Report No. 5038-CE Sri Lanka: Recent Economic Developments, Prospects and Policies May 4,1984 South Asia Programs Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Report No. 5038-CE
Sri Lanka: Recent Economic Developments,Prospects and Policies
May 4,1984
South Asia Programs Department
FOR OFFICIAL USE ONLY
Document of the World Bank
This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.
a/ The Sri Lanka rupee, which had been linked to the US dollar fromNovember 6, 1971, was re-linked to the Pound Sterling from July 10,1972, onward at a parity rate of US$1.00 = Rs 15.60. Parity rateswith all other currencies were determined from time to time by theCentral Bank. The rupee was delinked from Sterling on May 24, 1976,linked to a weighted basket of currencies. On November 15, 1977,the exchange rate was unified, depreciated, and allowed to float atan initial rate of US$1.00 = Rs 16.00.
bf This rate applied to all exports other than tea, rubber, and coconut,and all imports other than food, fertilizer, and drugs. FEECs wereabolished on November 15, 1977.
This report is based on the findings of an economic mission which visitedSri Lanka between November 28 and December 23, 1983; the mission comprisedMessrs. Rene Vandendries (Chief of Mission), Harold Pilvin, Fakhruddin Ahmed,Hassan Fazel, Mike Lav, John Wilton, and Mrs. Vidya Shetty. The energysection was prepared by John Borthwick, based on work by the Bank's energydepartment. Ms. Geri Wise provided secretarial support and coordinatedproduction of the report.
FOR OFFICIAL USE ONLY
GLOSSARY AND PRINCIPAL ACRONYMS
ARTI - Agrarian Research and Training InstituteBTT - Business Turnover TaxBTU - British Thermal UnitCBC - Central Bank of CeylonCDA - Coconut Development AuthorityCEB - Ceylon Electricity BoardCPC - Ceylon Petroleum CorporationCWE - Cooperative Wholesale EstablishmentECT - Energy Coordinating TeamEDB - Export Development BoardGCEC - Greater Colombo Economic CommissionGPS - Guaranteed Purchase SchemeGWh - Gigawatt-hour (1,000,000 kilowatt-hours)IRR - Internal Rate of ReturnJEDB - Janatha Estates Development BoardKWh - Kilowatt (1,000 watt hours)LPG - Liquid Petroleum GasMaha - Northeast monsoon, October-FebruaryM< - Medium and Long TermHMPE - Ministry of Power and EnergyMRID - Ministry of Rural Industrial DevelopmentMW - Megawatt (1,000 kilowatts)NDB - National Development BankNHDA - National Housing Development AnthorityPE - Public EnterprisePIP - Public Investment ProgramPoonac - Copra cakePTC - Presidential Tariff CommissionSLCTB - Sri Lanka Central Transport BoardSPC - State Plantations CorporationTSHDA - Tea Smallholder Development AuthorityYala - Southwest monsoon, May-September
This document has a restricted distribution and may be used by recipients only in the perfomance ofofficial duties. Its contents may not otherwise be dischsed without World Bank authorization.
TITLE : SRI LANKA: RECENT ECONOMIC DEVELOPMENTS, PROSPECTS AND POLICIES
COUNTRY : SRI LANKA
REGION : SOUTH ASIA
SECTOR : COUNTRY ECONOMIC
REPORT TYPE CLASSIF MK/YY LANGUAGES
5038-CE CEM Restricted 05 84 English
PUBDATE : 8405
ABSTRACT : The Sri Lankan economy improved in several respects during 1983.Despite a major drought and severe civil disturbances, economicgrowth was only marginally lower than in the preceding year,while the deficits in the budget and the current account ofthe balance of payments declined as a share of GDP. Theseimprovements notwithstanding, the size of these deficitsremained excessive, reflecting large imbalances between invest-ment and savings, and between the volume growth of exports andimports. These imbalances in Sri Lanka's economy symbolizeunderlying structural weaknesses, which include a low-yieldingpublic revenue system in the face of an ambitious and long-gestating public investment program; and distortions in theincentives framework for production and trade. Against thesetting of developments during 1978-83 and the medium-termoutlook, this report considers the short-term stabilization tasknow facing Sri Lanka and the requisite measures for structuralreforms in budgetary practices, and in the incentives andinstitutions of the key sectors of agriculture, industry andenergy. The report notes the significant reforms under way inthe energy sector and the recent initiatives in strengtheningbudgetary management. The report also presents a medium-termbalance of payments outlook for the country, embodying the mainelements of stabilization and structural reform measures, andprovides estimates of aid requirements during 1984-85.
SRI LANKA: RECENT ECONOMIC DEVELOPMENTS, PROSPECTS AND POLICIES
Table of Contents
Page No.
Country Data
SUMMARY AND CONCLUSIONS .................................
I. RECENT ECONOMIC DEVELOPMENTS ..................... 1.. ...
A. Introduction ........................................ 1B. Major Economic Developments, 1978-83 ................ 2
II. MEDIUM-TERM OUTLDOK ... ............ .......... 15A. The Macro-economic Problem . ....... ...... 15
Medium-Term Prospects Without Adjustment ......... 15Medium-Term Prospects With Adjustment ............... 17
B. The 1984 Budget and Recent Revisions ............... 19The November Budget ... ...................... 19Subsequent Revisions .............. . . .... 23
C. The Balance of Payments Outlook andCreditworthiness .................................. 25
D. Past Aid Flows and Requirements in 1984/85 ......... 32Aid Commitments and Disbursements, 1977-83 ......... 32Aid Requirements, 1984-85 ....................... 36
III. MAJOR DEVELOPMENT ISSUES ..... ......... . ...... 39Introduction 39A. Agricultural Sector Policies ............. 40
Introduction ......... .. ................ .... .0. 40Performance Since 1978 ..- ... o ............ ... 41Adjustment Issues and Policies ...................... 46
B. Industrial and Trade Policies ...................... 50Introduction ........................ o................ 50The Present Policy Environment ..................... 52
(a) Trade and Industrial Policy .................. 52(b) Manufacturing Public Enterprises .... 54
Adjustment Issues and Policies ...................... 57C. Energy Policies ................... . ................ 59
Energy Supply and Demand ............................ 60Energy Conservation ........ ....................... 62Institutional Developments ........................ 63Prospects in the Energy Sector ....... ........ 64
Table 1: Economic Indicators, 1978-83 ....................... 4Table 2: Agriculture: Selected Indicators, 1977-82 ......... 6Table 3: Summary of Budgetary Operations, 1977-83 ........... 9Table 4: Selected Balance of Payments Data, 1977-83 ......... 12Table 5: Projected Major Economic Indicators, 1983-90 ....... 18Table 6: Summary of Budgetary Operations, 1983-84 ........... 19Table 7: Proposed Capital Expendituxes, 1984 ................ 21Table 8: Government Revenues, 1983-84 ....................... 24Table 9: Balance of Payments Projections, 1982-90 ........... 26Table 10: Projected Total Foreign Exchange Requirements
and Financing, 1983-90 ........................... 31Table 11: Aid Commitments, 1977-83 ........................... 33Table 12: Aid Disbursements, 1977-83 ......................... 34Table 13: Disbursement Performance, 1978-83 .................. 35Table 14: Foreign Exchange Requirements, 1982-85 ............. 37Table 15: Summary Aid Pipeline, 1984-85 ...................... 38Table 16: Net Financial Return per Unit of Family Labor:
Selected Field Crops, Maha 1982/83 ...............Table 17: Tree Crops: Ratios of Domestic to Export
Prices, 1977-82 .................................. 45Table 18: Value Added in the Manufacturing Sector, 1977-83 ... 51Table 19: Characteristics of Public and Private Sector
Factory Industries in 1979 ....................... 55Table 20: Employment and Output Trends for the Private
and Public Industrial Sector, 1976-81 ............ 55Table 21: Primary Commercial Energy Consumption, 1980-83 ..... 60Table 22: Net Petroleum Imports, 1980-83 ..................... 61Table 23: Electricity Generation, 1980-83 .................... 62
Page 1 of 2 pages
COUNTRY DATA - SRI LANKA
AREA POPULATION a/ DENSITY65,607 sq km 15.2 million (mid-1982) 235 per sq km (1981)
Rate of Growth: 1.7% (from 1971 to 1981) 763 per sq km of agricultural land (1979)
POPULATION CHARACTERISTICS (1982) hI HEALTH (1982)Crude Birth Rate (per '000): 26.8 Population per physician: 7,460Crude Death Rate (per '000): 6.1 Population per Hospital Bed: 350Infant Mortality (per '000 live births): 38.0 c)
INCOME DISTRIBUTION (1978) DISTRIBUTION OF LAND OWNERSHIPZ of national income, highest quintile: 54 Z owned by top 10% of owners: -
lowest quintile: 4 1 owned by smallest 10% of owners: -
ACCESS TO PIPED WATER (1981) ACCESS TO ELECTRICITY (1971)Z of population - urban: 47 % of dwellings - total: 9
rural: 10 rural: 3
NUTRITION (1977) EDUCATION (1981)Calorie intake as % of requirements: 97 Adult literacy rate: 87%Per capita protein intake (grams per day): 43 Primary school enrollment: 98%
GNP PER CAPITA IN 1982: $320 di
OUTPUT IN 1983 BY SECTOR ANNUAL RATE OF GROWTH (Z. constant prices)
a/ Based on Provisional 1981 Census estimates.b/ Provisional.
S/ 1981: Source: Central Bank of Ceylon.dA World Bank Atlas estimate.ef Manufacturing, mining, construction, and utilities.If GDP at factor cost.g/ Includes capital revenue.hi Includes advance accounts.i/ Includes net lending.
Page 2 of 2 pages
COUNTRY DATA - SRI LANKA
MONEY. CREDIT, AND PRICES 1970 1977 1978 1979 1980 1981 1982 1983 a/(end of period) (Rs Millior)
Honey and Quasi Money 3,115 8,717 10.892 15,058 19,860 24,447 30,510 35,324Bank Credit to Public Sector 2,856 4,659 4,226 6.267 13,095 17,277 21,828 20,850Bank Credit to Private Sector 1,320 4,116 6,449 8,705 12,709 16,690 20,570 26,873
(Percentages or Index Numbers)
Money and Quasi Honey as Z of CDP 22.8 23.9 25.5 28.7 29.9 28.8 30.4 28.9General Price Index (1970-100) 100.0 147.0 164.8 182.6 230.2 271.6 301.1 343.3
Annual Percentage Changes in:General Price Index +5.9 +1.2 +12.1 +10.8 +26.1 +18.0 +10.9 +14.0Bank Credit to Public Sector +10.4 +7.7 -9.3 +48.3 +109.0 +31.9 +26.3 -6.1 a/Bank Credit to Private Sector +8.6 +40.5 +56.7 +35.0 +46.0 +31.3 +23.2 +33.0 a/
BALANCE OF PAYMENTS MERCHANDISE EXPORTS (1983)
1981 1982 1983 $ Million 2(US$ Million)
Tea 353 33.3Exports of Goods, NFS 1,346 1,305 1,354 Rubber 121 11.4Imports of Goods, NFS 2,055 2,205 2,136 Coconut Products 60 5.7Resource Gap (deficit - -) -709 -900 -782
All Other Commodities 525 49.6Interest Payments (net) -82 -80 -117Workers' Remittances - - - TOTAL 1,059 100.0Other Factor Payments (net) -15 -18 -18Net Transfers 203 264 272Balance on Current Account -603 -734 -645 EXTERNAL DEBT ($ Million) h/
Direct Foreign Investment 49 63 38 December December ciNet MfLT Loans 337 416 360 1982 1983
Outstanding and Disbursed 45.0 287.8End 1978 End 1981 Undisbursed 22.4 374.6USS1.00 - Ru 15.51 US$1.00 - Ra 20.55Rs 1.00 - USS 0.06 Rs 1.00 - USS 0.05 Outstanding, including
Undisbursed 67.4 662.4End 1979 End 1982USS1.00 - Re 15.45 US$1.00 - Ra 21.32Rs 1.00 - US$ 0.06 Rs 1.00 - USS 0.05
End 1980 End 1983US$1.00 = Ra 18.00 US$1.00 = Rs 25.00Rs 1.00 - US$ 0.06 Rs 1.00 - US$ 0.04
s/ End-November data; changes are from November 1982 to November 1983.V/ Repayable in foreign currencies and vith a maturity over one year.c/ Preliminary estimate.d/ Ratio of debt service on public and publicly guaranteed MALT debt (excluding IMF charges
and repurchases) to exports of goods and services.
South Asia Programs DepartmentMay 4, 1984
Summary and Conclusions
i. Sri Lanka's efforts to liberalize the economy and stimulate growthand employment during the past several years have been successful in a numberof ways, in spite of the adverse impact on the economy of such externalfactors as deteriorating terms of trade and world recession. At the sametime, some disappointment has set in as financial imbalances in the budgetled to inflation and large deficits in the balance of payments, andindustrial and export growth remained low. These problems have become asource of concern. Economic performance during 1983 broadly continued alongthe trends of previous years, even though there were some positive develop-ments as compared with 1982. Real GDP growth, at 4.9%, was lower than inprevious years, partly a result of drought in early 1983 and partly becauseof severe civil disturbances in July. On the other hand, the 1983 budgetdeficit and the current account deficit in the balance of payments, atrespectively 15.0% and 12.4% of GDP, were an improvement over 1982 for avariety of reasons. These include policy measures (such as exchange rateadjustments and efforts to increase resource mobilization), a decline inpublic capital spending, and, above all, an estimated 14% improvement in theterms of trade because of much increased tea prices. Nevertheless, thedeficits remained high, net international reserves remained negative because,in spite of the terms of trade improvement, there was no reserves build up,the public debt service ratio rose further from 11% in 1980 to 18% in 1983,and inflation accelerated during the year reaching 23% when measured betweenFebruary 1983 and February 1984.
ii. The underlying characteristics of Sri Lanka's recent economicdevelopments and the accompanying problems remained, fundamentally, unchangedduring 1983. Having initially taken some bold economic reform moves duringthe late 1970s, the Government did not follow through with a further seriesof policy measures needed to achieve its objectives of sustained fastereconomic growth, higher levels of domestic savings to finance higher levelsof investment and accelerated export growth. Instead, subsequent economicpolicymaking has been responding more to short-run political and economicpressures rather than medium-term objectives. The result has been an ini-tially high but then declining GDP growth rate over time against a backgroundof increasing and unsustainable balance of payments and budgetary deficits.The crux of these problems is the extremely high level of capital formationin relation to national savings and the slow growth of exports in relation toimport requirements. Between 1980 and 1983 capital formation remained at ahigh 30% of GDP largely because fully half of it was financed by foreignsavings.
iii. A review of the performance of various sectors throws some light onthese developments. On the positive side, paddy, garments and tourism standout as sustained successes. The growth in these areas has been a directresponse to the liberalization measures of the late seventies, including themove to full-cost pricing for rice, the initial devaluation of the rupee, thereduced controls on foreign exchange transactions and favorable incentivesfor foreign investors. Sectors which have performed poorly include treecrops (tea, rubber and coconuts), public manufacturing enterprises, whichaccount for 40% of value added in the non-petroleum manufacturing sector, andpractically all non-traditional exports, excluding garments. Underlying the
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poor performance of these sectors are two principal factors: poor managementof publicly owned activities, and the overall incentive framework, includingthe exchange rate and tariff policies embodying very high and uneven levelsof effective protection. In between, the construction sector has registeredperiodic high growth rates, reflecting the rapid expansion in the level ofinvestment, led by the large increase in public expenditure. Whenever theGovernment has been forced to bring spending more into line with domesticresources, as in 1981, the construction sector has undergone a similarcontraction.
iv. Although external circumstances were an important contributingfactor, the Government's budgetary management has been the major source ofthe financial instability in the economy during the past several years. Thedisequilibrium was greatest in 1980. Considerable progress has been madesince then in reducing the size of the balance of payments and budgetdeficits, but much still remains to be done. In addition, the need toimprove the quality and composition of public sector spending has receivedinadequate attention as the authorities have had to focus their effortsmainly on getting the level of spending under better control.
v. As a share of GDP, budgetary spending increased sharply from 23% in1977 to a record 43% in 1980, declining subsequently but still remaining at32% in 1983, in spite of a shortfall from original spending plans in 1983 asa result of the July disturbances. The increase in capital spending wasespecially dramatic, with heavy emphasis on capital-intensive and long-gestating projects, such as Mahaweli and housing and urban development. Therapid growth in spending was accompanied by large budget deficits whichpeaked at the equivalent of 23% of GDP in 1980 and still amounted to 15% ofGDP in 1983, largely because of a weak revenue performance. The principalcause of the latter is reduced earnings from export duties, as the tree cropsurplus was squeezed between declining world prices and falling productivity,and insufficient measures were taken to reduce dependence on these duties bysearching for revenues from alternative sources. The slow growth inrevenues, together with rapidly rising interest payments associated with thelarge deficits, meant that current spending had to be squeezed, includingspending on wages and salaries and operation and maintenance, not withoutimportant costs to the economy. Even so, savings on current account remainednegative. In spite of impressive donor support for the country's developmentprograms, equivalent to 7.3% of GDP during 1981-83, the high level of capitalinvestment meant that this covered only 45% of the overall deficit duringthese years; about 10% was covered by foreign commercial borrowing and theremaining 45% through domestic borrowing.
vi. The large budget deficits were a primary cause of the deterioratingbalance of payments situation. Other factors included the low growth in 'export volumes and the weakening terms of trade and international recession.The current account balance deteriorated from a positive 2.4% of GDP in 1977to a record 19.8% deficit in 1980, subsequently leveling off at an average13.7% during 1981-83. Roughly 60% of the large external deficits during1981-83 have been financed by gross aid disbursements, with the remainder metby a drawdown of reserves and non-concessionary borrowing. By the end of1983, net international reserves were slightly negative, gross officialreserves were equal to about two months of imports, and growing debt serviceobligations put limits on Sri Lanka's future borrowing on non-concessionalterms.
