reopening strategies. Official tourism activities resumed on January 21, 2021, when the government permitted independent travelers to enter Sri Lanka, subject to strict adherence to a series of health protocols. These measures included mandatory Coronavirus testing before and after arrival, quarantine requirements, and other safety guidelines designed to minimize the risk of COVID-19 transmission. The resumption marked a cautious step towards revitalizing the tourism industry, balancing economic imperatives with public health considerations. This phased reopening reflected Sri Lanka’s commitment to restoring its position as a desirable and safe destination in the post-pandemic era.

The tea industry in Sri Lanka functions under the jurisdiction of the Ministry of Public Estate Management and Development, reflecting the government’s active role in overseeing one of the nation’s most vital economic sectors. As a cornerstone of Sri Lanka’s economy, tea cultivation and export have historically contributed significantly to foreign exchange earnings and employment, particularly in rural areas. The ministry’s involvement encompasses regulation, development initiatives, and support for estate management, ensuring that the industry remains competitive and sustainable in the global market. This institutional framework has enabled the tea sector to maintain its prominence while adapting to changing economic and environmental challenges. By 1995, Sri Lanka had ascended to the position of the world’s leading tea exporter, capturing a remarkable 23% share of the global tea export market. This achievement marked a pivotal moment in the country’s agricultural history, as it surpassed Kenya, which held a 22% share at the time. The shift in global rankings underscored Sri Lanka’s successful expansion of tea production and export capacity, driven by improvements in cultivation techniques, estate management, and international marketing strategies. This milestone not only enhanced Sri Lanka’s reputation as a premier tea-producing nation but also solidified its influence in shaping global tea trade dynamics. The central highlands of Sri Lanka provide an exceptionally favorable environment for tea cultivation, owing to their unique climatic and geographical characteristics. These highlands are characterized by a consistently low-temperature climate, which is crucial for the growth of high-quality tea leaves. Additionally, the region receives adequate annual rainfall and maintains optimal humidity levels, creating ideal conditions for tea bushes to thrive. The combination of altitude, temperature, and moisture contributes to the distinctive flavor profiles and aroma of Ceylon tea, which is highly prized in international markets. The natural environment of the central highlands thus plays a foundational role in sustaining the quality and quantity of Sri Lanka’s tea production. Tea cultivation in Sri Lanka was introduced in 1867 by James Taylor, a British planter who had arrived in the country in 1852. Taylor’s pioneering efforts laid the groundwork for what would become a flourishing industry, as he established the first tea plantations and developed innovative processing methods. His work involved not only planting and harvesting tea but also experimenting with techniques to improve yield and quality, which helped to transform tea into a commercially viable crop. Taylor’s legacy is integral to Sri Lanka’s tea history, as his introduction of tea cultivation marked the beginning of a sector that would grow to become one of the nation’s economic pillars. In recent years, Sri Lanka has gained recognition as a significant exporter of fair trade tea, particularly to markets in the United Kingdom and other international destinations. The fair trade movement emphasizes ethical production practices, ensuring that tea farmers receive equitable compensation and work under humane conditions. Sri Lanka’s participation in this market segment reflects a broader commitment to social responsibility and sustainable agriculture. By aligning with fair trade principles, Sri Lankan tea producers have been able to access niche markets that value transparency and ethical sourcing, thereby enhancing the industry’s global competitiveness and appeal. Fair trade tea export projects originating from Sri Lanka are widely regarded as contributing to the reduction of rural poverty within the country. These initiatives provide smallholder farmers and estate workers with improved income stability and access to social benefits, which in turn foster community development and economic resilience. The infusion of fair trade premiums into local communities supports education, healthcare, and infrastructure projects, creating a positive ripple effect beyond the tea estates themselves. By promoting fair labor practices and empowering marginalized populations, fair trade tea exports have become an important mechanism for addressing socioeconomic disparities in Sri Lanka’s rural regions.

The apparel industry in Sri Lanka has established itself as a vital component of the nation’s export economy, with its products primarily destined for markets in the United States and Europe. These regions have consistently represented the largest international consumers of Sri Lankan apparel, reflecting strong trade relationships and demand for garments produced within the country. The focus on these key markets is driven by the high standards and quality expectations prevalent in the U.S. and European fashion sectors, which Sri Lankan manufacturers have successfully met through compliance with stringent regulatory and ethical guidelines. Sri Lanka’s apparel manufacturing sector is notably extensive, comprising approximately 900 factories dispersed across the island. This widespread network of production facilities underscores the scale and reach of the industry, which not only provides significant employment opportunities but also supports ancillary sectors such as logistics, textiles, and machinery maintenance. The geographic distribution of these factories allows for a diversified industrial base, reducing regional economic disparities and fostering industrial growth in both urban and rural areas. The presence of such a large number of manufacturing units also facilitates specialization and economies of scale, enabling Sri Lanka to maintain competitive pricing and quality standards in the global market. These factories have established strong partnerships with a range of internationally recognized fashion brands, including Victoria’s Secret, Liz Claiborne, and Tommy Hilfiger. The collaboration with these prominent companies highlights the integration of Sri Lanka’s apparel industry into the global fashion supply chain. By serving such high-profile clients, Sri Lankan manufacturers have demonstrated their capability to meet rigorous quality controls, timely delivery schedules, and compliance with ethical labor practices, which are increasingly demanded by global brands. This relationship not only enhances the reputation of Sri Lanka as a reliable apparel sourcing destination but also contributes to the transfer of technology and skills, further elevating the industry’s standards. Data compiled and reported by the Sri Lanka Export Development Board in 2017 revealed that the Textiles & Apparels sector accounted for approximately 44% of the country’s merchandise exports. This substantial share underscores the sector’s critical role in driving the national export economy and highlights its importance as a key pillar of economic development. The dominance of textiles and apparel in Sri Lanka’s export composition reflects decades of strategic investment, policy support, and industry evolution aimed at enhancing productivity, quality, and market access. The sector’s contribution extends beyond mere export earnings; it also plays a crucial role in foreign exchange generation, employment creation, and fostering industrial diversification within the country.

