Sri Lanka’s Middle-Income Transition: Challenges Ahead

Utsav Kumar

Senior Country Economist

Sri Lanka Resident Mission, ADB

IPS-Monash Conference on Economic Development in South Asia

8 January 2019

*Please do not quote or cite without explicit permission. The views expressed here are those of the presenter only and do notnecessarily reflect the views and policies of the Asian Development Bank, its Board of Governors, or the governments they represent.

OUTLINE

2

1. Sri Lanka’s Development: Glass Half Full or Half Empty?

2. Challenges and Solutions: Old Wine in New Bottle

Expectations met or belied?

“What more could a newly independent nation want?” (Snodgrass 1999)

• The country was held up as a model for the school of thought that emphasized basic needs fulfillment as a necessary step in the process of development (Streeten and Burki 1978).

• Sri Lanka has often been cited as an interesting case of a developing country whose level of social progress has been quite high relative to the country's per capita income level (Isenman 1980, Sen 1981).

• Sri Lanka was keenly poised for growth at the time of its independence in 1948 given its well-developed infrastructure, high human development standard, and democratic political system of the Westminster type (Abeyratne 2004).

• With better human development indicators relative to other countries at similar levels of per capita income in the 1960s, the country appeared well placed on the path to rapid economic development.

Sri Lanka has historically performed well on development indicators and continues to do so

Indicator

1990 2015

Sri Lanka LMIC UMIC Sri Lanka LMIC UMIC

Life expectancy at birth, total

(years) 69.5 59.4 68.5 75.1 67.6 75.1

Maternal mortality ratio (modeled

estimate, per 100,000 live births) 75.0 545.0 102.0 30.0 257.0 41.0

Mortality rate, infant (per 1,000

live births) 18.1 84.1 41.1 8.2 39.4 12.6

School enrollment, primary (%

net) 98.3a 76.6a 90.0a 98.9 94.9 87.8

Source: World Bank WDI.Note: aData is for 1986.

Sri Lanka is a leader in South Asia on human development and outperforms many E/SE Asian economies

Sri Lanka’s performance has improved consistently with some slowdown in recent years

5

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

HD

I

1990 2000 2010 2015 2017

Source: UNDP Human Development Report.Note: Number in brackets is the country’s rank in 2017 out of 151 economies.

GDP growth averaged 4.8% over 48 years with major gains in poverty reduction, amidst a long civil conflict. But…

Source: Weerakoon, Kumar, and Dime (Forthcoming). Sri Lanka’s Macroeconomic Challenges: A Tale of Two Deficits; World Bank WDI; and DCS.

…Sri Lanka has fallen behind economies it was once at par with (or ahead) in terms of per capita income

2,4

63

1,1

54

1,0

34

950

2,5

94

1,1

91

1,9

06

1,1

75

2,6

63

2,7

55

2,4

17

1,1

18

14

,87

1

12

,47

3

5,2

24

9,7

07

23

,15

8

4,6

46

6,6

59

35

,10

4

72

,58

3

10

,34

2

44

,32

8

13

,96

7

0

1

2

3

4

5

6

7

GD

P p

er

cap

ita (

2011 P

PP

$),

log

scale

GD

P p

er

cap

ita g

row

th (

%)

1960 2014 GDP per capita growth rate (1960-2014)

Source: Weerakoon, Kumar, and Dime (Forthcoming). Sri Lanka’s Macroeconomic Challenges: A Tale of Two Deficits; World Bank WDI; and DCS.

Glass Half Full or Half Empty?

8

• Development strides

• Strong growth despite civil conflict…

• …but growth not as high as E/SE Asia and Sri Lanka has

lagged behind

• Missed opportunities (small manufacturing base and limited

presence in GVCs)

“Our vision is to make Sri Lanka a rich country by 2025” / “Sri Lanka to become an upper-middle income country”—(Vision 2025, GoSL)

9Source: World Bank WDI.

Challenge 1: Persistent Macroeconomic Vulnerability

Classic Twin Deficit Economy

10

-25

-20

-15

-10

-5

0

5

Current Account Balance Fiscal Balance

Ratio to GDP(%)

Source: Weerakoon, Kumar, and Dime (Forthcoming). Sri Lanka’s Macroeconomic Challenges: A Tale of Two Deficits.

Downward trend in tax-to-GDP ratio which is starting to reverse but tax revenues remain low…

11Source: Weerakoon, Kumar, and Dime (Forthcoming). Sri Lanka’s Macroeconomic Challenges: A Tale of Two Deficits; World Bank WDI.

Sri Lanka

010

20

30

40

Ta

x-t

o-G

DP

Ra

tio

(%

)

6 7 8 9 10 11

Log GDP per capita (constant 2011PPP$)

1990

Sri Lanka

010

20

30

40

Ta

x-t

o-G

DP

Ra

tio

(%

)

7 8 9 10 11 12

Log GDP per capita (constant 2011PPP$)

2016

… and there are rigidities in the expenditure structure

12Source: Weerakoon, Kumar, and Dime (Forthcoming). Sri Lanka’s Macroeconomic Challenges: A Tale of Two Deficits;

Reflected in Debt and Exchange Rate Trends

13Source: Weerakoon, Kumar, and Dime (Forthcoming). Sri Lanka’s Macroeconomic Challenges: A Tale of Two Deficits.

0

20

40

60

80

100

120

0

20

40

60

80

100

120

140

160

180

Exchange Rate Central Government Debt (right axis)

SLRs/$ Ratio to GDP (%)

Challenge 2. Shift in growth model: From a debt-financed consumption-driven economy to export-led FDI-led growth

14

FDI to GDP Ratio

Sri Lanka’s growth conundrum…GDP growth strong by regional standards, exports not keeping pace

15

0

2

4

6

8

10

12

14

Sri Lanka Singapore India Viet Nam Indonesia Philippines

Avera

ge a

nn

ual g

row

th r

ate

, 2000-1

7

GDP Exports (goods and services)

Challenge 3. Diversifying

the economic base

• Agricultural sector productivity

• Beyond garments

• Lack of presence in GVCs

Challenge 4. Improving

competitiveness

• SOE reforms

• Improving business climate

• Urbanization

Urbanization in Sri Lanka

Note: White areas show stable areas of lighting over the period 1992-2012, whilst red areas show lights whichexisted in 2012, but not in 2002 or 1992Source: World Bank

Challenge 5. Human Capital

• Malnutrition

• Low female labor force participation rate

• Skills mismatch

• Ageing

Despite progress on social indicators, female labor force participation is significantly low

Source: ADB staff calculations based on World Bank WDI data.

21

Ageing in Sri Lanka

Source: ADB staff calculations based on UN Population Division Projections.

1000 500 0 500 1000

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80+

Population (000's)

Ag

e g

rou

ps

2050

Male Female

1500 1000 500 0 500 1000 1500

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80+

Population (000's)

Ag

e g

rou

p

2085

Male Female

1700 1200 700 200 300 800 1300

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80+

Population (000's)

Ag

e g

rou

p

2115

Male Female

1000 500 0 500 1000

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80+

Population (000's)

Ag

e g

rou

p

2015

Male Female

22

Source: Abeykoon (2018).

Ageing in Sri Lanka

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