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vii. The problems faced by Sri Lanka today, to a large extent, tave theirroots in basic structural characteristics of the economy which have existedfor many years and were not fully remedied by the reforms of the lateseventies. At the center of Sri Lanka's economic development since independ-ence has been the paddy economy. Up until 1977-79, the basic thrust ofGovernment policy with respect to paddy was consumer oriented. This was madepossible by using the surplus extracted from the tree crop sector to pay forrice imports. In addition, the tree crop surplus was also used to financesocial programs, which made Sri Lanka's outstanding social achievementspossible, and government investments generally. Among the latter were sub-stantial investments in the manufacturing sector which the Government viewedas a means to alter the structure of the industrial base as well as tosatisfy certain social goals, including employment creation. The reforms of1977-79 introduced a major change in the paddy economy in that policies nowbecame producer oriented. On the other hand, the Government inherited aninefficient manufacturing sector, which has been largely left untouchedsince, and a run-down tree crop sector, which had been starved for funds andsubjected to a prolonged nationalization process in the early seventies,which delayed necessary investments. This situation was further aggravatedsubsequent to nationalization by a weakened management of the sector. As thetree crop surplus continued to decline and the terms of trade deterioratedafter 1977, the high level of investment had to be funded by foreign anddomestic borrowing plus the use of international reserves. While the 1983-84terms of trade improvement is giving the economy some breathing space, notonly is there a need for stabilization measures in the short term, but it isapparent that basic structural change is needed, above all in the tree cropand manufacturing sectors, to regain the growth momentum in the medium term.
viii. To avoid the consequences of an abrupt downward adjustment inaggregate demand which is likely to follow from a continuation of pastpolicies, one of the priority objectives of Government policy should be torestructure the economy away from producing for the very limited domesticmarket towards exports. The basic thrust of the required policy packagewould be to move towards a more neutral incentive framework which wouldpermit the full diversity of Sri Lanka's particular comparative advantageto develop. However, in the short run, the capacity of the economy torespond to a changed set of incentives may be limited. In these conditions,the restoration of economic stability will depend upon a period of plannedreductions in aggregate demand. These short-run measures must be takenagainst the background of further policy changes designed to stimulate growthand restructure the economy.
ix. While the Government is making efforts in the right direction, theyneed to be strengthened considerably. To illustrate, traditional exportcrops are not expected to fully reverse the past declining trend in outputuntil 1988 even if the Government implements the positive policy measurescurrently under consideration. This means that non-traditional exports willhave to expand rapidly to strengthen the balance of payments, which isunlikely to occur unless the existing anti-export incentive framework isreformed. Likewise, the revised 1984 budget, though a substantial improve-ment over the recent past, has only begun to incorporate some of the struc-tural reforms needed to put government finances on a sound footing. It isdifficult to see how existing revenue measures can generate the resourcesrequired to meet projected expenditures. A review of the budget suggests,
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first, that it may prove difficult to hold both recurrent and capital expen-ditures to budget estimates. Second, the imbalance between current andcapital expenditures, which has reduced O&M expenditures to grossly inade-
quate levels, has not been resolved. Third, the budget continues to relyupon planned underexpenditures to live within resource limits. Fourth, to alarge extent, the revenue system continues to rely on discretionary annualmeasures and export taxes which cannot be sustained in the medium term.
x. A more viable scenario, presented in this report, is based upon
projections which embody a package of policy measures designed to strengthenlong-term growth potential while maintaining a manageable balance ofpayments. The real GDP growth rate should remain at approximately 5% in1984, declining temporarily thereafter until the economy has gone through thenecessary short-run adjustment process. The higher growth in 1984 reflectsthe recovery from the 1983 drought, the revival of tourism and the incomeeffect of the terms of trade improvement. However, by 1985 the effect ofthese factors will have dissipated, commodity price projections suggest thatthe terms of trade are likely to deteriorate and the reduced level of govern-ment expenditure will dampen demand. Thus, during the adjustment period,when the Government is attempting to restrain aggregate demand, economicgrowth is expected to fall to some 4%. If these short-run measures are takenin addition to the longer-term policy initiatives, then the economy should bewell positioned to grow by at least 5% per annum beyond 1987-88. In thisscenario the current account deficit in the balance of payments shoulddecline rapidly in the short run to about 9% of GDP in 1984 and thengradually fall over the medium term. Given expected disbursements of conces-sionary assistance, commercial borrowing needs should be at sustainablelevels and Sri Lanka's medium-term creditworthiness should be strengthenedconsiderably.
xi. The package of policy measures underlying the above scenarioincludes, apart from immediate attention to the short-run stabilizationproblem, four broad problem areas which have been identified as comprisingthe foundations for a further restructuring of the economy. The need forstructural reform applies especially to budgetary practices, and to the keysectors of agriculture, industry and energy.
xii. The first requirement is for economic stabilization through a reduc-tion in excess demand. As there are limits to possible or desirable reduc-tions in consumption, the major burden of the adjustment will have to fall oninvestment demand, and especially public sector investment. The latterfollows because future growth and strengthened creditworthiness will dependon shifts in the composition of investments with more emphasis on quick-yielding and private sector investments. In addition, there is a clear needfor the Government to begin to generate savings on current account. Thiswill require, above all, a thorough review of the taxation system to make itmore elastic. On the recurrent expenditure side, economic efficiency con-siderations call for much increased spending for O&M purposes and for highercivil service salaries. These increases will have to be accommodated largelyby reallocating expenditure away from low return uses, such as the continuingsubsidies to public corporations. With regard to capital spending, thedesirability of introducing priority setting cannot be overstressed.
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xiii. There have been encouraging institutional developments affectingbudgetary management in recent weeks. A new committee on economic policyhas been created, comprising the President, the Prime Minister and theMinister of Finance and Planning, empowered to enforce financial disciplineand ensure that Cabinet decisions on economic policy are implemented. Acomprehensive inter-ministerial exercise is ongoing, designed to ensureadequate expenditures on O&M which, starting in 1985, will appear explicitlyas a separate category of spending in the budget. Finally, the Cabinet haslaid down criteria for project selection for inclusion in future publiccapital budgets which should remedy a major weakness. Actual implementationof these measures, which would, among others, do away with the need for theunderexpenditure provision and help ensure improved coordination among themultitude of ministries, would be a major breakthrough in budgetarymanagement.
xiv. In addition to the above, sustained economic growth and long-ternviability in the balance of payments call for major policy changes in keysectors of the economy to create an incentives' environment for increasedprivate investment and expanded economic activity. In agriculture therecent experience of agricultural performance points to the principal issueswhich should be addressed in order to exploit the considerable potential forfurther growth and diversification. The determined application of strongincentives for paddy production and marketing has elicited a remarkablypositive farmer response. In contrast, for other field crops (coarse grains,pulses, tubers, oilseeds), farmer incentives as well as institutional supporthave been weak relative to paddy, thus resulting in their limited adoption.Milk prices were maintained at low levels through subsidized imports, con-straining dairy development. Tree crops growth was constrained by squeezingprofit margins and allowing the development of a fragmented institutionalbase and poor management practices for the plantations. Clearly, whilegovernment policy is committed to promoting producer initiatives-and hasbeen applied successfully in the paddy sector-the incentive framework andthe institutional support system for other subsectors need to be strengthenedand backed with priority investments. A first step towards reviewing theoverall effects of government policies on agricultural incentives was takenin November 1983 when the National Food Policy and Agricultural PricesCommittee was formed. The Committee secretariat should accord high priorityto organizing the data base and analytical methods for assessing agriculturalincentives and formulating recommendations for Government action to removeeconomic distortions. At the same time, the Government will need to under-take a number of institutional measures, including the completion of manage-ment and organizational reforms of the JEDB and the SPC; a review of the roleof other public enterprises in agriculture; rationalization of the multipleministries and other government agencies involved with tree crops; and theimprovement of extension services for smallholders, particularly in fieldcrops, minor export crops and tree crops. In planning investments, theimbalance between Mahaweli and tree crops will need to be corrected, withmore emphasis placed on rehabilitation and modernization of investmentsdesigned to obtain maximum returns from existing facilities. Furthermore,the wide range of investment subsidies now available for tree crops shouldbe reviewed and rationalized with a view to providing appropriate signalsregarding the choice of crops and the choice between activities such asinfilling, replanting or interplanting.
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XV. In industry, evidence suggests that the growth momentum whichresulted from the 1977 policy package has recently begun to slow down.Although external factors, such as sluggish world growth and rising petroleumprices have had a negative effect on performance, the industrial policy ofthe Government has been a contributing factor. While the 1977 reforms didliberalize the economy significantly, the overall incentive framework hasremained biased in favor of import substitution at the expense of exportactivities, both because of subsequent exchange rate policies and because ofa tariff structure providing high and non-uniform levels of effective protec-tion biased against exporting. As has happened in other countries, somegrowth has occurred under this situation as investors were drawn into produc-ing for the domestic market. However, due to the small size of Sri Lanka-sdomestic market, the "easy" import substitution activities were quicklyexhausted. In addition, the Government inherited a large and inefficientpublic enterprises sector. The cumulative effects of ineffectual management,unrealistic salary and bonus policies, employment practices and the condi-tions under which public enterprises are financed have been highly detrimen-tal to their viability and to the maintenance of their capital assets.
Xvi. The above suggests that many policy measures to stimulate efficientindustrial production need to be put in place. The relative inaction so farmay well reflect the absence of a consensus on future strategy, with bothprotectionist forces at work as well as forces intent on establishing a moreuniform incentive framework which attempts to minimize the discretionaryinfluence of public administrators. The latter is clearly the desirableroute for Sri Lanka to take, and proposals for a time-phased tariff reformtowards that end are expected to be placed before the Cabinet in the nearfuture. If adopted, appropriate adjustments in the exchange rate will haveto be combined with tariff reforms to avoid exacerbating the short-runbalance of payments impact. With respect to public manufacturingenterprises, Government policy will need to be flexible in order to addressthe special needs and circumstances of a group of activities which span awide range of potential economic efficiency. For the small number ofenterprises which are highly inefficient, unable now or in the future tocover even their variable costs, the Government should consider the pos-sibility of shutting them down. At the other extreme, in the case ofenterprises which already appear to be able to meet the market challenge, theGovernment should consider the option of selling them to the private sector;this option would relieve the Government's overstretched administrative andfinancial resources. However, for many enterprises a transition period willbe required during which changes in the incentive structure are introduced soas to determine their long-term viability and bring them to the point whereprivate investors would find the undertaking attractive. If a commitment ismade to introduce these reforms, there may be a major need for assistance, inthe form of technical, managerial and financial support during the transitionperiod.
xvii. In energy, most of the rapid growth in commercial energy consumptionduring the past few years was accounted for by petroleum, especially forthermal power generation, as hydro-electricity generation was constrained bypoor monsoons and inadequate generating capacity. As a result, the burden ofnet petroleum imports, which had risen from 14% of non-petroleum exports in1977 to 35% in 1980, rose to almost 50% by 1982. Despite heavy thermal power
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generation, there were serious shortages of electricity during this period,which inevitably had adverse effects on economic growth.
xviii. Although the overall energy situation will ease significantly throughthe end of the decade with the expected conissioning of three majorhydropower projects under the Accelerated Mahaweli Program during 1984-86,over the longer run Sri Lanka will become increasingly dependent uponimported energy to meet its needs. To help sustain economic growth and a:healthy balance of payments over the longer run, it is important that energybe used efficiently. Important areas for action include improved demandmanagement, the development of alternative sources of energy including renew-ables and imported coal, and strengthening of the institutional framework.The Government has acted on a number of these recommendations: petroleum andelectricity prices have been increased to reflect economic costs and in theprocess important changes in the price structure were made; it is takingsteps to improve energy efficiency in large industrial and commercial uses;it has begun planning for coal-based power generation in the 1990s, and theinstitutional structure and data base in the energy sector have been greatlystrengthened. Provided Sri Lanka can maintain the adjustment momentumdeveloped over the recent past, it should be able to cope with the energysituation through the 1980s and be in a good position to meet its energyneeds relatively efficiently in the years beyond.
xix. Early implementation of the several adjustment and structural reformmeasures discussed above is essential if Sri Lanka is to re-establish growthmomentum in the medium term. The scenario in this report presupposes suchaction. In order to finance the. near-term costs of adjustment, Sri Lankawill require substantial foreign assistance. The aid community has respondedenthusiastically to the Government's development efforts in recent years.The overall level of aid commitments increased from $250 million in 1977 to arecord of $815 million in 1981, equivalent to $55 per capita. Disbursementsgrew much more slowly and there was a rapid build up of the aid pipeline toaround $1,630 million by the end of 1981. With the need to curtail publiccapital spending during 1982-83, both because of implementation and domesticfinancial constraints, commitments declined to $550 million in 1982 and $370million in 1983, halting further increases in the pipeline. Aid disburse-ments have grown steadily, from $200 million in 1977 to $450 million in 1983,or close to $30 per capita. The slow growth of disbursements relative tocommitments through 1981 can be explained largely by two factors: the rapidacceleration in aid commitments themselves which proved beyond the country'sabsorptive capacity, and the relative shift over time from food and commodityaid towards slower disbursing project aid.
xx. Aid requirements during 1984 and 1985 are determined by a varietyof factors, including the decline in the current account deficit, the needto build up reserves, the declining reliance on commercial borrowing and thestill relatively large aid pipeline. During 1984 non-concessionary capitalinflows are still expected to be fairly substantial as a result of commit-ments already made. At the same time, because the proposed budget cuts fallmainly on aided projects, some slowdown in the growth of aid disbursementsappears likely. Required gross disbursements of aid are estimated at $457million, about the same level as in 1983. During 1985, however, aid disbur-sements required will rise. While the level of capital spending will bereduced, this should be achieved on the basis of economic criteria, resulting
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in an increase in the proportion of aid-financed projects in the total publiccapital expenditure target. Required gross disbursements of aid shouldincrease substantially to some $540 million. On average about one-fifth ofthese disbursements will have to come from new commitments.
xxi. Consistent with the temporary restraint in public capital spending,new commitments during 1984 are estimated at $486 million, but are projectedat about $600 million in 1985. It may at first appear that Sri Lanka'spublic finance situation would argue for further restraint in the introduc-tion of new projects in 1985, and that the case for food and commodity aid issomewhat weakened by the currently relatively strong balance of paymentsposition. But, since project commitments now are primarily for disbursementin future years, the proposed commitment levels are justified in view of SriLanka's medium-term needs. They do, however, reflect the assumption thattheir composition responds to a well-defined set of priorities for publicinvestment and that the structural reforms discussed earlier are put inplace. With regard to food and commodity aid, Sri Lanka's balance of pay-ments remains vulnerable to volatile tea prices. The projected build up ofreserves in 1984/85 is essential and the transition towards a more viablebalance of payments situation will need to be supported through non-projectaid. The proposed commitment levels can also be considered realistic giventhe likely availability of foreign aid. On a per capita basis they amount toabout $31 and $38 respectively for 1984 and 1985, below the levels of earlieryears even in nominal terms.
xxii. Expected commitments for Mahaweli downstream development during 1984amount to $200 million and a further $130 million is recommended during 1985.The present outlook for non-Mahaveli project aid is for $216 million of newcommitments during 1984, and a further $335 million is recommended during1985. Expected food and commodity aid commitments during 1984 are $70million; for 1985, $130 million in new commitments is recommended. If thisaid is to support an appropriate public investment program, it is essentialthat the aid be directed towards those high priority investments which theGovernment is already committed to undertake. These would include amongothers the development of the tree crop sector, rehabilitation investments,agricultural diversification, credit lines for the private sector anddevelopment of energy resources.
Chapter I: RECENT ECONOMIC DEVELOPMENTS
A. Introduction
1. The Sri Lankan economy showed improvement in several respects during1983. In spite of a major drought and the outbreak, in July 1983, of severecivil disturbances, GDP continued to grow though at a marginally lower rate
than in the preceding year. Both the overall budget deficit and the deficitin the current account of the balance of payments declined as a share of GDP.Nevertheless, the deficits remained very large, reflecting the massiveimbalance between investment and savings and the inadequate volume growth ofexports. Also,-only modest progress was made towards consolidation of thebasic reforms initiated in 1977.
2. The economic gains in 1983 were in part the result of governmentpolicy initiatives. These included efforts to increase resourcemobilization, progress in energy conservation policies, exchange rateadjustments, and an effort to place a freeze on new public investmentprojects. Yet, the improved performance also reflected fortuitousdevelopments, and especially a dramatic turnaround in the country's terms oftrade. This was a major factor in the improvement in Sri Lanka's fiscalposition and in the balance of payments outcome for 1983.