The agricultural sector of Sri Lanka has traditionally centered on the production of staple crops such as rice, coconut, and various grains, which form the backbone of the country’s food supply and rural economy. Rice cultivation, in particular, holds a vital place in the agricultural landscape, serving as the primary source of caloric intake for the majority of the population. Coconut farming also plays a significant role, not only as a food source but as a raw material for numerous domestic industries including coir production, oil extraction, and handicrafts. Grains, although produced in smaller quantities compared to rice and coconut, contribute to both local consumption and the diversification of agricultural output. The bulk of these agricultural products are intended for domestic consumption, sustaining the food security of the nation, while a smaller proportion is occasionally exported, providing supplementary income to farmers and contributing modestly to the national economy. Distinct from the general agricultural sector, the tea industry in Sri Lanka occupies a unique position due to its historical development and economic orientation. Established in 1867 during the British colonial period, the tea industry rapidly grew to become one of the country’s most important export sectors. Unlike rice, coconut, and grain production, which primarily serve domestic needs, tea cultivation and processing have been predominantly export-oriented from the outset. This export focus has led to the tea industry often being classified separately from the broader agricultural sector, reflecting its specialized market dynamics and international trade significance. Sri Lanka’s tea, particularly Ceylon tea, has gained global recognition for its quality and distinct flavor, making it a critical source of foreign exchange. The tea plantations, mainly located in the central highlands, also contribute significantly to employment and rural development, although their economic structure and market dependencies differ considerably from those of the staple crop producers. Both the agricultural and agri-allied manufacturing sectors in Sri Lanka are highly vulnerable to variations in climate, which have increasingly influenced production patterns and economic stability. Fluctuations in rainfall, temperature extremes, and the frequency of extreme weather events have posed substantial challenges to crop yields and the livelihoods of farming communities. The dependence on monsoonal rains for irrigation and crop growth renders the sector particularly sensitive to irregular precipitation, while rising temperatures and changing weather patterns have affected pest prevalence and soil health. These climatic vulnerabilities have necessitated adaptive strategies in farming practices, including the introduction of drought-resistant crop varieties, improved water management systems, and diversification of agricultural activities to mitigate risks associated with climate variability. Several notable climate-related events have had pronounced impacts on Sri Lanka’s agriculture in recent years, with significant floods occurring in May 2016, May 2017, and May 2018. These recurrent flooding episodes caused widespread damage to agricultural lands, destroying standing crops, eroding fertile topsoil, and disrupting planting and harvesting cycles. The floods not only reduced immediate agricultural output but also inflicted longer-term damage on infrastructure such as irrigation canals, rural roads, and storage facilities, thereby hampering recovery efforts and market access. The May 2016 floods, for instance, affected thousands of hectares of paddy fields, leading to substantial losses for smallholder farmers who rely heavily on rice cultivation for their income and food supply. Similar patterns of destruction were observed in the subsequent floods of May 2017 and May 2018, underscoring the persistent threat posed by extreme weather events to the stability and productivity of Sri Lanka’s agricultural sector. These events highlighted the critical need for enhanced disaster preparedness, improved water management policies, and investment in resilient agricultural infrastructure to safeguard the sector against future climate-induced shocks.

In June 2021, Sri Lanka embarked on an unprecedented agricultural transformation by initiating the first-ever nationwide program aimed at achieving 100% organic farming, also known as biological agriculture. This ambitious policy entailed a comprehensive ban on the importation and use of all inorganic fertilizers and pesticides across the country. The government’s decision marked a radical departure from conventional agricultural practices, which had long relied on synthetic agrochemicals to boost crop yields and sustain the nation’s food security. The organic farming program was positioned as a means to promote environmental sustainability, reduce chemical residues in food products, and enhance soil health by fostering natural nutrient cycles. However, the abruptness and totality of the ban on synthetic inputs raised significant concerns about the practical feasibility and economic implications of such a sweeping shift. The program received vocal endorsement from Vandana Shiva, a prominent Indian environmental activist and advocate of ecological agriculture, who praised Sri Lanka’s initiative as a pioneering step toward sustainable food systems. Shiva’s support lent international visibility and moral backing to the government’s policy, framing it within a global discourse on agroecology and the rights of smallholder farmers. Despite this endorsement, the organic farming initiative faced robust criticism from a broad spectrum of scientific experts, agronomists, and members of Sri Lanka’s farming community. Critics warned that the rapid transition without adequate preparation or phased implementation risked precipitating a collapse in agricultural productivity. They emphasized that the sudden withdrawal of inorganic fertilizers and pesticides could lead to nutrient deficiencies, pest outbreaks, and diminished crop yields, thereby threatening food security. Furthermore, concerns were raised about the broader economic ramifications, particularly in the context of Sri Lanka’s ongoing financial difficulties. The devaluation of the national currency was expected to exacerbate the crisis by increasing the cost of imported goods and destabilizing export revenues, with the tea industry—one of the country’s most vital foreign exchange earners—being especially vulnerable to production shortfalls and quality declines. By autumn 2021, the warnings of agricultural decline materialized into a severe crisis. Sri Lanka experienced a dramatic reduction in agricultural output, with some estimates indicating decreases of up to 50% compared to previous years. This precipitous drop in crop production triggered widespread food shortages, affecting both urban and rural populations. Staple foods such as rice, vegetables, and fruits became scarce, leading to increased prices and heightened food insecurity among vulnerable communities. The sudden scarcity strained supply chains and intensified competition for limited resources, further destabilizing the domestic market. The agricultural downturn also undermined rural livelihoods, as many smallholder farmers struggled to adapt to the new organic methods without sufficient technical support or access to organic inputs. The cumulative effect was a national food crisis that compounded existing socioeconomic challenges. The tea industry, a cornerstone of Sri Lanka’s economy and a major source of employment and export earnings, was reported to be in a particularly critical state. The shift to organic farming practices imposed significant financial burdens on tea producers, as organic cultivation was described as being approximately ten times more expensive than conventional methods. This cost increase stemmed from the labor-intensive nature of organic farming, the need for alternative pest and nutrient management strategies, and the scarcity of affordable organic inputs. Despite these higher costs, yields under organic tea cultivation were reported to be only half of those achieved through conventional farming. This dramatic reduction in productivity not only threatened the profitability of tea estates but also jeopardized the livelihoods of thousands of workers dependent on the industry. The decline in tea output had broader economic implications, as reduced export volumes and quality concerns risked diminishing foreign exchange earnings at a time when the country was already grappling with fiscal instability. In September 2021, the Sri Lankan government declared an “economic emergency” in response to the escalating crisis. This declaration underscored the severity of the agricultural downturn and its cascading effects on the national economy. The emergency was precipitated by a confluence of factors, including the depreciating exchange rate of the Sri Lankan rupee, which increased the cost of imports and external debt servicing. Inflation surged, driven in large part by escalating food prices resulting from the agricultural shortfall. Concurrently, the tourism sector, a vital source of foreign currency inflows, suffered significant revenue losses due to ongoing pandemic-related restrictions and reduced international travel. The combination of these economic pressures strained government finances and heightened social unrest, prompting urgent calls for policy reassessment and intervention to stabilize the situation. In response to the mounting crisis, the government began to rescind certain aspects of the organic farming measures. However, the importation of urea fertilizer—a key component of conventional agricultural inputs—remained prohibited, signaling a partial but cautious retreat from the initial policy. The continued ban on urea importation reflected concerns about the environmental and health impacts of synthetic fertilizers, as well as political considerations tied to the government’s commitment to organic agriculture. At the same time, the government started exploring the possibility of introducing peacetime rationing for essential goods to manage the widespread shortages and prevent hoarding or price gouging. This consideration highlighted the gravity of the supply disruptions and the need for stringent measures to ensure equitable distribution of scarce food resources amid the ongoing crisis. By mid-October 2021, the government took a more decisive step by largely lifting the ban on inorganic fertilizers on a temporary basis. This policy reversal was framed as a pragmatic response to the urgent need to restore agricultural productivity “until the island was able to produce enough organic fertiliser.” The temporary suspension of the ban acknowledged the challenges faced by farmers in transitioning to organic methods without sufficient organic inputs and technical support. It also reflected the government’s recognition that the initial timeline for achieving full organic agriculture was overly ambitious and that a phased approach was necessary to prevent further economic and food security deterioration. This partial retreat signaled a shift toward more flexible agricultural policies aimed at stabilizing production while maintaining long-term sustainability goals. By November 2021, Sri Lanka officially abandoned its ambition to become the world’s first fully organic farming nation. This decision followed sustained increases in food prices and weeks of widespread public protests opposing the organic farming plan. The protests reflected the deep dissatisfaction among farmers, consumers, and civil society groups who had borne the brunt of the policy’s negative consequences. Demonstrators criticized the government’s lack of consultation and the rapid implementation of the ban, which many perceived as ideologically driven rather than evidence-based. The abandonment of the fully organic farming goal marked a significant policy reversal and underscored the complexities involved in transforming national agricultural systems. It also highlighted the need for more inclusive, science-based approaches to agricultural reform that balance environmental sustainability with economic viability and social equity. As of December 2021, the damage inflicted on Sri Lanka’s agricultural production was already substantial and expected to have long-lasting effects. The country experienced significant price increases for vegetables nationwide, placing additional financial strain on consumers and exacerbating food insecurity. The reduction in crop yields and the disruption of supply chains contributed to persistent shortages and elevated market volatility. Agricultural experts projected an extended recovery period, noting that rebuilding soil fertility, restoring farmer confidence, and reestablishing stable production levels would require considerable time and resources. The setbacks also underscored the importance of resilient agricultural policies capable of withstanding external shocks and adapting to changing economic and environmental conditions. Following the partial lifting of the fertilizer ban, the government implemented selective exemptions allowing the use of inorganic fertilizers for certain crops deemed critical for food security and economic stability. However, the international price of urea fertilizer rose sharply due to increased costs of oil and gas, which are essential inputs in fertilizer production. This surge in global fertilizer prices further complicated Sri Lanka’s agricultural recovery efforts by increasing the cost of inputs and limiting the affordability and accessibility of fertilizers for many farmers. The combination of elevated input costs and lingering supply chain disruptions posed ongoing challenges to revitalizing agricultural productivity and stabilizing food markets. Jeevika Weerahewa, a senior lecturer at the University of Peradeniya and an expert in agricultural economics, forecasted that the fertilizer ban would result in an unprecedented 50% reduction in the paddy harvest for the year 2022. This projection highlighted the critical role that synthetic fertilizers had played in sustaining rice production, which is a staple food crop and a cornerstone of Sri Lanka’s food security. A halving of the paddy harvest would have profound implications for domestic food availability, import dependency, and rural livelihoods. Weerahewa’s forecast underscored the urgent need for balanced agricultural policies that integrate sustainable practices with pragmatic measures to maintain crop yields and support farmer incomes amid ongoing economic and environmental challenges.

The Information Technology (IT) sector in Sri Lanka demonstrated significant economic contribution in 2019, generating export revenues totaling US$1,089 million. This figure reflected the growing prominence of the IT industry within the country’s broader economic landscape, highlighting its role as a key driver of foreign exchange earnings. The sector’s export performance was underpinned by a combination of factors, including an expanding pool of skilled IT professionals, competitive service offerings, and increasing demand from global markets for software development, business process outsourcing, and IT-enabled services. Over the years leading up to 2019, Sri Lanka had strategically positioned itself as an emerging IT hub in South Asia, leveraging government initiatives and private sector investments to enhance infrastructure and foster innovation. The revenue generated from IT exports not only contributed substantially to the national economy but also supported employment growth and technological advancement. This milestone in 2019 underscored the sector’s potential to further integrate into global value chains and to sustain its upward trajectory in subsequent years.