3. Real GDP grew by an estimated 4.9% in 1983, compared to 5.1% in 1982,with highly divergent performances in some subsectors. While total agricul-ture grew at 5.1%, paddy output increased by an unprecedented 14.7%, but treecrop sector output declined by 4.1%. Growth in the manufacturing sector wasa disappointing 0.8% but the services sector continued to expand at 6%.Paddy production benefitted from a very favorable 1982/83 maha harvest whichwas the result of both an increase in area under cultivation and a rise inaverage yield. The expanded maha harvest more than compensated for a sharpdecline in 1983 yala production which resulted from the drought conditions ofearly 1983. Notwithstanding a rise in fertilizer prices (May 1983), fer-tilizer use in paddy increased during 1983. Output expansion was alsoencouraged by an increase in the guaranteed price of paddy in March 1983 toRs 62.5 from Rs 57.5 per bushel. In contrast to expanded output of paddy,production of plantation crops experienced a considerable decline. Declinesin output of 8% and 5% occurred in coconuts and tea, respectively; productionof rubber, on the other hand, increased by 8%. Although higher world pricesfor tea and rubber increased producer margins for both commodities during1983, there is no assurance that the improvement in the financial position ofthe state plantations is other than temporary. It is thus essential toemphasize the need for fundamental improvements in the efficiency of the treecrop sector.
4. Value added in manufacturing grew by 0.8% in 1983, a sharp reductionfrom the expansion in the previous year. This slower rate of growthreflected depressed activity in most major industrial subsectors, as agro-processing industries showed a sharp reduction in production (reflectingdeclining tree crop output), while the rate of growth of factory industriesdeclined from over 9% to around 2%. The declining pace of expansion inmanufacturing output was due to three factors: the drought in the first half
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of 1983, which affected tree crop output and agro-processing activity; thecivil disturbances; and, a lengthy shut-down of the national petroleumrefinery for repairs. Manufacturing activity was hampered also by thedrought-induced decline in hydro-electric energy output. The resultingshortage led to the imposition of power shut-downs in the latter part of theyear and a large resort to thermal electricity; during 1983 thermal plantsaccounted for about two-fifths of total power generated as compared withone-fifth in 1982.
5. The July 1983 civil disturbances, while short-lived in duration, hada measurable impact on some areas of economic activity. They also had aconsiderable effect on investment psychology and on the time and energy whichgovernment leaders had to devote to a solution to the problem of communalunrest. While agriculture was largely unaffected, considerable damage wasinflicted on industrial, commercial and residential property. Roughestimates suggest that the replacement value of damaged industrial machinery,plant and equipment alone was about $75 million; total damage, including thatto retail outlets and housing, may have amounted to $300 million; at thetime, the impact on employment was estimated at a reduction of nearly 50,000jobs and the total decline of wage income from both direct and indirecteffects at around Rs 300 million. The absence or departure of skilledworkers for security reasons slowed down or stopped work on several develop-ment projects. Although the full economic impact of the disturbances isdifficult to assess, restoration .f private (including foreign) investorconfidence will inevitably take some time, as will the full revival of thetourism sector which by 1982 had become one of Sri Lanka's major sources offoreign exchange.
6. The Government adopted a number of measures aimed at assisting riot-affected persons and business. Relief camps were established to house,clothe and feed some 80,000 persons who, on leaving the camps, received cashand food grants to assist in their rehabilitation. As a protective measuredamaged business establishments and residences were temporarily vested in theState, though most of these have by now been divested. Rehabilitation ofbusiness was helped in several ways, including the use of aid-financedindustrial credit facilities; the allocation of Rs 37 million to aid thetourism sector; and the provision of fiscal assistance through waiving ofduties on purchase of replacement equipment and allowing the deduction fromtaxable income of expenditures for repair of damaged property.
B. Major Economic Developments, 1978-83
7. Macro-Economic Developments and Policies. The basic objectives ofthe Government remain as they were when the initial steps towards liberaliz-ing the economy were taken in 1977, i.e., higher growth of production andrelated employment, higher levels of domestic savings and investment, andfaster export growth. To achieve these objectives, the Government introduceda series of policy measures which (a) reduced government intervention incommodity markets, (b) reduced government consumption subsidies to helprestore public savings and finance public investment, and (c) created afavorable environment for private (foreign and domestic) investment by taxconcessions, the creation of an Investment Promotion Zone, and the unifica-tion and depreciation of the exchange rate. Having initially taken some boldmoves, the Government did not follow through with a further series of policy
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measures needed to achieve its objectives. Instead, subsequent economicpolicymaking has been responding more to short-run political and economicpressures rather than medium-tern objectives. This may be seen from a reviewof major developments since the initial liberalization.
8. The economy in recent years has been marked by a positive but declin-ing GDP growth rate against a background of increasing balance of paymentsand budgetary problems. The real GDP growth rate has declined from anaverage 7.3% during 1978179 to an average 5.3% during 1981/83. Over the sameperiod the current account deficit in the balance of payments increasedsharply before leveling off at an average 13.7% during 1981-83; budgetdeficits followed a similar pattern, increasing to a record 23% in 1980before declining subsequently. The large budget deficits have contributed tointermittent periods of high domestic inflation, which recently againaccelerated; the rate of inflation, as measured by the Colombo cost of livingindex, was 14% on average in 1983 over 1982, but reached 23% when measuredbetween February 1983 and February 1984. The deficits also led to increaseddependence on foreign loans on commercial terms to finance the resultingincrease in import demand. This has led to a rise in the ratio of servicepayments on public external debt from 11.4% of exports of goods and servicesin 1979 to 17.7% in 1983.
9. The crux of Sri Lanka's problem of macro-economic imbalance remainsthe extremely high level of capital formation in relation to national savingsand the slow growth of exports in relation to import requirements. In 1983the ratio of gross domestic fixed capital formation to gross product wasclose to 30%, about the level of 1980-82. In an effort to reduce the growthin investments, the Government has put a halt to new public sector starts.With public savings negative, financing this very high level of investmentremains a major problem, although total national savings increased modestlyduring 1983. Domestic savings rose to around 14% and national savings to 16%of GDP, with migrants' remittances contributing no less than one-third of thetotal. While the ratio of foreign savings to gross product is well below theextreme level reached at the beginning of the decade-around 20% of GDP andamounting to nearly two-thirds of total investment-external savings in 1983still amounted to around 12% of GDP, financing over two-fifths of totalinvestment. Although 1983 witnessed some decline in the ratio of foreignsavings to GDP, this was largely due to the improvement in the country'sterms of trade; the volume of exports remained stagnant during the year.
c/ Equals current account deficit in the balance of payments.d/ December to December.
Sources: Central Bank; Ministry of Finance and Planning; and Bank staffestimates.
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10. Considerable light can be thrown on the declining GDP growth ratesand the expanding fiscal and balance of payments deficits through an examina-tion of the performance of various sectors over the past few years. On thepositive side, paddy, garments and tourism stand out as sustained successes,with construction registering periodic high growth rates. Paddy outputincreased by more than 6% per year in real terms since 1977, resulting in adecline in rice imports from an average 33% of total rice consumption during1970-77 to only 12% during 1978-83. Manufactured garment exports haveincreased from $12 million in 1977 to nearly $200 million in 1983, raisingtheir share of total merchandise exports from 2% in 1977 to 19% in 1983,whereas tourist arrivals have increased from 154,000 in 1977 to 407,000 in1982, with a reduction to 337,000 in 1983 due to the civil disturbances.
11. The growth in these areas has been a direct response to theliberalization measures introduced in 1977. In the case of paddy, the mostimportant factor in the strong performance was the decision in September 1979to replace the previous rice rationing scheme by a food stamp scheme and tomove to full-cost pricing on imported rice and wheat flour. As a result,retail prices for rice rose significantly, opening up profitable oppor-tunities for the private sector and maintaining farm gate prices well abovethe government guaranteed price level. This in turn led to reduced govern-ment procurement and increased competition in the private sector which haslowered marketing costs and increased farmer incentives. The growth in thegarments and tourism sectors has been due to the combined effect of a numberof economic measures: the initial devaluation of the rupee, the reducedcontrols on foreign exchange transactions and the generally more favorableincentives for foreign investors, for example, the Investment Promotion Zoneand tax concessions.
12. In the case of construction, the growth has resulted from rapidexpansion in the level of investment, led by the large increase in publicexpenditures. Whenever the Government has been forced to bring expendituresmore into line with domestic resources, for example in 1981, the constructionsector has undergone a similar contraction. Given the present financialconstraints, it is unlikely that the growth in construction activity willmatch past experience.
aj Rice imports converted to paddy equivalent at 1 MT paddy = 0.68 MT rice.bV Per hectare harvested or tapped.
Sources: Statistical Appendix, Tables; Central Bank of Ceylon; Ministry ofCoconut Industry, Progress 1983; and National Fertilizer Secretariat.
13. Sectors which have performed poorly include tree crops (tea, rubberand coconuts), public manufacturing enterprises and practically all non-traditional exports, excluding garments. The combined value added in tea,rubber and coconuts has basically remained stagnant during the last six
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years. Public manufacturing enterprises, which account for approximately 40%of value-added in the non-petroleum manufacturing sector have depressed theperformance of the manufacturing sector as a whole. Thus, output of privateenterprises had increased by 102% between 1977 and 1981, while publicenterprises achieved only a 19% increase. Over the same period, employmentin the public sector expanded by 24% compared to an increase of 50% in theprivate sector. The real growth of non-traditional exports has also beenfairly low and erratic.l/ Underlying the poor performance of all thesesectors are two principal factors: poor management of publicly ownedactivities, and the overall incentive framework, including the exchange rateand tariff policies.
14. In the particular case of public manufacturing enterprises, theeffects that production inefficiencies have on output levels are muted by theoften high levels of protection afforded them via import tariffs, licensingand subsidies. In the short run this strategy may protect existing levels ofemployment and output, but at a considerable cost in terms of misallocatedresources and growth opportunities foregone.
15. Public Finances. The major source of financial instability in theSri Lankan economy during the past few years has been the Government'sbudgetary policy. Not only has the level of spending been far in excess ofavailable resources, there are also important shortcomings in the compositionof spending, both between current and capital spending as well as withinthese two categories. While some progress has been made since 1981 in tack-ling the "size" problem and reducing the overall deficit, much more remainsto be done. Moreover, efforts to improve upon the quality and composition ofpublic spending have had limited success thus far.
16. As a share of GDP, budgetary spending increased sharply from 23% in1977 to a record 43% in 1980, declined to about 34% during 1981-82 andremained at 32% in 1983, in spite of a shortfall from original spending plansduring the latter year as a result of the July disturbances (Table 3). Theincrease in capital spending was especially dramatic, with heavy emphasis oncapital-intensive and long-gestating projects, such as the Mahaweli programand the housing and urban development program. The rapid growth in spendingwas accompanied by large budget deficits which peaked at the equivalent of23% of GDP in 1980 and still amounted to 15% of GDP in 1983. Following theinitial jump in government revenues between 1977 and 1978, primarily as aresult of the exchange rate reform, revenues have fallen rapidly as a shareof GDP. While current spending has, as a result, also been reduced as ashare of GDP, current savings have still been negative, since 1978 equivalentto 1.8% of GDP on average. This, together with the large public investmentprogram, has led to the large deficits.
If That is, exports excluding tea, rubber, coconuts (and by-products), andpetroleum re-exports. Garments are also excluded as they are dealt withseparately.
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17. The principal cause of the weak revenue performance is reduced earn-ings from export duties, and one weakness in government fiscal policy hasbeen inadequate measures to reduce dependence on these duties by searchingfor revenues from alternative sources. The taxable surplus of the tree cropsector could not be sustained given declining world market prices, decliningproductivity, and insufficient movewent in the nominal exchange rate tocompensate for domestic inflation. Moreover, even excluding export duties,government revenues as a share of GDP in 1983 were lower than in 1978. Whilethe revenue to GDP ratio in 1983 was 1.4 percentage points below theoriginally budgeted amount, primarily on account of the impact of the Julydisturbances, the budget itself had included new tax measures (increases inimport duty and turnover tax rates) equivalent to 2.5% of GDP to make up forthe lack of buoyancy of the system. Some of the reasons for the weak perfor-mance of non-export tax revenues were generous tax holidays and exemptions,lax tax administration, considerable reliance on specific levies, and thelack of growth in the contributions to net current revenues by public sectorcorporations and government enterprises. Progress made in remedying thesedeficiencies in 1983 was confined to the removal of tax holidays and thereduction in investment relief which should allow for increasing revenues inthe future. Clearly, however, a thorough overhaul of the tax system isneeded to increase its elasticity and buoyancy.
18. On the current expenditure side, subsidies and transfers increaseddramatically immediately after 1977 to enable a phasing in of the requiredprice adjustments following the unification and devaluation of the exchangerate. The increase went primarily for fertilizer, food, petroleum productsand the Central Transport Board. With the subsequent gradual conversion tofull costing, expenditures on transfers and subsidies declined as a share ofGDP from 11% in 1978 to 4.9% in 1983. The slow growth in revenues, however,together with rapidly rising interest payments associated with the largedeficits, meant that the Government had to restrain other current spendingitems as well, uot without important costs. While interest payments grewfrom 3.2% of GDP in 1978 to 5.4% in 1983, expenditures on wages and salariesdeclined from 5.4% to 3.9% between the same two years. Also, though noprecise estimates are available, expenditures for operation and maintenance(06M) of the country's growing capital stock are grossly inadequate.
19. The impact of the July 1983 disturbances on government current spend-ing was minor. While there were supplementaries for rehabilitation work andsome increases in transfers to public corporations, these were much more thanoffset by underexpenditure on interest and some subsidies. Provisionalestimates of actual spending during 1983 are below original budget estimatesby 1 percentage point of GDP.
a/ While the authorities treat these transfers as revenue, they are shown here as a financing itemfor purposes of comparison with previous years.
Sources: Central Bank; and Ministry of Finance and Planning.
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20. While a combination of higher revenues and restraint in currentspending will be necessary in order to start generating budgetary savingson current account, a major burden of the adjustment may well have to fallon increases in revenues. There are, on the one hand, some areas of currentspending where further cuts are possible: they include the transfers to coverlosses of public corporations, such as the National Water Supply and DrainageBoard, and continued subsidies such as those for fertilizer. On the otherhand, interest payments are fixed obligations which cannot be cut except overthe longer run by reducing the size of the deficit, and there are otherimportant areas of current spending where cuts are unwise or where increasesare called for. Further reductions in the relative size of the total wagebill may be difficult and, depending on the nature of the adjustments, tosome extent counterproductive. A primary requirement for a longer-ternimprovement in the efficiency of the public sector is a substantial increasein salaries at the higher professional level. To make room for this, thecurrent wage indexation scheme, which instead favors the lower income groups,should be reduced further while, over the longer term, a gradual reduction inthe total number of public sector employees is needed. In addition, therewill have to be substantial increases in spending for O&M not only because itis inadequate now but especially in order to ensure that the hoped forbenefits of the huge investment outlays of recent years materialize.
21. Excessive capital spending in relation to available resources hasbeen the dominant feature of Sri Lanka's budgetary developments in recentyears. Donor support for the country's development programs has beengenerous and averaged the equivalent of 7.3% of GDP during 1981-83, but eventhis covered only 45% of the overall deficit; about 10% was covered byrecourse to foreign commercial borrowing and the remaining 45% through domes-tic borrowing. The reliance on non-concessionary foreign borrowing forbudget support is undesirable. Gross borrowings were close to $90 million in1981, $60 million in 1982 and $40 million in 1983. The level of domesticfinancing of the budget deficit is also uncomfortably high. While CentralBank financing has been reduced sharply since 1980 to as low as 0.4% of GDPby 1983, borrowing from captive institutions (the National Savings Bank, theEmployees' Provident Fund) has remained large.
22. While the Government has made efforts to curtail capital spending,these efforts have been both insufficient, as witnessed by the continuinglarge deficits, and poorly directed. The 1983 budget speech included awelcome decision not to introduce any new projects during 1983 and 1984. Itwas not clear, however, whether "new projects" meant "projects not alreadyincluded in some previous investment program" or "new, yet to be initiatedprojects". By the latter definition some new projects have continued to beintroduced. More importantly perhaps, until very recently, the review of thecapital budget was not undertaken systematically enough, with investmentallocation criteria in mind, so as to be able to identify possiblerephasings, reductions or eliminations of ongoing capital works. Inparticular, efforts to restrain non-aid-financed expenditures have been weakand there has been a tendency to assist more public and private corporationsthrough transfers without a systematic review of the medium-term budgetaryimplications.
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23. Provisional estimates of capital spending during 1983, at 12.7% ofGDP, are well below budgeted amounts and lower, as a share of GDP, than atany time since 1979. While it is unclear how much of this underexpenditureis due to implementation constraints and how much is the result of the July1983 civil disturbances, it did not result from any systematic effort toreduce or rephase spending on the basis of investment allocation criteria.There was, in fact, a massive underexpenditure in aided projects while therewere large increases in supplementiries to non-aided activities whichincluded the Air Force, the Shipping Corporation, Air Lanka andAdministrative Complexes. About 25% of the Government's capital spendingduring 1983 consisted of transfers to public corporations, including theWater Supply and Drainage Board, Air Lanka, the National Housing DevelopmentAuthority, the Sugar Corporation, the public plantation corporations, thePort Authority, Shipping Corporation, and the Fertilizer ManufacturingCorporation. These transfers are prime candidates for a thorough review oftheir economic justification, especially in the light of the Government'soverall severe budgetary constraints.