Sri Lanka has long been renowned for its production of a diverse array of gemstones, encompassing chrysoberyl, corundum, garnet, ruby, spinel, and tourmaline. Among these, the country holds a particular distinction as the leading global producer of the Ceylon Blue sapphire, a variety of corundum that has become emblematic of Sri Lanka’s gemstone heritage. The island’s geological formations, particularly in the central and southern regions, have fostered the formation of these precious stones over millions of years, contributing to a vibrant mining industry that has been integral to the nation’s economy and cultural identity. Ceylon sapphires have achieved a prestigious status in the international gemstone market, frequently commanding prices that reach into the thousands of U.S. dollars per carat. This high valuation stems from their exceptional desirability and superior quality, characterized by their vibrant hues, clarity, and brilliance. The unique combination of geological conditions in Sri Lanka, including the presence of trace elements and the specific environmental factors during sapphire formation, has resulted in stones that are highly sought after by jewelers and collectors worldwide. This demand has positioned Sri Lanka as a critical supplier in the global luxury gemstone trade. Contrary to a common misconception that Sri Lanka produces only blue sapphires, the country actually yields sapphires in a full spectrum of colors. These include yellow, pink, purple, green, and the exceptionally rare padparadscha variety, which is prized for its delicate pink-orange hue reminiscent of a lotus blossom. Despite this chromatic diversity, blue sapphires remain the most sought after and consistently yield the highest prices in the market. The prominence of blue sapphires is attributed not only to their striking appearance but also to their association with historical and cultural symbolism, which further enhances their market value. Sri Lanka has been the source of some of the world’s largest and most famous sapphires, underscoring its importance in the global gemstone landscape. Notable examples include the Logan Sapphire, a remarkable 423-carat blue sapphire now housed in the Smithsonian Institution, and the Blue Belle of Asia, a 392.52-carat sapphire renowned for its exceptional size and quality. These gemstones exemplify the extraordinary natural wealth of Sri Lanka’s mines and have contributed to the country’s reputation as a premier gemstone producer. Their discovery and subsequent acquisition by international collectors have drawn significant attention to Sri Lanka’s mining regions and have helped to elevate the profile of its gemstone industry. The principal regions known for gemstone mining in Sri Lanka are concentrated primarily in the central and southern parts of the island, with Balangoda, Elahera, Kamburupitiya, Moneragala, Okkampitiya, and Ratnapura standing out as historically and economically significant mining areas. Ratnapura, often referred to as the “City of Gems,” has been the epicenter of the country’s gem mining activities for centuries, with its name literally translating to “City of Gems” in Sinhala. These regions are characterized by alluvial deposits and secondary gem deposits in riverbeds and soil, where artisanal and commercial mining operations extract precious stones. The mining methods range from traditional hand-dug pits to more mechanized approaches, reflecting a blend of ancient practices and modern technology. Beyond its rich gemstone deposits, Sri Lanka also possesses a variety of industrial minerals that contribute substantially to its mining sector. These include ball clay, kaolin, and other clays, which are essential for ceramics and paper industries. Additionally, the country has deposits of calcite and dolomite, used in construction and agriculture, as well as feldspar, which is important in glassmaking and ceramics. Graphite, limestone, ilmenite, mica, rutile mineral sands, phosphate rock, quartz, zircon, and silica sand further diversify the mineral portfolio. Each of these minerals plays a role in supporting domestic industries and export markets, reflecting the geological diversity of the island and its capacity to supply a broad spectrum of mineral resources. One of the most significant non-ferrous mineral reserves in Sri Lanka is found in the Pulmoddai beach sand deposit, located on the northeastern coast of the island. This deposit is recognized as the most important of its kind in the country and ranks among the richest mineral sand deposits globally. The heavy mineral concentrates extracted from Pulmoddai range from 50% to 60%, a remarkably high concentration that includes substantial quantities of titanium minerals such as ilmenite and rutile. These minerals are critical for the production of titanium dioxide, a pigment widely used in paints, plastics, and paper. The Pulmoddai deposit’s richness and accessibility have made it a focal point for mineral sand mining and processing activities, contributing significantly to Sri Lanka’s mineral exports. Sri Lanka is particularly famous for its high-purity vein graphite, which is highly valued in the global market for its exceptional quality and purity. Unlike flake graphite found in many other parts of the world, Sri Lankan vein graphite is crystalline and occurs in veins within metamorphic rocks, resulting in a product with superior carbon content and fewer impurities. This form of graphite is sought after for specialized applications, including in batteries, lubricants, refractories, and high-tech industrial processes. The quality of Sri Lankan graphite has earned it a reputation that extends beyond regional markets to international industries requiring premium-grade carbon materials. As of 2014, the two largest graphite mines in Sri Lanka were the Bogala and Kahatagaha Mines, which served as the primary sources of graphite production in the country. Both mines have a long history of operation, with Bogala Mine dating back to the late 19th century and Kahatagaha Mine similarly established in the early 20th century. These mines have been instrumental in sustaining Sri Lanka’s position as a leading producer of vein graphite, employing modern mining and processing techniques to maintain output and quality standards. Their continued operation has supported local economies and provided employment opportunities while ensuring the steady supply of graphite for both domestic use and export. The graphite mining sector in Sri Lanka has attracted significant investment from both domestic and international companies. Major investors and companies involved include Graphite Lanka Ltd., Bogala Graphite Lanka Plc, Bora Bora Resources Ltd. (BBR) of Australia, MRL Corp. Ltd. of Australia, and Saint Jean Carbon Inc. of Canada. These entities have brought capital, technical expertise, and global market access to the Sri Lankan graphite industry, facilitating modernization and expansion of mining operations. Their involvement reflects the strategic importance of graphite as a mineral resource and underscores Sri Lanka’s role as a key player in the global supply chain for high-quality graphite products. Through partnerships and investment, the sector continues to evolve, contributing to the broader mining economy of the island.

Sri Lanka has cultivated a range of multinational companies and internationally recognized brands that span diverse sectors of the economy, reflecting the country’s evolving industrial landscape and its integration into global markets. These enterprises have not only contributed significantly to the domestic economy but have also established Sri Lanka’s presence on the international stage through exports, foreign investments, and global partnerships. The development of such companies has been driven by strategic diversification, innovation, and a focus on quality, enabling them to compete effectively beyond national borders. Among the most prominent conglomerates in Sri Lanka are Cargills, John Keells Holdings, Hayleys, LOLC Holdings, and Carson Cumberbatch, each representing a multifaceted portfolio of businesses that encompass various industries. Cargills, originally established as a retail and food processing company, has expanded into sectors such as agriculture, logistics, and financial services, becoming a household name in Sri Lanka. John Keells Holdings stands as one of the largest and most diversified conglomerates in the country, with interests ranging from leisure and property development to transportation and consumer goods, thereby playing a pivotal role in shaping Sri Lanka’s corporate environment. Hayleys, known for its extensive industrial and agricultural operations, has developed a strong presence in sectors like manufacturing, plantations, and power generation, contributing to both domestic growth and export earnings. LOLC Holdings, initially rooted in finance and leasing, has broadened its reach into agriculture, plantations, and renewable energy, reflecting a strategic approach to sustainable business development. Carson Cumberbatch, with its origins in plantation management, has diversified into sectors such as insurance, finance, and power generation, underscoring the dynamic nature of Sri Lankan conglomerates adapting to evolving market demands. The apparel industry in Sri Lanka has emerged as a cornerstone of the country’s export economy, with MAS Holdings and Brandix standing out as the largest and most influential companies in this sector. MAS Holdings has gained international acclaim for its innovation in garment manufacturing, specializing in intimate apparel, sportswear, and performance wear, and has established partnerships with leading global brands. The company’s commitment to sustainability and ethical manufacturing practices has further enhanced its reputation worldwide. Brandix, similarly, has positioned itself as a major player in the global garment industry, focusing on advanced manufacturing technologies and supply chain efficiencies. Both companies have contributed significantly to employment generation in Sri Lanka and have been instrumental in elevating the country’s status as a preferred sourcing destination for international apparel buyers. Their success reflects the broader growth trajectory of Sri Lanka’s textile and apparel sector, which has become a vital contributor to foreign exchange earnings and economic development. In the energy sector, LAUGFS Holdings has established itself as a prominent company, playing a critical role in Sri Lanka’s energy landscape. The company operates across various segments, including fuel retailing, liquefied petroleum gas (LPG) distribution, and renewable energy projects. LAUGFS Holdings has been instrumental in improving energy accessibility and infrastructure within the country, while also expanding its footprint into regional markets. Its diversification into renewable energy aligns with global trends toward sustainability and reflects Sri Lanka’s broader commitment to reducing carbon emissions and enhancing energy security. The company’s strategic initiatives in energy have contributed to stabilizing supply chains and supporting the country’s industrial and domestic energy needs. Aitken Spence is a well-known hospitality conglomerate in Sri Lanka, recognized for its extensive operations in the tourism and hotel industry. The group manages a diverse portfolio of hotels and resorts across Sri Lanka and other countries, catering to both leisure and business travelers. Aitken Spence has played a significant role in promoting Sri Lanka as a tourist destination by investing in high-quality hospitality infrastructure and services. Beyond accommodation, the conglomerate is involved in travel and tour operations, logistics, and power generation, demonstrating a multifaceted approach to business. Its contribution to the tourism sector has been vital in generating foreign exchange and employment, particularly in regions where tourism is a key economic driver. Dilmah stands out as a globally recognized Sri Lankan tea brand, renowned for its commitment to quality and ethical production practices. Established in 1988, Dilmah revolutionized the tea industry by emphasizing single-origin tea and direct engagement with tea growers, setting it apart from traditional bulk tea exporters. The brand has successfully penetrated international markets, becoming synonymous with premium Ceylon tea and representing Sri Lanka’s rich tea heritage on the world stage. Dilmah’s approach combines traditional craftsmanship with modern marketing, and it has been a pioneer in promoting sustainability and social responsibility within the tea industry. Its global presence has helped elevate the profile of Sri Lankan tea, contributing significantly to the country’s export revenues. The consumer goods sector in Sri Lanka is represented by several major brands that hold significant market positions and have become integral to daily life in the country. The Ceylon Tobacco Company, a subsidiary of British American Tobacco, dominates the tobacco industry with a strong market share and extensive distribution networks. Elephant House, a leading food and beverage company, is known for its wide range of products including soft drinks, ice creams, and snacks, enjoying widespread consumer loyalty. DCSL (Dipped Products PLC) is a key player in the rubber industry, producing latex and rubber goods for both domestic consumption and export. CBL (Ceylon Biscuits Limited) has established itself as a major manufacturer of biscuits and confectionery, with a reputation for quality and innovation. Maliban, another significant brand, specializes in bakery products and confectionery, contributing to the vibrant consumer goods market. Together, these companies have shaped Sri Lanka’s consumer landscape by offering diverse products that cater to local tastes and preferences, while also enhancing the country’s industrial capabilities and export potential.

In 2002, Sri Lanka’s export economy demonstrated a significant reliance on the United States as its primary international market. Exports to the United States were valued at approximately $1.8 billion, representing a substantial 38% share of the country’s total exports for that year. This underscored the critical role the U.S. market played in Sri Lanka’s trade portfolio, particularly given the diversity of goods exported. Among these, the garment industry stood out as a dominant sector, with the United States consistently serving as the largest destination for Sri Lankan garment exports over many years. More than 63% of the country’s total garment exports were directed to the U.S., reflecting the deep integration of Sri Lanka’s textile and apparel manufacturing sector with American retail and wholesale markets. This strong bilateral trade relationship was shaped by a combination of factors, including preferential trade agreements, competitive labor costs in Sri Lanka, and the demand for ready-made garments in the United States. On the import side, India emerged as Sri Lanka’s largest supplier in 2002, with imports valued at $835 million. This trade relationship was influenced by the geographic proximity and historical economic ties between the two South Asian neighbors. India supplied a wide range of goods to Sri Lanka, including petroleum products, machinery, and consumer goods, which were essential to Sri Lanka’s domestic consumption and industrial sectors. The prominence of India as a supplier reflected the broader regional trade dynamics within South Asia, where cross-border commerce played a vital role in supporting economic growth and development. Traditionally, Japan had been Sri Lanka’s largest supplier, a position it held for many years due to Japan’s advanced industrial base and investment in Sri Lankan infrastructure and manufacturing. However, by 2002, Japan had shifted to the fourth-largest supplier, with exports to Sri Lanka totaling $355 million. This decline in relative ranking indicated changes in Sri Lanka’s import patterns and the emergence of other Asian economies as key trade partners. Despite this shift, Japan continued to be an important source of capital goods, technology, and investment, contributing to Sri Lanka’s industrialization efforts and infrastructure development. Other significant suppliers to Sri Lanka included Hong Kong, Singapore, Taiwan, and South Korea. These economies, known for their robust manufacturing sectors and strategic positions in global trade networks, supplied a variety of intermediate and finished goods to Sri Lanka. The inclusion of these countries among Sri Lanka’s key suppliers highlighted the island nation’s integration into the broader East and Southeast Asian supply chains. Imports from these countries ranged from electronics and machinery to textiles and chemicals, supporting both consumer demand and industrial production within Sri Lanka. The United States, while being the largest export market for Sri Lanka, was ranked as the 10th-largest supplier to the country in 2002. According to trade data from the Central Bank of Sri Lanka, imports from the United States amounted to $218 million that year. This figure reflected a more modest role of the U.S. as a source of goods for Sri Lanka compared to its dominant position as an export destination. American exports to Sri Lanka typically included machinery, agricultural products, and technology-related goods, which complemented the island’s development needs. The asymmetry in trade flows between the two countries illustrated the specialized nature of their economic relationship, with Sri Lanka focusing on labor-intensive exports and the U.S. providing capital-intensive imports. In addition to trade dynamics, Sri Lanka undertook significant infrastructure projects to enhance its position as a regional maritime hub. One such initiative was the construction of a new port in Hambantota, located in the southern part of the island. This project was financed by the Chinese government as part of its aid package to Sri Lanka, reflecting the growing strategic and economic ties between the two countries. The Hambantota port was envisioned as a critical development to address the increasing congestion at existing Sri Lankan ports, particularly the Port of Colombo, which had long been the primary maritime gateway for the country. By expanding port capacity and improving logistical efficiency, the Hambantota project aimed to facilitate greater volumes of international shipping and trade transshipment. The strategic importance of the Hambantota port extended beyond domestic considerations, as it was positioned along key Indian Ocean shipping routes. Its development was expected to enhance Sri Lanka’s role in global maritime trade, offering an alternative to the crowded Colombo port and attracting transshipment traffic from neighboring regions. The project also aligned with broader regional infrastructure investments and the Chinese Belt and Road Initiative, signaling Sri Lanka’s increasing integration into global economic networks facilitated by maritime connectivity. In 2009, Sri Lankan ports collectively handled a total of 4,456 ship visits, underscoring the country’s active participation in international shipping and trade. This volume of maritime traffic highlighted the significance of port infrastructure to Sri Lanka’s economy, supporting not only imports and exports but also regional transshipment activities. The steady flow of ships through Sri Lankan ports reflected the island’s strategic location along major sea lanes and its role as a logistical hub in the Indian Ocean. The data on ship visits also emphasized the need for continued investment in port facilities and capacity expansion to accommodate growing trade volumes and to maintain competitiveness in the global maritime industry.