24. Balance of Payments. The principal features of balance of paymentsdevelopments in Sri Lanka since 1977 can be read from Table 4. The overallpicture is one of a sharp deterioration in the trade account up until 1980,followed by continued high deficits and increased foreign borrowing. Thecurrent account balance deteriorated from a positive 2.4% of GDP in 1977 to arecord 19.8% deficit in 1980, subsequently leveling off at an average 13.7%during 1981-83. Roughly 60% of the large external deficits during 1981-83have been financed by gross aid disbursements, with the remainder met by adrawdown on reserves and non-concessionary borrowing.
25. As a result, by the end of 1983, net international reserves werenegative while gross official reserves were less than two months of imports.Even after allowing for imports financed by foreign aid, gross officialreserves covered only 2.4 months of imports. The build up of external debthas resulted in a steady rise of the public debt service ratio to 17.7% by1983.1/ In order to strengthen Sri Lanka's creditworthiness in the future,it will be necessary to resolve the basic structural weaknesses-savings-investment imbalance, low export growth-underlying the past performance ofthe economy.
26. Three major factors have contributed towards creating this weakbalance of payments situation: viz. the international recession and weakeningterms of trade, the budget deficit and the low growth in export volumes.
1/ The debt service ratio is defined as the ratio of debt service payments(interest and amortization) on public and publicly guaranteed mediumand long-term debt, including IMF interest charges and repurchases, toexports of goods and services. If debt service on private non-guaranteeddebt and on short-term debt were to be included, the total debt serviceratio in 1983 amounts to 23.6%.
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Table 4: SELECTED BALANCE OF PAYMENTS DATA, 1977-83(in million US$)
Sources: Central Bank; and Ministry of Finance and Planning.
27. With respect to the first point, both the international recession andthe adverse movement in Sri Lanka's terms of trade have contributed sig-nificantly to worsening the trade gap. For example, between 1977 and 1982the price of tea (which accounted for 55% of total exports in 1977) declinedby 23%, while petroleum prices doubled and the unit values of capital goodsimports increased by 36%. The overall terms of trade deteriorated every yearafter 1977 (by approximately 30% between 1978 and 1982), until this wasreversed (by 14%) in 1983. Although the trade balance would still havedeteriorated over this period, the susceptibility of the Sri Lankan economyto wide fluctuations in the terms of trade is an important factor in assess-ing both past performance and future prospects.
28. Secondly, the budgetary deficits and a fairly heavy reliance ondomestic bank borrowing have increased the trade deficit via increases intotal domestic demand. As discussed earlier, total investment increasedsharply after 1977, to an average of approximately 30% between 1981-83. witha very large increase in public capital expenditures. As total nationalsavings have been well below investment levels, a considerable part of totalinvestment had to be funded by increased foreign borrowing.
29. Over the period 1977-80, when the level of public capital expenditureincreased rapidly, the average annual real rate of growth in imported capitalgoods was approximately 60%. As public capital expenditure liveled off, theannual rate of increase in investment goods also declined, to roughly 5% perannum in real terms between 1980-83. The problem is that the investmentsmade with foreign savings have largely been in the public sector and have notyielded the gains in output and exports required to service the associated
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increased external debt. This is partly because the public investmentsnecessarily have been in long-gestating projects (e.g., infrastructure) butalso, and of greater concern, because some investments have been in lowreturn, low priority areas.
30. In addition, the general expansion of the budget deficit has resultedin a rapid growth in imported consumer goods. The real rate of growth inimported consumer goods (excluding rice, sugar and wheat) averaged some 43%per annum over the period 1977-80, subsequently leveling off under theinfluence of tighter monetary and budgetary discipline to an approximate 8%real annual growth rate between 1980-83. The adverse economic effects ofallowing rapid monetary expansion at the same time as import barriers werelifted without adequate incentives to export inevitably resulted in adeteriorating trade balance.
31. The low growth in export volumes has been a third factor underlyingthe balance of payments performance. Aside from garment exports, which areaffected by world import quotas, neither traditional (tea, rubber andcoconut) nor non-traditional exports have performed well. Between 1977 and1983 the average annual growth rate of real merchandise exports has beenapproximately 3% against an average annual growth rate in merchandise importsin real terms of over 10%. This poor performance largely reflects theabsence since the 1977 reforms of government policies designed to create anincentive framework, with some major exceptions such as for paddy or tourism,which would encourage efficient export or import substitution activities.
32. With regard to traditional export crops, both tea and rubber volumeshave declined since 1977 (by 15% and 8%, respectively) with coconut volumesstaying fairly constant. This declining trend resulted from a neglect ofnecessary investments, brought about by a prolonged nationalization processin the early seventies, followed by the creation of numerous and poorlycoordinated ministries, the absence of medium-term planning. and inadequateworker incentives. In addition to these managerial problems, the overallincentive framework, which is largely defined by the high net export taxesand real exchange rate, has provided low to negative margins for both publicand private producers.
33. The real growth of non-traditional exports 11 has also been fairlylow and erratic. After an initial jump following the 1977 reforms, volumesdeclined in 1979 and 1980 with positive growth rates in 1981 and 1982 beingfollowed by a decline again in 1983. Given the small base figures aad dif-ferent price deflators, it is difficult to be precise in dealing with thisbasket of goods; however, the overall trend is not encouraging.
34. Any explanation of the poor performance of non-traditional exports iscomplicated by movements in external markets over which Sri Lanka has nocontrol. However, domestic policies do impinge on export competitiveness,and in terms of two of the most important components in determining thatcompetitiveness, the exchange rate and tariff policy, the Government's record
1! Excluding petroleum re-exports and garments.
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has been inadequate. A recent study j demonstrates that the present tradetax system has established levels of effective protection which are high andnon-uniform with an overall bias in favor of production for the domesticmarket. With regard to the exchange rate, a comparison of price-level-deflated exchange rates with Sri Lanka's major trading partners and exportcompetitors indicates a real appreciation of the rupee ranging from 10% to25% between 1978 and 1982 depending on the comparator countries selected.These distortions have protected inefficient manufacturers and encouragedprivate investors to enter non-traded activities. The result has been sub-stantial growth in the non-traded sector and low growth in non-traditionalexports.
35. Although the Government has introduced several export promotionschemes since 1979 via the Export Development Board, these schemes have addedvery little to incentives. This is largely because the various selectivemeasures that the Government has employed since 1979, such as import dutyrebates and concessionary export finance schemes, have been dwarfed by theadverse effects of the exchange rate and tariff structure.
36. The balance of payments position as of end-1983 does show someimprovement. The lower rate of growth in imports and the significantimprovement in the terms of trade (approximately 14% over 1982) have enabledthe Government, for the first time since 1979, to finance the trade deficitwithout a further reduction in international reserves. The lower rate ofoverall economic growth, the reduced budget deficit and the adoption of amore realistic exchange rate policy have been partially responsible for theslow down in the growth of imports. However, although these developmentsare encouraging, the continuing negative trend in the trade account indicatesthat the structural weaknesses in the economy remain. It is estimated thattotal merchandise export volume actually declined by approximately 4.4% in1983 while merchandise import volumes increased by 3.4%. Thus, while thebalance of payments position has improved in 1983, and is likely to continueto do so through 1984, much of the gain derives from an improvement in theterms of trade. For the future, therefore, it remains imperative to designeconomic policies to stimulate real growth through structural change so as toattain a sustainable balance of payments.
1/ "Effective Protection to Manufacturing Industry in Sri Lanka",Cuthbertson and Khan, September 1981.
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Chapter II: MEDIUM-TERM OUTLOOK
A. The Macro-economic Problem
37. In the past the total resource gap arising from successive budgetdeficits and slow export growth has been financed partly by increased remit-tances and partly, and of more importance, by an increased use of foreigncapital inflows. This strategy has been sustainable to date because conces-sional finance was available and the initial level of debt, especially non-concessionary debt, was low. However, given likely future capital inflows itwould seem that Sri Lanka will not be able to continue to finance its largetrade deficit without, in the medium term, sacrificing economic growth.Gross reserves are roughly equivalent to two months of imports and publiclyguaranteed commercial borrowing has clear limits. Basically, the currentlevel of demand is being sustained by foreign borrowing. Unless outputexpands, so as to make the servicing of the associated debt compatible withSri Lanka's resources, the level of consumption and investment will even-tually have to be cut drastically.
38. To avoid the consequences of such an abrupt adjustment, the objectiveof Government policy should be to restructure the economy away from producingfor the very limited domestic market towards exports. As discussed below, inChapter III, the basic thrust of the required policy package would be to movetowards a neutral incentive framework which would permit the full diversityof Sri Lanka's particular comparative advantage to develop. This, in addi-tion to measures aimed at alleviating other constraints to development, suchas the strengthening of key institutions and the tightening of budgetarymechanisms, should enable the economy to satisfy the current level of demandwithout recourse to a prolonged period of recessionary cuts.
39. However, in the short run, the capacity of the economy to respond toa changed set of incentives may be limited. In these conditions, the res-toration of economic stability will depend upon a period of planned restraintin aggregate demand. The scenario presented beginning in para 44 attempts toillustrate one way I--- which the restraints needed to address the short-termproblems could, when combined with longer-term policy measures, create theconditions whereby the Government's growth objectives can be approximated.
Medium-Term Prospects Without Adjustment
40. The outlook for 1984 is for a further improvement in the currentaccount of the balance of payments because of an additional improvement inthe terms of trade over 1983, and a projected reduction in the budget deficit(from 15% of GDP in 1983 to 10% in 1984). However, if no new policy initia-tives are taken, the economic situation is likely to deteriorate rapidlybeyond 1984. The external deficit would increase due to a subsequent weaken-ing in the terms of trade coupled with the continued stagnation of exportvolumes. For example, traditional export crops are not expected to fullyreverse the past declining trend in output until 1988 even if the Governmentimplements the positive policy measures currently under consideration.Furthermore, neitber garments nor petroleum exports, both of which have ahigh import content, are likely to expand rapidly. The latter is constrainedby the capacity of the refinery and increasing domestic demand, and the
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former is constrained by the current quota restrictions in importingcountries; relaxation of these quotas would clearly improve Sri Lanka'sexport prospects. Lastly, and most importantly, other non-traditionalexports seem unlikely to fill the gap unless the existing anti-export incen-tive framework is reformed.
41. With regard to the budget, it is difficult to see how existingrevenue measures can generate the resources required to meet projected
expenditures. The analysis of the planned 1984 budget, provided in thefollowing section, illustrates the problems. To briefly summarize, thereappear to be four basic problems; firstly, it may prove difficult to hold
both recurrent and capital expenditures to budget estimates. Secondly, theimbalance between current and capital expenditures, which has reduced O&Hexpenditures to grossly inadequate levels, has not been resolved. Thirdly,the budget continues to rely upon across-the-board underexpenditure provi-sions to reduce future expenditure targets. And, lastly, the revenue systemcontinues to rely on discretionary annual measures and high export taxeswhich cannot be sustained in the medium term. Thus, unless the Governmentcarries through with its proposed comprehensive review of the budgetaryprocess (paras 64 and 65), deficits will increase in the coming years raisingthe level of required borrowing, increasing inflationary pressure and worsen-ing the balance of payments.
42. A primary problem of the medium-term scenario without adjustment isan overambitious public investment target. If we assume that the Governmentdoes not want to reduce private investment, the level of public capitalexpenditure planned for in the most recent five-year public investmentprogram appears to exceed resource availability. That is, although thebudget shows a reduced the level of public investment, the new public expen-diture estimates from 1985 through 1987 would generate a total investmentrequirement in excess of the level of total resources available from domesticsavings plus an acceptable level of foreign borrowing. Whether theGovernment's medium-term projections of public investment can be achievedwithout either inflationary domestic financing or additional commercialborrowing is questionable, as they appear to be based on the assumption thatthe terms of trade remain at the very favorable 1984 position. Although thisprovides the additional savings required to balance investment needs withoutrecourse to increased borrowing, the assumption of no change in the terms oftrade does appear extremely unlikely. Thus, given more likely price trends,if the Government's projected public investment level is to be attained, itwould appear that either increased pressure on domestic interest rates willoccur due to increased domestic borrowing or additional foreign commercialborrowing will be incurred. Neither development would be conducive tomedium-term growth.
43. To conclude, without adjustment the medium-term economic positionappears unsustainable. If corrective economic measures are not taken now,expanding deficits will continue to raise the debt service ratio, ultimatelyforcing the economy to achieve the required degree of balance in the externalaccount via slower growth.
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Medium-Term Prospects With Adjustment
44. The more favorable scenario presented here is based upon projectionswhich embody a package of policy measures 11 designed to achieve theGovernment's growth objectives while maintaining a viable external account.In the "adjusted" case, the real GDP growth rate should remain atapproximately 5% in 1984, declining temporarily thereafter until the economyhas gone through the necessary short-run adjustment process. The highergrowth in 1984 reflects both the recovery from the 1983 drought and theincome effect of the terms of trade improvement. However, by 1985 the effectof these factors will have dissipated, the terms of trade are expected todeteriorate and the reduced level of government expenditure will dampendemand. Thus, during the adjustment period, when the Government is attempt-ing to restrain aggregate demand, economic growth is expected to fall toapproximately 4%. If these short-run measures are taken in addition to thelonger-term policy initiatives, then the economy should be well positioned togrow by at least 5% per annum beyond 1987-88. Under this scenario, thecurrent account deficit in the balance of payments should follow a similartrend declining rapidly in the short run (from 12.4% of GDP in 1983 to 8.9%in 1984), and then gradually falling over the medium term. Given the disbur-sement of total concessionary finance projected in para 92, it is anticipatedthat the necessary level of commercial borrowing should be sustainable. Asdiscussed in greater detail below, this scenario should strengthen SriLanka's medium-term creditworthiness, thereby enabling the country to raisethe total external assistance required to attain the Government's growthobjectives.
45. A reduced level of public expenditure is one of the primary measuresunderlying the adjusted scenario. To avoid an increased dependence on non-concessional foreign savings, total investment should decline from 28.6% ofGDP in 1983 to 25% by 1987. In order not to squeeze the private sector andthereby inhibit potential growth areas, the burden of adjusting to this lowerlevel of total investment should fall primarily on the public sector. Publiccapital expenditure would have to decline from the 12.7Z of GDP in 1983 toapproximately 10% by 1987. The adjusted scenario implies maintaining thereal level of public capital expenditures at the 1984 level until 1987, withexpansion thereafter on the basis of higher GDP growth rates.
46. With regard to current expenditure, the earlier arguments concerningthe past neglect of O&M expenditures coupled with the comparatively low levelof public sector salaries indicates a need to increase expenditure levels.However, in order to contain the Government's claim on resources, much ofthis increased expenditure will have to be obtained by reallocating revenuewithin the recurrent budget away from low return uses, such as, e.g., con-tinuing subsidies to public corporations. In these circumstances, currentexpenditures would need to be contained to a ceiling of 211 of GDP.
1/ These policy measures are discussed in both the following sections ofthis chapter, i.e., the budget and balance of payments, and inChapter III.
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Table 5: PROJECTED MAJOR ECONOMIC INDICATORS, 1983-90
47. These adjusted expenditure estimates will require a renewed resourcemobilization effort to reduce borrowing to a sustainable level. It isestimated that revenues will have to increase from the 20.5% of GDP budgetedfor in 1984 to an average 23% for the 1985-87 period and 24% for 1987-90.Although this level of resource mobilization is high for a low per capitaincome country like Sri Lanka, past experience demonstrates that theGovernment can attain these revenue levels. However, this should not detractfrom the Government focusing on the trade-offs involved in claiming moreresources to finance public expenditure as against cutting expendituresbeyond projected levels to free resources for the private sector.
48. The expenditure and revenue levels in this scenario imply publicsavings equivalent to 2% to 3% over the 1984-90 period and a reduction in theoverall budget deficit from an average 17% over the period 1979-83 to 9% overthe period 1984-87 and 7% over 1987-90. This level of deficit can befinanced by the projected inflow of foreign savings plus domestic non-bankborrowing equivalent to approximately 3% of GDP. There would be no need toresort to domestic bank borrowing.
49. However, it should be stressed that the projected deficits in boththe current account of the balance of payments and in the budget are sus-tainable only if the corresponding level of foreign concessionary savingsmaterializes. The fairly high deficits should not be interpreted as repre-senting desirable targets for Government policymaking. Lower overalldeficits and a higher level of public savings will be required if aid flowsdecline or external developments, e.g., the world recovery or the terms oftrade, prove less favorable than currently forecast. The first task, in any
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event, is to control public expenditure, and this must begin with an examina-tion of the budgetary process.
B. The 1984 Budget and Recent Revisions
50. The 1984 budget proposals, as presented to Parliament in November1983, include a sizeable increase in expected revenues over 1983 (27% incurrent prices, 12% in real terms), strict control of current spending,including advance accounts (12% growth in current prices, -1% in real terms)and further restraint in capital spending growth (6% in current prices, -61in real terms). As a result, the overall deficit would decline from 15.01 ofGDP in 1983 to 11.2L.in 1984. Even so, there would still be a need for someforeign commercial borrowing (about Rs 900 million) and domestic bank borrow-ing (about Rs 700 million) to finance the deficit. Of equal importance,there are a number of uncertainties, especially with regard to capitalexpenditures, which could easily lead to a considerably larger overalldeficit than is envisaged by the budget. Subsequent revisions to theoriginal budget estimates have led to a further substantial reduction in theoverall deficit to the equivalent of 10.0% of GDP, which would permit asignificant net repayment of bank borrowing by the Treasury, although manyof the uncertainties remain. The following paragraphs first review somemajor features of the 1984 budgetary estimates as presented to Parliament inNovember and then discuss the recent revisions.
Table 6: SUMMARY OF BUDGETARY OPERATIONS, 1983-84
Provisional 1983 Budget 1984 Revised 1984Rs Mn. % of GDP Rs Mn. Z of GDP Rs Man. of GDP
51. Several new revenue proposals were introduced in November, includingthe following major ones. Two temporary (one year) revenue measures weretaken in response to the additional expenditures resulting from the July 1983
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disturbances: a rehabilitation levy of 1% on the gross remuneration of allemployees in the public and private sectors, expected to yield Rs 200million, and a rehabilitation surcharge of 10% on income taxes, expected toyield Rs 400 million. The rate of turnover tax on general trading wasreduced from 4% to 1% while a number of rates at the point of import ormanufacture were raised; largely because the lower rate on general tradingis expected to lead to an enormous reduction in evasion, the additionalrevenue from these rate changes is projected at Rs 400 million. This willclearly require a substantial administrative effort. The exemption limit onincome tax for individuals has been raised to Rs 18,000 and the tax bandshave been adjusted to reflect inflation. The resulting revenue loss isestimated at Rs 100 million. On the other hand, a major effort to reducetax evasion through strengthening tax administration and collection isenvisaged which would yield an additional revenue of Ru 300 million.
52. The projected extra revenues from improved tax administration couldbe on the optimistic side. Administrative reforms take time under the bestof circumstances and there may have to be a considerable strengthening of thestaff of the Inland Revenue Department. Even assuming, however, that thebudgetary revenue estimates were on target, the buoyancy of the revenuesystem did not change much; the raising of the exemption limit on income tax,by itself, in fact narrowed the tax base. The budget implies a revenue toGDP ratio of 18.4% for 1984 as compared with 17.2% in 1983. However, therehabilitation levy and surcharge (Rs 600 million) are temporary, and thecollection of import duties on government imports (Rs 585 million) as well asthe transfer from the Ceylon Petroleum Corporation to cover the additionalcost of kerosene stamps (Re 210 million) are new entries. Subtracting theseitems from projected revenues would yield a revenue to GDP ratio of 17.4%,only marginally above 1983.
53. The 1984 capital budget proposals raise a number of issues which arecause for some concern. While an effort has been made to lower the overalllevel of public investment more in line with available resources, this hasbeen achieved in a manner that is both untenable and unsatisfactory. Asexplained further below, the assumed level of underexpenditure (expectedshortfalls in spending from approved amounts) is likely to prove too high,and the composition of public capital spending has been shifted from foreignaid-financed to non-aided projects, increasing the financial burden on theGovernment.
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Table 7: PROPOSED CAPITAL EXPENDITURES, 1984 a/(Rs million)
1983-87 PublicInvestment Program 1984 Budset
Foreign- Non- Foreign- Non-Aided Aided Total Aided Aided Total
Total 13,752 6.555 20,307 12,360 7.132 19492Underexpenditure
Provision 1,625 2,924
Net Total 18,682 16,568 a/
Note: Details may not add to total due to rounding.
a/ On Treasury basis; differs slightly from data in other tables which are onIMF basis.
Source: Ministry of Finance and Planning.
54. As a share of GDP, capital spending is budgeted at 11.3% in 1984versus an estimated 12.7% in 1983, a significant reduction from what wasalready an unplanned low level of spending in 1983 as a result of the Julydisturbances. A more meaningful comparison is with the 1984 provisions inthe 1983-87 Public Investment Program (PIP). The PIP envisaged 1984 capitalexpenditures at Rs 20,307 million, gross of underexpenditure, and these havenow been cut to Rs 19,492 million in the budget or by Rs 815 million. If onetakes account of the differing exchange rate assumptions (US$=Rs 23 in PIP,versus US$1=Rs 26 in the budget) and of the inclusion in the budget of Rs 585million for duties on government imports which were not included in the PIP,the cut is significant. In addition, the 1984 budget includes a provisionfor underexpenditure of 15% versus 8% in the PIP.
55. Although the cuts in the 1984 budget from the original PIP provisionfor 1984 were not across the board, they were far from desirable (Table 7).While foreign-aided projects were cut by about 10% on average, the allocationfor non-aided projects was increased by 9%. This has increased the imediatefinancial burden on the Government in carrying out its investment program.Also, several of the increases for non-aided projects could be questioned oneconomic grounds, including substantial transfers to public corporations, thedecentralized budget and defense. Moreover, by prolonging the disbursementperiods of ongoing aided projects, future aid receipts are jeopardized and,to the extent that the cuts in aided projects include local cost financing,the country loses free foreign exchange.
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56. It is far from clear that the 15% underexpenditure assumed in the1984 budget will be realized. The assumption derives from actual experienceduring 1983 which was clearly unusual. The underexpenditure is expected tomaterialize on activities that have already been subjected to substantialcuts, as indicated above. Thus, e.g., an underexpenditure of 15% on foreign-aided projects on top of the 10% cut below the PIP would mean a 27% reductionin spending on those projects below PIP provisions, an unrealistic and inmany cases undesirable outcome. Looked at differently, it is relatively easyto identify individual items in the budget for which no underexpenditure islikely. They would include, e.g., Victoria (Rs 1,536 million), Kotmale(Rs 1,304 million), Randenigala (Rs 938 million), SLCTB (Rs 600 million),NDA (Rs 584 million), Power VII (Rs 250 million), decentralized budget(Rs 840 million), GCEC (Rs 60 million) and the Shipping Corporation (Rs 250million) for a total of Rs 6,362 million, representing 33% of the capitalbudget (Treasury basis). This would imply a 22% underexpenditure on allother projects/items in the budget, even though many of these have alreadybeen cut substantially from PIP provisions.
57. The above not only throws serious doubts on whether capital spendingcan be contained to budgeted amounts, but also serves to underscore thepossible undesirable consequences on resource allocation resulting from theunderexpenditure provision mechanism, which is a major weakness in thebudgetary process in Sri Lanka. It is an expression of the inability toclosely monitor and control capital spending by allowing for large margins oferror and consequently substantial misallocation of resources, because it isa clear indication that spending priorities have not been fixed. It also isa potential source of budget indiscipline in that higher amounts have beenvoted and approved for individual programs than allowed for in the budget,and there is no legal restraint to spending those amounts. In practice, theTreasury has ensured underexpenditure and enforced budget discipline througha calculated, slow release of funds. It would clearly be a much sounderbudgetary practice to contain the size of the capital budget to availableresources and allocate those resources according to an agreed set ofpriorities.
58. There remains an ambivalence about the definition of new projects.Both the 1983 and 1984 budget speeches stressed that no new projects would beintroduced, in order to be able to finish what is ongoing before taking onsomething new. While donors are as much to blame as Government, there arenew activities started in 1983 which are being allowed to gather momentum in1984, while ongoing projects are being subjected to cuts which cannot alwaysbe justified on either economic or implementation capacity grounds.Investment allocation criteria are being developed now and should be effec-tively introduced as soon as possible so as to identify real spendingpriorities, provide projects crucial to maintaining growth in the short tomedium term with adequate funding, emphasize projects nearing completion aswell as those with 100% financing, and wean out other activities that can besafely delayed without adverse impact on the economy.
59. With regard to the longer term, the overall thrust of economic policyproposals outlined in the budget speech to achieve stabilization and maintainthe momentan of growth is generally in the right direction, with emphasis onthe importance of maintaining a realistic exchange rate policy, carrying out
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structural reform and ensuring law and order. In particular, theGovernment's policy proposals stress improvement in the quality of publicinvestment and in the performance of public enterprises, priority to opera-tion and maintenance expenditures and the creation of an appropriate incen-tive framework for the private sector to strengthen export development andefficient import substitution. As discussed in more detail elsewhere in thisreport, however, given the current financial situation and outlook, and theconsiderable catching-up which remains to be done in order to rectify theincentives structure, the projected real growth rate in GDP of 5.5% p.a.during the next few years appears optimistic. With respect to public finan-ces in particular, a mechanism to improve the quality of public investment, asystem to provide for needed operation and maintenance expenditures, and arevised taxation system to ensure adequate revenues all are still in thedevelopmental stage.
Subsequent Revisions
60. The revisions in the 1984 budget authorized by the Cabinet duringearly 1984 would, together with upward revisions in expected export taxrevenues, result in an improvement (reduction in the overall deficit) of someRs 1.9 billion over the November 1983 proposals, made up as follows:revenues are up by Rs 2.4 billion, current spending (including advanceaccounts) is reduced by Rs 0.3 billion and capital spending is up by Rs 0.8billion. For the first time in several years, the Government would be gener-ating budgetary savings equivalent to about 2% of GDP to help finance itsinvestment program.
61. Revenues are now forecast to rise in 1984 to the equivalent of 20.1%of GDP. The main increases over the November budget are in tea ad valoremexport duty (Rs 1,400 million) and specific duty (Rs 90 million), rubber duty(Rs 350 million), import duties (Rs 300 million) and contributions frompublic corporations (Rs 350 million). Recent price trends for tea wouldindicate that the tea revenue estimate may still be on the conservative side.The estimated increase in import duty collections is based on someadministrative changes as well as higher sugar duties. The contributionsfrom public corporations result from a decision that the corporations pay50% of net after tax 1983 profits to the treasury during 1984.
62. Whereas 1984 revenues are now estimated to be an impressive 2.9Z ofGDP higher than in 1983, it must be recalled that some of the increases aretemporary, e.g., rehabilitation taxes, while others are new entries, e.g.,profit transfers by public corporations, duties on government imports and CPCtransfers: these add up to the equivalent of 1.2% of GDP. The remainderof the increase derives basically from administrative improvements and espe-cially from export taxes: the latter rise by 1.1% of GDP in 1984 over 1983.This illustrates the inherent high vulnerability of Sri Lanka's taxes.Income tax revenues (minus the rehabilitation taxes) are still lower than inprevious years as a percent of GDP, as are "other" taxes, thus necessitatingregular ad hoc rate increases or new measures to maintain a desirable levelof revenues.
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Table 8: GOVERNMENT REVENUES, 1983-84
Provisional 1983 Budtet 1984 Revised 1984Rs Mn. Z of GDP Rs Mn. % of GDP Rs Mn. Z of GDP
of which: Transfer CPC - - (210) (0.2) (210) (0.2)ProfitTransfer PC a/ - - (-) __..) (350) (0.2)
Total 21,088 17.2 26,698 18.4 29,115 20.1
a/ Public Corporations.
Source: Ministry of Finance and Planning.
63. The Rs 300 million decline in current spending (including advanceaccounts) in the revised estimates as compared with the November budget isthe result of several substantive changes largely offsetting one another inthe aggregate. The allocation for advance accounts has been increased byRs 350 million. Supplementary current expenditure allocations have risen bymore than Rs 1,000 million, much of it to grant additional subsidies topublic corporations, including SLCTB, CEB, Textiles, Cement and Shipping,which runs contrary to the Government's stated policy of reducing such sub-sidies and encouraging more financial discipline. This increased allocationhas been largely offset by a reduction in the Ministry of Finance's provisionfor contingencies. The net savings in current expenditures results from theCabinet decision for each Ministry to identify 2% savings in recurrentexpenditures, which comes on top of the 2% underexpe2diture provision. Thesesavings in current spending may be difficult to obtain and could beundesirable. Items such as interest payments or wages and salaries are fixedobligations, while transfers and subsidies have proven hard to cut, leavingopen the possibility that savings may be looked for in what is already adeficient level of operation and maintenance spendivg.
64. Capital expenditures are forecast to increat- by about Rs 800 millionabove original budget estimates, a sum roughly equivalent to the addedappropriation for the SLCTB, which was omitted from the original budget, andan increased allocation for Randenigala. Both of these are ongoing aidedprojects. At the same time, some new allocations have been added (airportdevelopment, railways), but these increases have been offset by an evenhigher underexpenditure provision of 15.7%. The Committee of DevelopmentSecretaries has been charged with the task of identifying specific cases ofrephasings of projects so as to avoid the need for across-the-board anduneconomic cuts in capital spending to achieve the underexpenditure target.The success in this endeavor will constitute a significant step towardsimproved budgetary practices.
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65. There have been encouraging institutional developments affectingbudgetary management in recent weeks. A new committee on economic policy hasbeen created, comprising the President, the Prime Minister and the Ministerof Finance and Planning, empowered to enforce financial discipline and ensurethat Cabinet decisions on economic policy are implemented. A comprehensiveinter-ministerial exercise is ongoing, designed to ensure adequate expendi-tures on operation and maintenance which, st-iting in 1985, will appearexplicitly as a separate category of spendi,., in the budget. Finally, theCabinet has laid down criteria for project selection for inclusion in futurepublic capital budgets which should remedy a major weakness. As discussedabove, however, the 1984 budget does not yet reflect these promising develop-ments and still contains many shortcomings. Decisions during the comingweeks will be a test of the Governmentos resolve to improve upon its finan-cial programming.
C. The Balance of Payments Outlook and Creditworthiness
66. The important features of the projected balance of payments, asderived from the "with adjustment" scenario, can be read from Table 9. Theoverall trend is one of significant improvement in 1984 being followed by amore gradual improvement based upon a higher real rate of growth in exportsagainst a background of moderate import growth and gradually declining termsof trade. The Government should be able to add to international reserves in1984 for the first time since 1979, as a result of both export volume (due toimproved weather conditions) and terms of trade improvements. However, asLhe effects of these short-run developments dissipate, further reductions inthe current account deficit depend crucially on the growth of non-traditionalexports plus the rehabilitation and stabilization of traditional exports.The following pages consider first the sector growth rates required if theeconomy is to grow at the targeted rate, then the implied aid requirements,followed by, in Chapter III, a discussion of the policy issues that theGovernment needs to confront to set the economy on a path towards sustainablemedium-term growth.
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Table 9: BALANCE OF PAYMENTS PROJECTIONS, 1982-90(Millions of US$ at Current Prices)
67. Merchandise Exports. Record tea prices, the general improvement inprimary commodity prices, and volume growth in tea as a result of the rainsin late 1983 and early 1984 should boost export earnings in the near termfrom the major traditional exports (tea, rubber and coconuts). However, theunderlying volume growth rate for these commodities is expected to be fairlylow up until at least 1988 due to the long-gestating nature of theinvestments. Although account has been taken of the expected volume declinein coconut exports of approximately 30% for 1984 (partly drought-induced andpartly as a result of licensing restrictions), it is anticipated that, beyond1984, the Government would implement policies to increase production andexports.
68. The overall trend in tree crops is that by 1985 total export volumesshould be restored to their 1982 level, after bottoming out in 1983.Thereafter, a 3% real rate of growth is expected, due to favorable interna-tional prices, the adoption of taxation/subsidy measures designed to sig-nificantly increase producer margins, and in the medium term, direct publicinvestment and management reforms designed to rehabilitate state plantations.
69. Two other major export activities, garments and petroleum, may alsohave limited growth potential. The further expansion of petroleum exports,which are basically re-exports of by-products, are constrained by tLeprocessing capacity of the domestic refinery. Some growth in the near termis possible as the refinery moves towards maximum capacity utilization andthe new hydro-units reduce the domestic demand for particular by-products.But after the end of the decade the real level of petroleum re-exports can beexpected to remain constant and then decline due to increased domesticdemand.
70. Garment exports are currently constrained by import quotas in thefinal markets of the USA and EEC. Sri Lanka has, in the past, been treatedfavorably in the allocation of quotas; starting from a small base garmentexports have grown at an average annual real rate of over 40% between 1978and 1983. Even recent growth rates have exceeded the increase in quotasprobably due to expansion into new markets..1 While it is difficult to seesuch rapid growth recurring in the future, assuming the costs of productionin Sri Lanka remain competitive, a more moderate expansion of approximately8% per year in real terms should be attainable. To the extent thatGovernment policies help reduce Sri Lankans' relative production costs vis-a-vis competitor countries via restrained domestic inflation and exchange rateadjustments, garment exports may well exceed this fairly conservativeestimate.
71. However, Sri Lanka must look towards growth in the "other" exportactivities of minor agriculture products, industrial goods and minerals ifthe overall rate of economic growth is not to be constrained by the insuffi-cient growth momentum provided by traditional exports. The past exportrecord of both industrial goods and minor agricultural commodities has beenfairly erratic, being heavily influenced by the performance of one or two
1/ In constant 1982 prices, garment exports grew by 10% in 1982 and 26%in 1983.
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relatively large activities in relation to a fairly small total base figure.Nevertheless, both have registered some growth of about 5% between 1977 and1983. Mineral exports, on the other hand, have remained stagnant, decliningas a share of total exports from 4.3% in 1977 to 3.0% in 1983.
72. The positive record of some manufactured and agricultural commoditiesduring a period when the overall incentive structure continued to favorproduction for the domestic market indicates that, given a more neutralincentive framework, higher rates of growth are possible. Although thepresent analysis reflects the fact that the short-run response to improvedexport incentives will be constrained by supply-side factors, the analysisalso demonstrates that if the Government's medium-term growth objectives areto be attained, non-traditional exports must attain a minimum 8% to 10%annual growth rate over the next few years.