Sri Lanka has established several Free Trade Agreements (FTAs) that are currently in effect, notably with its neighboring countries India and Pakistan. These agreements have played a crucial role in enhancing bilateral trade relations by reducing tariffs and non-tariff barriers, thereby facilitating smoother and more cost-effective exchange of goods and services. The FTA with India, signed in 1998 and operational since 2000, has been particularly significant due to the geographic proximity and historical economic ties between the two nations. This agreement covers a wide range of products, enabling Sri Lankan exporters to access the vast Indian market more competitively, while also allowing Indian goods to enter Sri Lanka with reduced duties. Similarly, the FTA with Pakistan, which came into effect in 2005, has contributed to strengthening trade flows by providing preferential tariff treatment on a variety of products, thereby encouraging diversification of trade and investment opportunities between the two countries. In addition to these bilateral agreements, Sri Lanka expanded its trade relations with Singapore through a Free Trade Agreement that became effective in May 2018. This FTA marked a significant milestone in the bilateral economic partnership between the two countries by creating a framework for increased market access and cooperation in sectors such as services, investment, and intellectual property rights. The agreement aimed to reduce tariffs on a broad range of goods, streamline customs procedures, and promote trade facilitation measures, thereby enhancing the competitiveness of Sri Lankan exports in the Singaporean market. Given Singapore’s role as a major financial and trading hub in Southeast Asia, this agreement also served to position Sri Lanka more strategically within regional supply chains and foster greater economic integration. Sri Lanka benefits from the European Union’s Generalized Scheme of Preferences Plus (GSP+), a preferential trade arrangement that grants duty-free access to the EU market for a wide array of Sri Lankan products. The GSP+ scheme is designed to support sustainable development and good governance by providing trade incentives to developing countries that ratify and implement international conventions related to human rights, labor rights, environmental protection, and good governance. Sri Lanka’s inclusion in the GSP+ scheme has been instrumental in boosting its exports to the European Union, particularly in sectors such as textiles and garments, tea, spices, and rubber products. This preferential access has enabled Sri Lankan exporters to compete more effectively in the EU market by lowering the cost of their goods, thereby contributing to job creation and economic growth within the country. The scheme requires continuous compliance with the stipulated conventions, which also encourages Sri Lanka to maintain and improve its social and environmental standards. Complementing its access to the European market, Sri Lanka also enjoys trade preferences under the United States’ Generalized System of Preferences (GSP). This program allows duty-free entry for certain eligible products into the U.S. market, thereby supporting the economic development of beneficiary countries by enhancing their export competitiveness. Sri Lanka’s participation in the U.S. GSP scheme has facilitated increased exports of products such as apparel, leather goods, and agricultural commodities, which are critical to the country’s export portfolio. The duty-free treatment under the GSP has helped Sri Lankan exporters reduce costs and expand their market share in the United States, which remains one of the largest consumer markets globally. The scheme also encourages diversification of Sri Lanka’s export base by providing incentives to develop new products and industries that can benefit from preferential access. Regionally, Sri Lanka is a member of the South Asian Free Trade Area (SAFTA), a trade agreement established under the South Asian Association for Regional Cooperation (SAARC) framework. SAFTA aims to promote economic integration among South Asian countries by progressively reducing tariffs and non-tariff barriers on intra-regional trade. Since its implementation in 2006, SAFTA has sought to create a more conducive environment for trade by harmonizing customs procedures, simplifying rules of origin, and encouraging cooperation among member states. Sri Lanka’s participation in SAFTA has enabled it to strengthen trade ties with other South Asian nations such as Bangladesh, Nepal, Bhutan, and the Maldives, fostering regional economic cooperation and integration. The agreement has also provided Sri Lankan exporters with preferential tariff rates, which have enhanced the competitiveness of their products within the South Asian market, thereby contributing to increased trade volumes and economic growth. Beyond South Asia, Sri Lanka is also a participant in the Asia-Pacific Trade Agreement (APTA), formerly known as the Bangkok Agreement. APTA is a preferential trade agreement among several Asia-Pacific countries designed to promote trade cooperation and provide tariff concessions on a mutually agreed list of products. Established in 1975, APTA is one of the oldest preferential trade agreements in the region and includes members such as China, India, South Korea, and several Southeast Asian nations. Sri Lanka’s involvement in APTA has facilitated access to these diverse markets by reducing tariffs on selected goods, thereby encouraging trade diversification and economic collaboration across the Asia-Pacific region. The agreement also promotes cooperation in areas such as trade facilitation, customs procedures, and technical standards, which help to lower trade costs and improve market access for Sri Lankan exporters. In pursuit of further expanding its trade network and deepening economic integration with key Asian economies, Sri Lanka has been actively negotiating Free Trade Agreements with China, Bangladesh, and Thailand. These negotiations reflect Sri Lanka’s strategic intent to leverage its geographic location and economic potential to enhance trade and investment flows with some of the fastest-growing economies in Asia. The proposed FTA with China is particularly significant given China’s status as the world’s second-largest economy and a major trading partner for Sri Lanka. This agreement is expected to cover a broad spectrum of trade and investment issues, including tariff reductions, services liberalization, and cooperation in infrastructure development. Similarly, negotiations with Bangladesh and Thailand aim to establish preferential trade terms that would facilitate increased market access, promote bilateral investment, and strengthen economic ties. These ongoing efforts demonstrate Sri Lanka’s commitment to diversifying its trade partnerships and integrating more deeply into regional and global value chains, thereby supporting its long-term economic development objectives.