73. Merchandise L=morts. The significant slowdown in the rate of growthin merchandise imports achieved in 1983 is anticipated to continue in 1984and 1985 due to further restraint in public investment and a continuation ofthe Government's more flexible exchange rate policy. Although, as discussedbelow, some imports will necessarily expand, the restraint in public spendingcoupled with adjustments in the overall incentive framework designed tostimulate efficient import substitution should restrain the growth in importsduring the period of adjustment.
74. The real level of both capital goods and petroleum, the two mostimportant import categories declined in 1983 by 5% and 91 respectively, withthe level of intermediate goods, the next largest import category, stayingconstant. The restraint in investment in 1984 is expected to lead to somefurther decline in capital goods imports; however, much of this saving willbe offset by an expansion in petroleum imports as the refinery is operated atincreased capacity./ Intermediate goods should record some growth, but thisis anticipated to be moderate due to a fairly low rate of growth in themanufacturing sector.
75. Beyond 1984 the level of capital goods imports should remain fairlyconstant in real terms until 1987 as the economy adjusts to a lower level ofinvestment. As private investment is less importhapital-intensive thanpublic investment, a reduction in the proportion of total investmentaccounted for by public expenditure should also assist in moderating thetotal demand for imported capital goods.
76. The demand for intermediate goods, however, is anticipated to expandin order to provide the necessary inputs to the existing capital stock. Forexample, fertilizer imports are anticipated to increase by more than 50% in1984, largely due to the suspension of production at the domestic plant.Indeed, given Sri Lanka's natural resource base, any significant increase ineconomic growth will necessarily entail an expansion in imported intermediateinputs. This should not present a problem if the imported inputs are used inthe efficient production of tradable commodities.
IJ The refinery was closed for a few months in 1983 due to repairs andmaintenance work.
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77. With regard to food imports (rice, wheat and sugar), the future ismore uncertain. Due to the flooding of certain paddy areas, a provision toimport approximately 50,000 metric tons in 1984 has been allowed for.However, .3iven more stable weather conditions and the utilization of the newMabaweli lands, rice imports should become negligible beyond 1987.1/ On theother hand, wheat grain imports are anticipated to expand, but much dependson the availability and price of rice. The level of sugar imports, however,should decline as several new projects (Sevanagala, Pelwatte) come intooperation.
78. The future growth in imports of "other" consumer goods (whichaccounted for 17% of total non-petroleum merchandise imports in 1983) isheavily dependent on future Government policy. Although the present analysisanticipates a 15% real increase in "other" consumer goods for 1984, this rateof growth is expected to decline subsequently due to a reduced budgetdeficit, coupled with a continuous review by the Government of theappropriate BTT rates and exchange rate. Without these policy changes thegrowth in consumer goods will exert continuous pressure on the balance oftrade, eventually jeopardizing the Government's open economic strategy.
79. The overall trade deficit for 1984 is likely to show a significantimprovement over 1983, declining from 16.6% of GDP to approximately 12.6%,although much of this improvement is due to the short-run increases in teaprices and volumes. However, the expected deterioration in the terms oftrade beyond 1984 would make a further reduction in the trade deficit moredifficult to achieve. In fact, the trade deficit is likely to widen again in1985 and then gradually narrow towards the end of the decade if theGovernment implements a corrective policy package.
80. Net non-factor services should continue to make a growing positivecontribution, as tourism recovers from the setback caused by the Julydisturbances. Total tourist arrivals in 1983 were 17% below 1982, but bythe end of the year bookings began to approach the previous year's levels.Due to an increased advertising campaign, significantly reduced hotel rates,and exchange rate adjustments, total arrivals should increase in 1984 andsteadily expand thereafter, given a stable political situation.
81. The trend in net factor income is also encouraging in the short run.Due to the anticipated reduction in short-term foreign borrowing plus theaccumulation of international reserves in 1984, debt repayments should easeand factor receipts from reserves should increase in 1985. However, eventhe scenario described above generates a need for further foreign borrowingwhich will maintain debt service payments at fairly high levels in the mediumterm. On the other hand, the continued migration of labor, particularly tothe Middle East, should maintain the positive growth in net privatetransfers.
11 In 1983 rice imports accounted for only 2.2% of non-petroleum merchan-dise imports.
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82. The overall result is a decline in the current account deficit from15.2% of GDP in 1982 to 12.4% in 1983 and 8.9% in 1984. As noted earlier,deteriorating terms of trade beyond 1984 prevent a further decline in thecurrent account deficit in 1985, with a very gradual improvement thereafteras volume growth more than compensates for continued adverse price movements.
83. On the basis of the above scenario for the current account in thebalance of payments, Sri Lanka's creditworthiness should be strengthenedconsiderably in the coming years. Some of the major indicators are shown inTable 10. As discussed earlier, between 1980 and 1983 the economy had con-tinned to grow and investment had remained at a high 30% of GDP largelybecause of a very high level of foreign savings, equivalent to 15% of GDP.Accompanying a poor export performance was a low level of national savingsand excessive demand, especially investment demand. Much of the investmentwas also fairly low yielding, because of an inappropriate incentives'environment, or slow-yielding because of the preponderance of public sectorinfrastructure development. In addition, the composition of foreign savings,i.e., the financing of the current account deficit, deteriorated during thoseyears. Earlier, in 1978-79 the current account deficit was not only fullyfinanced by concessionary borrowing and grants but also international reser-ves were being built up. In contrast, during 1980-83, a breakdown of thefinancing of the current account deficit (plus debt amortization) was asfollows: 521 was financed by concessional aid and grants; 131 by privatedirect investment and short-term borrowing; 101 by drawing down reserves; and25% by commercial borrowing. By the end of 1983, net international reserveswere negative, gross official reserves covered about two months of imports,and the debt service ratio had risen rapidly from 11.31 in 1980 to 17.7% in1983. Debt service, as a share of GDP, amounted to 4.71 during the latteryear compared to 2.91 in 1980. Given these developments, Sri Lanka's credit-worthiness had suffered. While the current improvement in the terms of tradeis giving the country some breathing space, this- is not likely to last.Without a substantial shift in policies, both with regard to investment(level and composition) and with regard to the incentives' framework,economic growth would slow down significantly and the country-s creditworthi-ness would become marginal. On the other hand, the balance of paymentsprojections in this report illustrate how such a shift in policies wouldresult in an improvement in creditworthiness.
84. The first requirement is for economic stabilization through a reduc-tion in excess demand. As there are limits to possible or desirable reduc-tions in consumption, the major burden of the adjustment will have to fall oninvestment demand and must be initiated imediately. It is anticipated, inthis connection, that the Government will not only use taxation to capture alarge part of the windfall gain of high tea prices but also seize the oppor-tunity for a substantial build up of reserves from the precariously low levelof end-1983. This is vital to reduce domestic inflationary pressure and toprovide a cushion against future short-run adverse price movements. In thescenario in this report, future investment levels have been constrained by afeasible level of national savings (which among others will require addi-tional public sector resource mobilization), the likely availability offoreign capital and a manageable burden of external debt.
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Table 10: PROJECTED TOTAL FOREIGN EXCHANGE REQUIREMENTSAND FINANCING, 1983-90
1983 1984 1985 1986 1990
Current Account Deficit 645 503 569 571 818
Debt Amortization 86 127 151 188 284
Total Foreign ExchangeRequirements 731 630 720 759 1,102
Gross Official Reserves inMonths of Imports 1.9 2.4 2.5 2.5 2.2
Debt Service Ratio b/ 17.7 16.8 18.2 19.6 16.7
a/ Includes net credit from DIF (and errors and omissions in 1983).b/ As percentage of exports of goods and services. See footnote .f,
para 25.
Source: Bank staff estimates.
85. Of equal importance, future economic growth and strengthened credit-worthiness will depend on shifts in the composition of investments with moreemphasis on quick-yielding and private sector investments. Public sectorcapital outlays should be confined to essential infrastructure and to invest-ments complementing past expenditures. In addition, as discussed inChapter III, it is crucial that a number of policy measures are taken toimprove the overall incentives' framework for the private sector. Inparticular, in the medium term, the maintenance of a sustainable totalresource gap and debt service ratio is dependent upon the Governmfnt adoptingpolicies now which will generate the required real growth in exports in thefuture, as illustrated by the balance of payments trends. The importantmedium-term trend for Sri Lanka is that export volume growth will have tocompensate for both an already sizeable deficit plus a possible deteriorationin the terms of trade beyond 1984, if the external deficit is to remainmanageable. Moreover, much of this growth will recessarily fall on non-traditional exports due to the relatively low short-run supply elasticity oftree crops and the external market constraints on garments. To the extentthat non-traditional export growth can exceed the 8Z to 10% growth rate used
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in the projections, then the external deficit will decline further, GDPgrowth wiLl be enhanced and Sri Lankas creditworthiness will strengthen.Thus, the projections in this report do not represent a target, but ratherthe minimum level of adjustment needed to sustain medium-term growth.
86. It is also clear that beyond 1984 Sri Lanka will require substantialforeign assistance in order to finance the near-term costs of adjustment.Even if the Government implements the policy measures needed to restoreincentives, and thereby the growth potential of export activities, non-traditional exports will take time to react. If a rapid rundown of theinternational reserves accumulated in 1984 and a renewed build up of non-concessional foreign borrowing is to be avoided, foreign assistance should bemaintained at high levels. The following paragraphs discuss first the pastrecord on aid commitments and disbursements, and second the recommendedfuture level of commitments that will be necessary if Sri Lanka's tightmedium-term external account position is not to jeopardize sustainable long-term growth.
D. Past Aid Flows and Requirements in 1984185
Aid Commitments and Disbursements, 1977-83
87. The aid community has responded enthusiastically to the Government'sdevelopment efforts in recent years. The overall level of aid commitmentsincreased from $250 million in 1977 to a record of $815 million in 1981,equivalent to $55 per capita. Disbursements grew much more slowly and therewas a rapid build up of the aid pipeline to around $1,630 million by the endof 1981. With the need to curtail public capital spending during 1982-83,both because of implementation and domestic financial constraints, commit-ments declined to $550 million in 1982 and $370 million in 1983, haltingfurther increases in the pipeline. There was also a significant shift in thecomposition of aid commitments: in 1977-78 project aid accounted for about50% of total commitments, but this rose to 77% for the period 1979-83 largelyreflecting the emphasis on increased capital spending in the Governmentosbudget. The Accelerated Mahaweli Program has played a dominant role in theaid picture, accounting for 42% of all project aid comitments during thepast five years.
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Table 11: AID COMMITMENTS, 1977-83($ million)
1977 1978 1979 1980 1981 1982 1983
Food Aid 23.2 57.5 38.9 39.4 40.2 63.5 64.4 a/Commodity Aid 96.3 145.7 114.8 82.8 101.0 83.7 33.8Project Aid 130.0 196.9 415.0 505.0 675.3 407.3 270.8
88. Because of the long-gestation nature of the Mahaweli program, donorsagreed that commitments to that scheme should be additional to normal aidflows, and to a large extent this objective was achieved. Non-Mahawelicommitments during 1979-81 averaged 11% in nominal terms above the 1978 leveland 73% above the 1977 level. At the same time there was, also within thesub-total of non-Mahaeli aid commitments, a substantial shift from non-project to project aid. In other words, a rapid build up of the Mahaweliproject aid pipeline during 1979-81 was accompanied by an equally rapidincrease in the non-Mahaweli project aid pipeline. As initial underestima-tion of costs and subsequent high price escalation greatly increased thecosts of the Mahaweli program, large financing gaps resulted, necessitating asqueeze on other investments so as to avoid inflationary finance. Theseother investments, however, had also gathered momentum and were also donorsupported. As the financial strain on the economy intensified, the form ofdonor support had to change. There was limited scope for introducing newprojects and it was clearly desirable to increase general budget and balanceof payments support. New project aid conmitments did decline in 1982/83 butthere was no corresponding increase in food and commodity aid.
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Table 12: AID DISBURSEMENTS, 1977-83($ million)
1977 1978 1979 1980 1981 1982 1983
Food Aid 62.7 58.1 36.0 38.4 37.4 34.1 63.2 a/Commodity Aid 83.9 98.1 122.7 102.4 91.8 67.9 63.9Project Aid 57.1 95.0 109.4 185.8 240.2 312.3 326.7
89. Aid disbursements have grown steadily, from $200 million in 1977 to$450 million in 1983, or close to $30 per capita. The slow growth of disbur-sements relative to commitments through 1981 can be explained largely by twofactors: the rapid acceleration in aid commitments themselves which provedbeyond the country's absorptive capacity, and the relative shift over timefrom food and commodity aid towards slower disbursing project aid (Table 13).The overall disbursement rate declined markedly from 40% in 1978 and 30% in1979 to around 20% recently, with less than half of the decline explained bychanges in the composition of aid. The disbursement rates of individualtypes of aid have varied quite significantly.
90. In the case of project aid, the decline in the disbursement rate isbasically attributable to non-Mahaveli project aid. During 1978-80, lineministries devoted most of their efforts to introducing new projects ratherthan implementing those which had already been approved; as a result, disbur-sements on ongoing projects suffered. Subsequently, when budgetary controlwas strengthened, disbursements have been constrained by large cuts in non-Mahaweli capital expenditures. Project aid disbursements have also tended tolag as a result of budgetary procedures related to the reimbursement bydonors of local cost expenditures. There are many instances where work hadbeen done by line ministries under budgetary allocations from theConsolidated Fund, but the reimbursement claims to donors tended to lag.Mahaweli aid, on the other hand, has generally disbursed well, an indicationof the high priority being attached to the program and the fact that most of
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the aid is going towards financing obligations to foreign contractors who areoperating under tight schedules.
91. The declining disbursement rate for commodity aid during the lastcouple of years is cause for concern, especially because, in principle, thisis the type of aid which Sri Lanka needs the most. Disbursements have sloweddown so considerably that, even though (or because of it) new commitmentshave also declined, the undisbursed pipeline has nevertheless grown during1982 and 1983. It is clearly essential that both Sri Lanka and donors takeevery measure to ensure that this vital type of aid can be used more rapidly.On the part of Sri Lanka, this means taking steps to ensure that whenevercommodity aid is appropriate and available to finance certain imports, thatit be used. There has been an increasing tendency in recent years for theend-users of commodity aid to avoid the relatively complex proceduresassociated with it by going directly to the banking system for foreignexchange. While this may indeed make importing easier for the individualimporter, it is not in the best interest of the country as a whole. TheGovernment should therefore continue to ensure that aid-financed imports aresufficiently attractive to justify their use. On their part, the donorsshould attempt to place as few restrictions as possible on their aid to allowSri Lanka maximum flexibility and to ensure Lhat the aid can in fact bereadily utilized. Food aid, in contrast, disburses very quickly due both todonors commitment procedures and the relatively few institutions involved inSri Lanka, and continues to provide one of the quickest and most effectivesources of budget and balance of payments support.
Aid Requirements, 1984-85
92. Aid requirements during 1984 and 1985 are determined by a varietyof factors, including the decline in the current -account deficit, the needto take advantage of the tea price boom to build up reserves, the decliningreliance on commercial borrowing and the still relatively large aid pipeline.During 1984 non-concessionary capital inflows are still expected to be fairlysubstantial as a result of commitments already made. At the same time,because the proposed budget cuts fall mainly on aided projects, some slowdownin the growth of aid disbursements appears likely. Spending targets alongwith the need to accumulate reserves would indicate that the required grossdisbursements of aid are $457 million, about the same level as in 1983.During 1985, however, required aid disbursements will rise. The Governmentshould, in 1985, have more flexibility in determining where further cuts inpublic investment should fall. While it is hoped that a reduced level ofpublic investment will contribute towards reducing the demand for commercialborrowing, it is assumed that this reduced level of capital expenditure willbe achieved on the basis of economic criteria. This should result in anincrease in the proportion of aid-financed projects in the total publiccapital expenditure target. The Government needs both to increase disburse-ments from the existing pipeline so as to complete ongoing projects andsolicit new commitments for those priority investments that are currentlyunderfinanced. If this is achieved, required gross disbursements of aidshould increase substantially, to some $540 million. On average, aboutone-fifth of these disbursements will have to come from new commitments.
of which: Official Grants (162) (171) (166) (160)Concessional Loans (252) (283) (291) (380)
Other Capital 299 240 233 175Reserves (- = increase) 27 -1 -110 -50
Source: See Table 10.
93. The aid pipeline, which built up rapidly during previous years, hasdeclined marginally in nominal terms between January 1982 and January 1984,which by itself should result in an increase in the disbursement rate.Consistent with the temporary restraint in public capital spending, newcommitments during 1984 are estimated at $486 million, but are projected atabout $600 million in 1985. There is currently a moratorium on the introduc-tion of new projects during 1984, and the planned increases on spending foroperation and maintenance purposes during 1985 will continue to put pressureon Sri Lanka's public finances. It may at first appear that this would arguefor further restraint in the introduction of new projects in 1985, and thatthe case for food and commodity aid is somewhat weakened by the currentlyrelatively strong balance of payments position. However, as project comit-ments now are primarily for disbursement in future years, the proposed com-mitment levels are fully justified in view of Sri Lanka's medium-term needs,but reflect the assumption that their composition responds to a well-definedset of priorities for public investment. With regard to food and commodityaid, Sri Lanka's balance of payments remains vulnerable to volatile teaprices. The build up of reserves in 1984/85 is essential and, as discussedearlier, the transition towards a more viable balance of payments situationthrough a strengthened export sector is bound to take time and will have tobe supported through non-project aid./ The proposed commitment levels canalso be considered realistic given the likely availability of foreign aid.On a per capita basis they amount to about $31 and $38 respectively for 1984and 1985, below the levels of earlier years in nominal terms.
1/ The assumed total commitment levels imply that the aid pipeline byearly 1986 would be at the same level in nominal terms as in early 1982.
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Table 15: SUMMARY AID PIPELINE, 1984-85($ million)
Non-Mahaweli Mahaweli Food andProject Project Commodity Total
1984Opening Balance 1,005 419 151 1,575New Connitments 216 200 70 486Disbursement from Past
94. Expected commitments for Mahaveli downstream development during 1984amount to $200 million and a further $130 million is recommended during 1985.The present outlook for non-Mahaweli project aid is for $216 million of newcommitments during 1984, and a further $335 million is recommended during1985.
95. If this aid is to support an appropriate public investment program,it is essential that the aid be directed towards those high priority invest-ments which the Government is already committed to undertake. These wouldinclude among others the development of the tree crop sector, rehabilitationinvestments, agricultural diversification, credit lines for the privatesector and development of energy resources.
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Chapter III: MAJOR DEVELOPMENT ISSUES
Introduction
96. The preceding chapters have reviewed events in 1983 and considered,against the setting of developments in 1978-83 and the medium-term outlook,the main economic problems and policy issues now confronting the economy.Broadly speaking the Government is faced with two categories of policyissues. One comprises those problem areas which bear most imediately anddirectly on the central macro-economic problems which continued to be severeduring 1983. These problems relate to the imbalance between investment andsaving, the gathering inflation and the large deficit in the externalaccounts. The second major set of problem areas relate to the need to estab-lish long-term viability in the balance of payments through the developmentof the major productive sectors, so as to reduce dependence on imports, whereeconomically feasible, and to expand export production. There is of course aclose relationship between the immediate problem of economic stabilizationand the longer tern need for structural adjustment, and in a very real senseaddressing the longer term structural problems is an extension of themeasures needed to achieve stabilization in the short run.
97. A successful attack on the short term stabilization problem facingSri Lanka today requires a major improvement in public finances, includingboth an increase in revenues, as wei.l as restraint on the growth in publicinvestment. Reduction in the budget deficit will permit an adequate supplyof credit to the private sector sufficient to allow expansion in activity,while alleviating balance of payments pressure. Among the most effectivemeans of reversing the large deficit in the balance of payments is a flexibleexchange rate policy as well as appropriate pricing policies in the majorsectors of the economy. As noted earlier, the Government made importantstrides during 1983 towards greater flexibility in pricing policy, forexample in the areas of exchange rate policy and energy pricing.
98. Besides these stabilization problems requiring immediate attention,four broad problem areas have been identified as comprising the foundationson which restructuring of the economy must be accomplished so as to ensurelong term viability of the balance of payments. The need for structuralreforms applies especially to budgetary practices, as discussed inChapter II, and to three key sectors: agriculture, industry and energy.
99. The three sectors are examined at some length in this chapter. Forthe budget, the central issue is one of fundamental reforms in currentprocedures. Following liberalization, and with the introduction of theprogram of so-called lead projects, public capital spending soared from 5.7Zof GDP in 1977 to over 19.3Z in 1980. While the Government has, in the lastfour years, recognized the impossibility of sustaining capital formation atthese high levels, the budgetary process has not been adapted to ensure themost effective use of limited resources, given national priorities.Fundamental reforms in the budgetary process are essential if optimal use isto be made of the resources available to the economy in the next severalyears. Among the budgeting and investment planning requisites discussed inChapter II is the need for a tightening of budgeting priorities, whichpresently weaken control over expenditures, and the introduction of a system
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for establishing investment priorities. One of the principal requirements isthe strengthening of the current inadequate process of preparing and approv-ing projects. At present the criteria for appraising and evaluating publicsector projects are formulated rather loosely and implemented 'iaphazardly.There is an urgent need to introduce a rigorous and systematic process ofevaluating project costs and benefits in order to maximize the benefits tothe economy of each new public sector project.
A. Agricultural Sector Policies
Introduction
100. Sri Lanka-s natural resources and climate permit a wide range ofagricultural pursuits, which makes agriculture an important element in anyprogram for the economic development of the country. About 75% of thepopulation lives in rural areas, and agriculture accounts directly for about20-25Z of GDP, 50% of employment, 40% of government revenues and 55-60% ofexport earnings. In addition, much manufacturing, transport and servicesector activity is related to the supply of agricultural iaputs, or to theprocessing and marketing of agricultural output.
101. Agricultural performance since 1978 has been characterized by asubstantial and sustained increase in paddy output, bringing Sri Lanka tothe verge of self-sufficiency in rice. The performance of other field cropshas been mixed; their potential for diversifying the country's agricultureremains to be tapped. Development of dairying has also remained far belowits potential for promoting agricultural diversification. Consequently, thisimportant source of supplemental income for many small farmers and landlesslaborers has been underutilized. The output of tree crops, which is crucialto export earnings, has remained stagnant, while, with a few exceptions, theoutput of minor export crops has fluctuated considerably from year to year.
102. The differing subsector performance can be attributed largely toproducer responses to prevailing economic incentives and, to a lesser extent,to factors such as the weather, the state of infrastructure and marketconditions. Thus, the determined application of strong incentives for paddyproduction and marketing has elicited remarkably positive farmer response.For other field crops (coarse grains, pulses, tubers, oilseeds), farmerincentives as well as institutional support have been weak relative to paddy,thus resulting in their limited adoption. Moreover, potential substitutesfor coconut products (e.g., sesame, groundnuts, soybean, cassava, maize) havegenerally been less attractive due to the competitive impact of low domesticprices for coconut products relative to world prices. Indeed, until theintroduction of some pricing reforms in the 1982 budget, the domestic coconutmarket had remained tightly insulated by an elaborate system of export taxa-tion and quantitative restrictions. The aim of that system was tv stabilizenot only local consumer prices for fresh coconuts and coconut oil, but alsothe local prices of milk via cheap supplies of poonac (coconut meal or copracake) to the livestock feed and dairy industry. Milk prices, furthermore,were maintained at low levels through subsidized imports. As a result, dairydevelopment was constrained by low producer prices, as well as by lack ofinfrastructure, and inefficiencies in collection, processing and marketing.For tree crops, delays in adjusting export taxes and development subsidieshave resulted in weak and unclear signals to producers, leading to poor
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performance not only in short-term production and exports but also inrehabilitation activities that are vital to the longer-term health of thissubsector. In addition, the weak institutional base for the coordinationof tree crop policies and programs has been a significant constraint,although the basic principles for improving the management of the publicestate sector have been agreed upon now.
103. Essentially, the recent experience.of agricultural performance points
to the principal issues which should be addressed in order to exploit theconsiderable potential for further growth and diversification. WhileGovernment policy is committed to promoting producer initiatives--and hasbeen applied successfully in the paddy sector-the incentive framework andthe institutional support system for other subsectors need to bestrengthened, and backed with priority investments. A first step towardsreviewing the overall effects of government policies on agricultural incen-tives was taken in November 1983 when the National Food Policy andAgricultural Prices Committee was formed. The Committee secretariat shouldaccord high priority to organizing the data base and analytical methods forassessing agricultural incentives and formulating recommendations forGovernment action to remove economic distortions. At the same time, theGovernment will need to undertake a number of institutional measures, includ-ing the completion of management and organizational reforms of the JEDB andthe SPC; a review of the role of other public enterprises in agriculture;rationalization of the multiple ministries and other government agenciesinvolved with tree crops; the improvement of extension services forsmaltholders, particularly in field crops, minor export crops and tree crops.In planning investments, the imbalance between Mahaveli and tree crops willneed to be corrected, with more emphasis placed on rehabilitation and modern-ization of investments designed to obtain maximum returns from existingfacilities. Furthermore, the wide range of investment subsidies now avail-able for tree crops should be reviewed and rationalized with a view toproviding appropriate signals regarding the choice of crops, the choicebetween activities such as infilling, replanting and inter-planting, andoptimal cultivation practices.
104. The rest of this section on agriculture first examines principaldevelopments over the last five years, and then outlines key adjustmentissues. For various reasons, the coverage of this section is necessarilyrestricted. Thus, for example, the highly technical nature of issues inirrigation design and management precludes its treatment in this report.Issues in agricultural research and credit are not addressed because cur-rently these are subjects of studies by the Government and some donors.
Performance Since 1978
105. Agricultural performance over the 1977-83 period improved substan-tially with growth in value added averaging over 4.0% per annum, compared toabout 2% per annum during 1970-77. This overall result was buoyed by animpressive increase in paddy output, averaging over 6% per annum, but wasdepressed by virtual stagnation in the tree crops sector. Some trends inprincipal agricultural crops are indicated in Table 2.
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106. The Government's wide-ranging initiatives in the paddy sector haveboosted production to record high levels in virtually every year, despitebelow normal rainfall in some years. Most of the increase in production hasbeen due to increasing yields. Between 1977-82, average yields rose bynearly 30% while gross area sown rose by 4-5%. Probably the major factorwhich has helped to increase yields has been the existence of strong producerincentives resulting from successive increases in the Government procurementprices, adjustments to the retail prices and continued fertilizer subsidies,especially on urea. At the same time, minimal charges were levied in respectof either the recurrent or the capital costs of government irrigation, andthe paddy sector remained remarkably free from other direct taxes and levies.The Government, moreover, opened up paddy marketing and processing to theprivate sector--which responded favorably to the profitable opportunities--and genuinely curtailed the role of the state in the rice trade. Through theGuaranteed Purchase Scheme (GPS), the Paddy Marketing Board now serves mainlyto maintain a floor price for paddy while the Food Commissioner's Departmenteffectively maintains a ceiling price by importing quantities equal toexpected shortfalls and selling on a cost-incurred basis.
107. With increased availability of rice, and generally higher incomes,it was only to be expected that demand, and production incentives, for theless preferred substitute field crops (maize, sorghum, millet) would decline.Sri Lankan consumers have thus been well-served by the rapid improvements inpaddy incentives, production and marketing. There are, however, a number ofother nutritionally and economically viable field crops which could have beenpromoted with appropriate incentives and institutional support: for example,pulses, oilseeds and high-value cash crops such as onions, potatoes andchillies. The production of these crops was impeded by inadequate extension,marketing and storage facilities; by wide seasonal price fluctuations; andthe occasional large imports, by the Cooperative Wholesale Establishment(CWE), intended to lower consumer prices. Thus, despite the operation since1979 of a floor price scheme for some of these crops, producer response hasbeen mixed. Producer response remained low also because of the relativelyhigher returns obtainable from paddy and, in the case of edible oilseeds andanimal feed crops, because of the competitive impact of low-priced coconutproducts.
108. Table 16 below, which gives data for major growing areas, indicatesthat, with some exceptions, financial returns to paddy are generally moreattractive in both rainfed and irrigated farming._/ Correspondingly, thedata in Table 16 reveal the limited diversification of field crop agriculturewhich has occurred so far. Compared to paddy, which is seen to be grown inevery district, the spread of other crops appears to have been very limited.Yet, as described in a recent study, there is considerable physical potential
1! The notable exceptions, which appear from the particular data for the1982/83 Maha, are: potatoes and red onions in Jaffna and Trincomalee,where these crops are grown on a highly mechanized and intensivelyirrigated commercial basis; irrigated potatoes in Nuwara Eliya andBadulla, where the climate is particularly suitable and sound culturalpractices have been developed; and irrigated chillies in Kurunegala,which obtain high yields from intensive and sound cultural practices.
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for diversification through stabilized upland cropping in the longer-term, aswell as through the introduction of these crops to irrigated rotation as ameans of maximizing returns from limited Yala water supplies.1/
109. Dairying also has considerable potential for diversified productionin the Mid and Hill country of the Wet Zone, and could become a major focusfor developing integrated crop-livestock farming systems in the Dry Zone. Asyet, this potential has not been realized. By latest estimates, domesticmilk production currently is about 400,000 litres per day, with imports ofdairy products providing liquid milk equivalent of another 400,000 to 500,000litres per day to meet domestic demand. Here again, pricing policies havebeen a major disincentive to development. Low milk prices for consumers weresupported by subsidized imports while dairy producer prices (Rs 2.00 toRs 2.80 per litre before March 1983) remained well below costs of production(Rs 2.55 to Rs 5.33 per litre). Meanwhile, low feed prices-particularly forpoonac--over a long period encouraged dependence on purchased feed, anddiscouraged the development of grazing resources, production of alternativefeed crops (e.g., maize, cassava) and the development of modern private feedindustry. However, in March 1983, the Government took major steps todiminish the distortions in milk pricing. Producer prices were raised toabout Rs 3.20 per litre; consumer prices for sterilized and pasteurized milkwere raised, respectively by 35% and 39%; and the price of imported milkpowder was raised (from Rs 36 per kg to Rs 47 per kg) to cover the full costof importing and packaging this product. The process of economicrationalization of the dairy sector thus begun will need to be maintainedand, furthermore, sector development will need to be strengthened withappropriate institutional and infrastructural support, as outlined inparagraphs 122 and 127.
1/ T. Sanmugan and S.M.P. Senanayake, "Prospects for Expansion in theProduction of Coarse Grains and Grain Legumes", Agrarian Research andTraining Institute (Colombo, 1982). Further potential is also beinginvestigated under the Diversified Agricultural Research and SupportProject (supported by USAID), particularly in the Dry and IntermediateZones, the Mahaweli System C and other irrigated areas.
Table 16: NET FINANCIAL RETURN PER UNIT OF FAMILY LABOR: AlSELECTED FIELD CROPS, KAHA 1982/83
(Rupees per Kanday)
Paddy maize Greengram Soybean Groundnut Potato Chilli Red OnionR I R I R I R IR R I R
A/ (Net return excluding imputed cost of family labor) per (Manday of family labor input).
Note: R denotes rainfed; I denotes irrigated.
Source: Department of Agriculture, Peradeniya; Cost of Cultivation of ARricultural Crops - Haha 1982/83;Volumes I and II (December 1983).
vT M7 0 WAILAB"
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110. The disappointing performance of tree crops has been cited andanalyzed in several reports. Since 1978, the combined volume of tea, rubberand coconuts has been virtually stagnant. This has primarily been the resultof cumulative past neglect of standing stock, factory capacity and marketinfrastructure emanating from the uncertainties associated with land reformsand poor management, and from the erosion of incentives associated with heavyexport taxation. Rehabilitation of the production base has been encouragedthrough a wide range of investment subsidies since 1977, but progress in thevarious activities has been inadequate to cover current needs as well as thebacklog. Producer margins have remained low as, in the absence of alterna-tive sources, the Government has had to rely on heavy export taxation of thissector for revenues (Table 17). While tax rates have been adjusted atvarious times, the adjustments have not been timely or automatic; and thesubsidies on current inputs (e.g., fertilizer, transport) and investmentshave been variable and complex to administer.
Table 17: TREE CROPS: RATIOS OF DOMESTIC TO EXPORT PRICES af, 1977-82(Percentages)
a/ Domestic prices are Colombo market or auction prices; exportprices are FOB prices.
bh No shipments permitted.
Sources: Central Bank of Ceylon; Rubber Control Department; andCoconut Development Authority.
111. Besides revenue considerations the Government has been reluctant toallow higher margins to the public corporations which were afflicted with anumber of organizational and managerial deficiencies, and lacked a cohesiveinvestment strategy and plan. Between them, these corporations, the JEDB andthe SPC, are responsible for 67% of tea greenleaf production, 78Z of teamanufacture and 35% of rubber production. External consultants have recentlyrecommended measures to improve the performance of the corporations. Theserecommendations include clear definition and delegation of authority, comple-mented with increased accountability; setting physical and financial targets;restructuring of corporate finances; improvements of accounting and informa-tion systems; and incentive pay to personnel. Incentive schemes for teaestate and factory workers, and salaried staff, have already been introduced.Also, an improved accounting system recommended by the consultants is beingtested in the field. An estate-by-estate list of medium-term expenditureshas been prepared and now needs closer analysis to determine the economicviability of the overall investment program.
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112. While implementation of the above measures would eventually set thepublic corporations on a sound footing, the incentives and institutions forthe private smallholder sector remain to be strengthened. This also meansthat the coconut sector, which is a predominantly (90%) smallholder sectorwill have to be strengthened. Since 1977, the Government has made sig-nificant efforts to rehabilitate the coconut sector, first by stepping upinvestment subsidies, and then by a reform of the export duty structure toallow world market trends to affect local prices. However, as discussedlater on, much more remains to be done in this vital sector, which, unliketea and rubber, must cater to the highly competing interests of domesticproducers and consumers.
113. From the discussion so far, it is clear that Sri Lanka's liberaliza-tion policies in agriculture, including its efforts to ensure adequateproducer incentives, have been focussed primarily on the paddy sector, whichhas also benefitted from large investments in irrigation and other inputs,such as fertilizers, and has remained free from direct taxes and levies.Given the significance of rice to Sri Lanka, this focus was understandable.Nevertheless, in the interest of efficient further growth, some adjustmentsought to be considered now even as the essential policies and investments forraising further the productivity of paddy are put in place. The process ofadjustment might start with regular analysis and review of agriculturalpricing policies; strengthening selected agricultural institutions and, inparticular, orienting them to serving direct producers; and identifyingefficient priority investments for the future.