Sri Lanka has historically exhibited a high dependency on foreign assistance to support its economic development and the implementation of various related projects. This reliance stems from the country’s need to supplement domestic resources with external financial aid to address infrastructure deficits, social development programs, and economic reforms. Foreign assistance has played a pivotal role in bridging fiscal gaps, facilitating investment in key sectors such as agriculture, education, health, and transportation, and stabilizing macroeconomic conditions during periods of economic stress. The inflow of aid has often been critical for sustaining development momentum, especially in the context of Sri Lanka’s evolving economic challenges and its efforts to integrate more fully into the global economy. In 2003, Sri Lanka witnessed the launch of several prominent foreign assistance initiatives aimed at bolstering its economic prospects. These initiatives were designed to provide both financial support and technical expertise to accelerate development projects and structural reforms. The year marked a concerted effort by the Sri Lankan government and international partners to mobilize resources that would address pressing economic needs, including poverty reduction, infrastructure enhancement, and institutional capacity building. The coordinated nature of these initiatives reflected a growing recognition among donor countries and international financial institutions of Sri Lanka’s strategic importance and the necessity of sustained support to ensure long-term economic stability. The most significant foreign aid initiative in 2003 originated from an international aid conference held in Tokyo in June of that year. This conference represented a major diplomatic and financial milestone, bringing together a broad coalition of stakeholders committed to supporting Sri Lanka’s development agenda. The Tokyo conference served as a platform for dialogue between the Sri Lankan government and the international donor community, enabling the articulation of development priorities and the alignment of aid strategies. It also underscored the importance of multilateral cooperation in addressing the complex economic and social challenges faced by Sri Lanka at the time. Participation in the Tokyo aid conference included several major international financial institutions and donor countries, reflecting a diverse and influential group of contributors. Notably, the International Monetary Fund (IMF), World Bank, and Asian Development Bank (ADB) played key roles, bringing their expertise in economic stabilization, development financing, and regional cooperation. In addition to these multilateral organizations, significant bilateral donors such as Japan, the European Union (EU), and the United States (US) were actively involved. Their participation highlighted the geopolitical and economic interests vested in Sri Lanka’s stability and growth, as well as their commitment to supporting the country’s development through financial aid, technical assistance, and policy advice. At the Tokyo summit, the total financial pledges made to support Sri Lanka amounted to an impressive $4.5 billion. This substantial sum represented a collective commitment to provide both immediate relief and long-term development financing. The pledged funds were intended to be disbursed through various channels, including grants, concessional loans, and technical cooperation programs, thereby addressing a wide range of economic sectors and development objectives. The magnitude of the pledges underscored the confidence of the international community in Sri Lanka’s development potential and the importance of sustained foreign assistance in facilitating economic progress. These financial commitments were expected to play a crucial role in supporting Sri Lanka’s efforts to achieve macroeconomic stability, enhance infrastructure, and improve social welfare outcomes in the years following the conference.

Prior to 2016, Sri Lanka experienced a significant escalation in its national debt, largely driven by extensive infrastructure development projects undertaken by the government. These ambitious initiatives, aimed at modernizing the country’s transportation networks, ports, and energy facilities, were financed through a combination of domestic borrowing and substantial external loans. The rapid accumulation of debt placed Sri Lanka on the brink of bankruptcy, severely straining its fiscal stability and foreign exchange reserves. This precarious financial position ultimately necessitated a bailout from the International Monetary Fund (IMF) to prevent a full-scale economic collapse and to restore confidence among international creditors and investors. In May 2016, Krystal Tan, an Asia economist at Capital Economics, underscored the gravity of Sri Lanka’s financial situation by stating that without an IMF loan, the country would have faced a highly precarious position. She highlighted that Sri Lanka’s foreign exchange reserves at the time covered only around 80 percent of its short-term external debt obligations, a coverage ratio considered insufficient to meet imminent repayment demands and to maintain currency stability. This imbalance exposed the country to significant risks of a balance of payments crisis, which could have triggered a sharp depreciation of the Sri Lankan rupee and further economic instability. Tan’s assessment reflected the broader consensus among economists and financial analysts regarding the urgent need for external financial support and structural reforms. Responding to the crisis, the IMF agreed in April 2016 to provide Sri Lanka with a bailout loan amounting to $1.5 billion. This financial assistance was contingent upon the Sri Lankan government meeting a set of stringent criteria designed to improve the country’s economic fundamentals and fiscal health. The conditions attached to the loan program included commitments to fiscal consolidation, enhanced revenue mobilization, monetary policy tightening, and structural reforms aimed at improving governance and competitiveness. The IMF’s involvement was intended not only to provide immediate financial relief but also to signal to international markets that Sri Lanka was undertaking credible steps to restore macroeconomic stability and sustainable growth. By the fourth quarter of 2016, Sri Lanka’s total debt burden had reached an estimated $64.9 billion. This figure included at least $9.5 billion of additional debt incurred by state-owned enterprises and organizations, which contributed to the overall fiscal strain. The accumulation of debt by these entities often occurred through borrowing for capital-intensive projects, some of which faced challenges related to cost overruns and delayed returns on investment. The combined debt of the government and state-owned organizations underscored the complexity of Sri Lanka’s indebtedness and highlighted the need for comprehensive debt management strategies that encompassed both sovereign and quasi-sovereign liabilities. Since early 2015, Sri Lanka’s domestic debt had increased by approximately 12 percent, reflecting heightened government borrowing from local financial markets to finance budget deficits. Concurrently, external debt rose by 25 percent, driven by new foreign loans and the accumulation of interest obligations on existing debt. This dual increase in domestic and external liabilities exacerbated the country’s vulnerability to shifts in global financial conditions and exchange rate fluctuations. The growing debt service requirements placed additional pressure on government finances, necessitating reforms to improve revenue collection and expenditure management to ensure debt sustainability. In late 2016, international financial institutions stepped up their support for Sri Lanka’s economic reform efforts. The World Bank provided $100 million in financing aimed at budget support and structural reforms, while the Japan International Cooperation Agency (JICA) extended a $100 million loan with similar objectives. These funds were intended to assist Sri Lanka in implementing reforms to enhance competitiveness, transparency, public sector efficiency, and fiscal management. The coordinated assistance from these institutions complemented the IMF program by addressing structural impediments to growth and improving the institutional framework for economic governance. The World Bank reported that the Sri Lankan government acknowledged the critical need for reforms in fiscal operations, competitiveness, and governance. Officials recognized that fully implementing these reforms could enable the country to achieve Upper Middle-Income status within the medium term. This acknowledgement reflected a growing consensus among policymakers that structural changes were essential to break the cycle of debt accumulation and to foster sustainable economic development. The Bank’s assessment underscored the importance of improving tax administration, reducing fiscal deficits, enhancing public investment efficiency, and strengthening institutional capacity to support long-term growth. In November 2016, the IMF announced it would disburse $162.6 million, equivalent to Special Drawing Rights (SDR) 119.894 million, to Sri Lanka. This disbursement exceeded the originally planned amount of $150 million, signaling the IMF’s confidence in the country’s progress under the bailout program. The additional funds provided much-needed liquidity to support balance of payments and budgetary needs, reinforcing the government’s capacity to meet its external obligations and stabilize the economy. The release of these funds was contingent upon Sri Lanka’s adherence to the agreed reform benchmarks and fiscal targets. The IMF’s evaluation in November 2016 was cautiously optimistic. It noted that inflationary pressures had abated, reflecting improved monetary conditions and the impact of tighter fiscal policies. However, credit growth remained strong, raising concerns about potential overheating in the economy and the risk of asset bubbles. The Central Bank of Sri Lanka was reported to be prepared to tighten monetary policy further if inflationary pressures or excessive credit expansion persisted. This stance demonstrated the authorities’ commitment to maintaining price stability while supporting economic recovery through prudent macroeconomic management. The IMF also highlighted the Sri Lankan authorities’ intention to build up foreign exchange reserves through outright purchases in the currency market, while simultaneously allowing greater exchange rate flexibility. This approach aimed to strengthen external buffers and enhance the resilience of the economy to external shocks, such as fluctuations in commodity prices or changes in global financial conditions. By allowing the exchange rate to adjust more freely, the authorities sought to improve competitiveness and reduce vulnerabilities associated with rigid exchange rate regimes. The banking sector in Sri Lanka was reported to be well-capitalized during this period, indicating a relatively sound financial system capable of withstanding economic shocks. Ongoing efforts were underway to establish a resolution mechanism for distressed financial institutions, which would provide a framework for managing non-performing loans and facilitating orderly restructuring or liquidation of troubled banks. These measures were intended to enhance financial stability and protect depositors, thereby supporting confidence in the banking system. The IMF emphasized the need to strengthen the supervisory and regulatory framework governing the financial sector. Particular attention was drawn to identifying and mitigating vulnerabilities associated with non-bank financial institutions and state-owned banks, which posed risks to systemic stability. Strengthening oversight mechanisms, improving risk management practices, and enhancing transparency were considered critical to preventing the build-up of financial imbalances and ensuring the resilience of the sector to future shocks. As part of broader debt management reforms, Sri Lanka implemented a new Inland Revenue Act designed to improve tax administration and increase revenue collection. The government also introduced an automatic fuel pricing formula aimed at reducing fiscal subsidies and aligning domestic fuel prices more closely with international market rates. These reforms sought to enhance fiscal discipline, reduce budget deficits, and create a more predictable and transparent policy environment for investors and consumers. Tax reforms included increasing the Value Added Tax (VAT) rates and narrowing exemptions, thereby broadening the tax base and improving revenue mobilization. These measures were intended to address structural weaknesses in the tax system, reduce reliance on volatile revenue sources, and create a more equitable and efficient fiscal framework. The enhanced VAT regime contributed to strengthening government finances and supporting the objectives of fiscal consolidation. The IMF’s third review of Sri Lanka’s economic program noted that the country was on track with key objectives, including fiscal consolidation, revenue mobilization, monetary policy management, and accumulation of foreign exchange reserves. Progress in these areas indicated that the government was making steady strides toward stabilizing the economy and restoring macroeconomic balance. The review highlighted the importance of maintaining momentum in implementing reforms to ensure sustainable growth and debt sustainability. In the IMF’s fourth review conducted in June 2018, it was stated that Sri Lanka had made important progress under its Fund-supported program. However, the review emphasized that further advancement was required in revenue-based fiscal consolidation, prudent monetary policy, and sustained efforts to build international reserves. The IMF underscored the need for continued commitment to structural reforms and macroeconomic discipline to address lingering vulnerabilities and to lay the foundation for long-term economic resilience. In 2018, China extended a $1.25 billion loan to Sri Lanka as part of bailout measures aimed at alleviating the country’s debt distress. This loan comprised a below-market-rate syndicated loan and smaller Panda bond issuances, reflecting China’s strategic financial engagement in Sri Lanka. The assistance from China provided additional liquidity to support the government’s financing needs and helped diversify Sri Lanka’s sources of external funding amid tightening global credit conditions. In 2021, Bangladesh agreed to provide Sri Lanka with loans amounting to at least $200 million from its foreign exchange reserves through a currency swap arrangement. This agreement followed Sri Lankan Prime Minister Mahinda Rajapaksa’s visit to Bangladesh, which coincided with joint celebrations of Bangladesh’s golden jubilee of independence and the birth centenary of Bangabandhu Sheikh Mujibur Rahman. The currency swap deal was designed to enhance Sri Lanka’s foreign exchange liquidity and strengthen bilateral economic cooperation between the two countries. In December 2021, Sri Lanka announced a repayment plan for a $251 million oil debt owed to Iran. The repayment arrangement involved exporting $5 million worth of Ceylon tea monthly to Iran, reflecting an innovative barter-type settlement mechanism aimed at managing foreign exchange constraints. This agreement demonstrated Sri Lanka’s efforts to meet its international obligations despite ongoing economic challenges and underscored the importance of maintaining good relations with key trading partners. Throughout this period, the IMF and other international observers consistently stressed that a strong and credible structural reform program was critical for Sri Lanka to avoid a prolonged economic crisis. They emphasized that addressing the root causes of the country’s financial difficulties—such as fiscal imbalances, weak governance, and inefficient public enterprises—was essential to restoring investor confidence and achieving sustainable economic growth. The implementation of comprehensive reforms was viewed as indispensable to breaking the cycle of debt accumulation and vulnerability to external shocks. As Sri Lanka’s economic crisis deepened in 2022, India extended multi-pronged assistance amounting to approximately $4 billion. This support came through multiple credit lines and currency swap arrangements, reflecting India’s ‘Neighborhood First’ policy aimed at strengthening regional stability and economic cooperation. The assistance package provided crucial liquidity support to Sri Lanka, helping to stabilize its foreign exchange reserves and meet urgent balance of payments needs. India’s intervention illustrated the growing importance of regional partnerships in addressing economic challenges and underscored the geopolitical dynamics influencing Sri Lanka’s debt and financial management landscape.