Adjustment Issues and Policies
(a) Prices and Incentives
114. Like many countries, Sri Lanka employs a wide range of fiscal andadministrative instruments in agriculture, which effectively constitute priceintervention measures. Some of the better known measures (e.g., fertilizersubsidies, milk prices, tree crop export taxes, various tree crop rehabilita-tion subsidies) were referred to earlier (see paras 106, 109, 110, 112). Theimpact of these measures has been varied and can be expected to have producedsignificant efficiency and income distribution effects. For instance, therelatively strong incentives to paddy among field crops has probably affectedcropping patterns and farm incomes; export taxation of tree crops over a longperiod has undoubtedly impaired incentives to invest in this crucial sector;and the availability of cheap coconut products has diverted output to domes-tic consumption and, at the same time, discouraged the development of promis-ing substitutes (see paras 107, 109). This is not to say that, in practice,any or all measures have been unqualifiably deleterious at all times. Thus,during 1978-82, the initial interventions in favor of paddy (see para 106)were quite appropriate to dismantle past policy distortions and, among otherbenefits, tended to narrow differences between domestic and internationalprices of rice. However, for reasons of efficiency and equity, it is impor-tant for policy makers to review periodically the economic and welfareimpacts of the various intervention measures, and then make requisitechanges.
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115. Sound decisions to alter price interventions, however, can only bemade on the basis of careful analysis of the distortions arising from exist-ing measures and the consequences of changing them. Such analysis, in turn,requires an appropriate data base (e.g., schedules of agricultural prices,direct and indirect taxes, and subsidies; physical controls, if any; account-ing prices; elasticities and cross elasticities of demand and supply for therelevant agricultural products; cost profiles for agricultural products) anda suitable analytical framework.
116. In Sri Lanka, the National Food Policy and Agricultural PricesCommittee, which was formed in November 1983, is the policy-level body desig-nated to review agricultural prices and incentives. The secretariat of thisCommittee would be an appropriate body for guiding and coordinating theanalysis of agricultural price factors, and recommending specific action tophase out economic distortions. Some agencies already are compiling relevantfield data in the course of their normal work, e.g., the Market Research Unitof the Agrarian Research and Training Institute (ARTI) (subsidiary food cropsmarket information); the Division of Agricultural Economics of the Departmentof Agriculture at Peradeniya (district-wise sample costs of production forpaddy and selected field crops); the SPC and JEDB (tea and rubber costs ofproduction); the Sri Lanka Tea Board and the Rubber Controller's Department(tea and rubber market prices); and the Coconut Development Authority(coconut costs of production and prices). The Committee secretariat,therefore, might begin by developing an analytical framework, examining theavailable data, and identifying additional data requirements (e.g., demandand supply elasticities, accounting prices) and the means of generating them.
117. A comprehensive examination of agricultural price interventionmechanisms should also explore the role of various public sector corporationsstill involved in agricultural marketing and processing; for example, theMarketing Department, the Cooperative Wholesale Establishment, the Oils andFats Corporation, the National Milk Board and the Sugar Corporation. Somesuch agencies might be sold to, or replaced by, private operations in thecontext of pricing and incentive reforms. Also in this context, theGovernment's agricultural policy and service agencies providing support tothe private sector will need to be strengthened.
(b) Strengthening Selected Institutions
118. Government administration in agriculture is characterized by a multi-plicity of institutions in virtually every subsector: tree crops,irrigation, livestock, etc. The variety of ministries and agencies makes itvery difficult to formulate and coordinate sector policies and programs.While prospects for sector-wide rationalization, and better coordination andmotivation ought to be examined at some stage, a quick and practical approachis needed to obtain rapid results. This approach would identify and resolvespecific institutional obstacles that are constraining agricultural produc-tion in the country. Some illustrations are provided in the followingparagraphs.
119. Recently, the World Bank's tree crop sector review identified keyinstitutional problems constraining smallholder tea production, and recom-mended measures to reduce those problems. One of the recommendations was toformalize and spread the productive relationships between public tea estates
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and private smallholders which occurs on an ad hoc basis in a few localities.The aim would be to spread, on a commercial basis, the practice whereby theestate superintendents assist neighboring smalliolders in obtaining fer-tilizer and planting material, and provide them technical advice on soundcultural practices. Another recomendation was to transfer the respon-sibility for smallholder tea extension services from the Tea SmallholderDevelopment Authority (TSHDA) to the Department of Agriculture's Training andVisit (T&V) System,1/ and also to divest the TSHDA of its factory operations.This way, the TSRDA would be able to devote more energy towards serving smallgrowers--in the administration of subsidy schemes, provision of input andcredit, and organization of leaf collection. It was further recommended thatthe Greenleaf Collecting Societies, which are groups of small privategrowers, be accorded clear legal status to enable them to enter into formalagreements for credit with the commercial banks. In this way, the provisionof credit and the distribution of input supplies could be organized moreeffectively by dealing with voluntary groups of farmers instead of a largenumber of individual smallholders. In addition, drawing on the experience ofthe very successful smallholder tea program in Kenya, it was proposed thatsmallholder participation in factory ownership and management be introducedon an experimental basis. Early decisions on such institutional proposalsfor serving the smallholder sector should be possible.
120. In another illustration, development of the predominantly smallholdercoconut sector is also hampered by institutional difficulties, which seem tomilitate against the well-intentioned investment subsidies. The CoconutCultivation Board administers five different subsidy schemes, which takes aninordinate amount of the time of Coconut Development Officers, distractingthem from proper extension work. The process of obtaining a subsidy involvesnine steps. A survey conducted by the Coconut Development Authority (CDA) inGampaha District during 1981 found that, on average, the process of obtaininga subsidy took nearly 18 months. If an initial application is approved,payment is made in two to five installments, depending on the type ofsubsidy. The CDA survey found that only 13% of the permit holders who hadobtained the first installment bothered to obtain the second installment; andless than 2% sought a third installment. The survey identified a number ofadministrative reasons for the excessive delays in the administration ofthese schemes; their resolution should receive priority.
121. A Ministry of Finance and Planning study of intercropping in coconutlands (December 1981) also identified the fragmentation of institutionalsupport to intercropping to be a constraint to development. The CoconutCultivation Board provided subsidies and, nominally, promotional/extensionsupport for cocoa, coffee, pepper and pastures whereas planting material andresearch were handled by the Department of Minor Export Crops and theAgriculture Department. Unless the activities of the various agencies aremerged, or properly timed and coordinated, the smallholders cannot beexpected to adopt intercropping. Indeed, among other measures, strengtheningthe institutional support to intercropping would be necessary to stemming thedecline in the Sri Lankan coconut crop. This is because studies in Sri Lanka
1/ A similar recommendation was also made for smallholder rubber andcoconut extension services.
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and elsewhere 1/ suggest that coconut planting or replanting is financiallyattractive only in cropping schemes which involve intercropping coconuts witha combination of annual or perennial plants. (Some simulated schemes, basedon 1979 data in Sri Lanka, give internal rates of return of over 52Z.) As amonocrop, coconut planting/replanting is far less attractive (IRR about19-20%) compared to monocrops of, for example, turmeric, ginger, pepper,pineapple, banana, or coffee (IRR over 30%), which may explain why farmersare reluctant to plant or replant sole crops of coconuts.
122. A last illustration of the need for strengthening institutions isdrawn from the dairy sector, in which the responsibilities of the fourseparate entities within the Ministry of Rural Industrial Development (MRID)are not clearly delineated, leading to considerable overlapping of functionsin some activities, such as the formation of dairy cooperatives. The fourentities are (a) the National Milk Board (milk collection, processing andmarketing); (b) the National Livestock Development Board (developmentprojects, establishment and maintenance of breeding stations and farms,organization of dairy cooperatives); (c) the National Oils and FatsCorporation (principal supplier of compound feeds); and (d) the Department ofAnimal Production and Health (veterinary services, organization and manage-ment of dairy cooperatives). Still another agency, the Cooperative WholesaleEstablishment under the Ministry of Trade, is engaged in the import of dairyproducts. The Government now has before it some proposals for sector-wideinstitutional reforms. These proposals would involve reorganization of dairycooperatives; divestiture of the National Milk Board investments in chillingcenters and processing plants to a semi-public or a joint private-cooperativecompany; and rationalization of the HRID fuctions aimed at providing acoherent sector policy direction and the technical inputs for improving theefficiency of milk production.
(c) Future Investments
123. Agricultur-l investments during the last five years continued toemphasize paddy settlement schemes, occasionally without adequate referenceto economic criteria. Expenditures on tree crops lagged behind for lack ofresources and of an overall investment program. As the present phase ofMahaveli headworks is completed, the imbalance between paddy and tree cropinvestments will need to be corrected. Some general support will also berequired to promote profitable expansion of other field crops and minorexport crops through activities such as cropping systems research anddevelopment.
124. Although in principle general priority should be given to investmentsin tree crops, it is clearly essential that the level and composition of suchinvestments should reflect economic priorities and economic returns. Thedetailed estate-by-estate review of public corporation investments, which
1/ National Planning Division, Ministry of Finance and Planning, "A Studyof Intercropping in Coconut Lands", Colombo, 1981.Dan M. Etherington and K. Karunanayake, "An Economic Analysis of SomeOptions for Intercropping Under Coconuts in Sri Lanka", Sri LankaJournal of Agrarian Studies, Vol. 2, No. 1, 1981.
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has begun, is of major importance, while the associated problem of whetherinvestment should be financed through the central budget or out of estateprofits also needs resolution. With an appropriate investment program, andassured improvements in the organization and management of the public cor-porations (para 111), the Government should permit the corporations to assumegreater responsibility for investment.
125. The wide range of replanting, inter-planting, infilling and othergrants available to tree crops should ensure that the relative incentives forcoconuts, rubber and tea have been considered in relation to each other.Since these very often are alternatives for the same land (especially inlowland areas), the signals being given may well be sub-optimum, both inrelation to choice of crop and in relation to timing of replanting or otherinvestments.
126. Rehabilitation and modernization investments should be designed toobtain maximum returns from existing facilities. Even in the case ofMahaweli, there are clearly high priority investments in System H and innon-Mahaweli schemes receiving supplementary supplies which are necessary tomake best use of the major initial Mahaveli investment. In this respect, itis important to be aware that, even though a major project such as System Hmight be "completed", it may still require several years before all thebalancing and other investments have been finally reduced to a purely "OWK"level.
127. Investment will also be needed to exploit the considerable potentialof the dairy sector for agricultural diversification, and for raising sup-plemental incomes of smallholders and landless agricultural laborers.Investments are required to promote dairy cooperatives, improve the economicsand logistics of milk processing, and provide the necessary infrastructuralsupport to the sector, including training and research activities relatedto dairying.
B. Industrial and Trade Policies
Introduction
128. While the industrial sector has registered the lowest overall sectorgrowth rate of the major sectors within Sri Lanka over the period 1977-83, itis difficult to establish a disaggregated picture due to data inadequacies.Table 18 does, however, provide some comparative estimates of performancewithin the sector based on data from the Department of Census and Statisticsand the Central Bank.lI Although there are marked differences between thetwo series, probably due to different categorization, the trends are similar.
jf The Census and Statistics data are generally considered to be moreaccurate largely because they do not operate under the same pressure asthe Central Bank which attempts to provide up-to-date information.
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Table 18: VALUE ADDED IN THE HANUFACTURING SECTOR, 1977-83(Constant 1975 prices; Rs million)
Dept. of Census andStatistics Estimates 1977 1978 1979 1980 1981 1982 1983
Total Value Added 6.758 6,866 7,043 7,071 7.327 7,625 n.a.Export Processing (tea,
Central Bank EstimatesTotal Value Added 5,372 5,791 6.06 6.110 6,427 6,734 6.788
Real Growth Rate
Dept. of Census & Stat. n.a. 1.6 2.6 0.4 3.6 4.1 n.a.Central Bank -0.6 7.8 4.6 0.8 5.2 4.8 0.8
As Z of GDP (current prices)Dept. of Census & Stat. 25.9 23.4 20.7 19.0 17.3 16.8 n.a.Central Bank 23.1 20.0 19.1 17.7 16.2 15.4 14.3
Sources: Department of Census and Statistics National Accounts, 1975-82;and Central Bank.
129. The Department of Census and Statistics data indicate that, as onewould expect, the real level of output of the export processing industries(tea, rubber and coconut) has declined steadily since 1977, with a sharpdecline in 1980 bringing down the overall manufacturing sector average growthto an all time low. The stronger performance in the other two subsectors,factory and cottage industry, is largely due to the growth of the garmentsindustry, coupled with the varying performance of a few large producers, inparticular the Petroleum Corporation. In addition, both series confirm therelative decline in the share of GDP accounted for by manufacturing activity.
130. The same trend can clearly be seen in the behavior of industrialexports. The share of total industrial exports (including mining andquarrying) increased from approximately 17% in 1977 to 43% in 1982. However,if we exclude petroleum re-exports and garments, remaining industrial exportsexpanded from the relatively small base figure of $49 million (7Z of totalexports) to only $115 million by 1982 (11% of total exports), with zerogrowth experienced in 1983.
131. There are, therefore, signs that the growth momentum which resultedfrom the 1977 policy package has recently begun to slow down. Althoughexternal factors, such as sluggish world growth and rising petroleum prices,and non-policy-related domestic constraints, i.e., the drought and consequent
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power shortages, have had a negative effect on performance, the industrialpolicy of the Government has also been a concributing factor. While the 1977reforms did significantly liberalize the economy in comparison to the pre-1977 situation, the overall incentive framework was still biased in favor ofimport substitution at the expense of export activities. As has happenedin other countries, some growth has occurred under this situation as inves-tors were e.rawn into producing for the domestic market. However, due to thesmall size of Sri Lanka's domestic market, the "easy" import substitutionactivities were quickly exhausted. In addition, the Government inherited asituation where public enterprises (PEs) accounted for a large share (over40% of manufacturing value added) of total manufacturing activity. Althoughthe Government has successfully resisted the further expansion of PEs, thepoor performance of PEs has compounded the allocative inefficiencies causedby the trade regime. Thus, with the exception of the clothing industry, therealization of the objective of high rates of growth of manufacturing outputand non-traditional exports has been less than expected. The followingparagraphs discuss in more detail the policy measures which have contributedto the poor performance of the sector.
The Present Policy Environment
132. The following analysis breaks the discussion of these policy measuresdown into those policies which define the trade and industry environment andthose which determine the performance of PEs.
(a) Trade and Industry Policy
133. The trade policy environment in Sri Lanka comprises of four policyinstruments: the foreign exchange rate, the tariff structure, importlicenses, and a number of export promotion measures. At this time theexchange rate and tariff structure are the most important policy instrumentsin the overall trade incentive structure.
134. Following a considerable devaluation in the nominal and real exchangerate in 1977, the nominal rate has been devalued several times since then bysmaller percentages, while at the same time the real effective exchange ratehas appreciated. The appreciation of the effective rate has reduced thecompetitiveness of local production and particularly that of exports. Undera recent IMF credit, some progress in implementing an appropriate exchangerate policy has begun. However, given the all-pervasive effect of theexchange rate on relative incentives throughout the economy, the importanceof maintaining a flexible and appropriate exchange rate policy cannot beoverstressed.
135. Regarding the tariff structure, the 1977 reforms established a six-tier structure with rates ranging from zero for certain essential imports toover 100% for luxury goods and imports competing with local production.Import duties on raw materials, capital goods and spare parts ranged from 5%to 25% while a 50% duty was levied on various imports not classified underany of those categories.
136. Several changes have been introduced in this tariff structure since1977. Some of those changes were motivated by consideration of fiscalrevenue while others were in response to demands of local interest groups
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seeking favorable adjustments in duty rates. Most of those adjustmentsslightly increased the levels of protection with the public enterprises beingthe important beneficiaries. In any event, as documented in a 1979 study,the present tariff structure provides high and non-uniform levels of effec-tive protection, with an overall bias against exporting and in favor ofimport substituting activities.,/
137. Changes in the tariff rates for fiscal revenue were implemented bythe Ministry of Finance. Most of these changes reduced to a small extent thevariance in the levels of protection among manufacturing subsectors.Piecemeal changes in the tariff rates were the result of appeals to andrecommendation of the Tariff Review Commission, which in November 1980,became the Presidential Tariff Commission (PTC). For the most part, thesechanges reflected protective responses to appeals from manufacturers. Theemerging conclusion is that most of the changes recommended by PTC haveincreased disparities in effective protection although by and large, suchchanges seem to have been small. Overall, the tariff structure has become alittle more complex, a little more discriminating among import substitutingactivities, and capable of raising a little more revenues from a given valueof imports. In sum, it would appear that there has been no narrowing of dutybands which might have reduced disparities in the levels of effective protec-tion among local activities. The exception to this is the list of tariffreforms passed on January 10 this year. While the direction of those tariffchanges is appropriate and does represent some evidence that the Governmentis willing to consider broad tariff reforms, the tariff changes themselveswere largely symbolic. The commodities listed were generally non-controversial items and many of the tariff rate adjustments involved reducinglargely redundant tariff rates. Thus, while individual tariffs wereadjusted, there was not a significant retreat from the trade reforms embracedin 1977.
138. The importance of import licensing in controlling imports wasdramatically reduced by the 1977 reforms. Some import licensing remainseither for protection purposes, primarily to support flagging PEs such as theChemicals Corporation, Steel Corporation or Textiles Mills. In the absenceof detailed price comparisons, it is difficult to measure the impact ofimport licensing as a trade barrier and the extent to which it discriminatesamong productive activities. However, as the incidence of import licensinghas not substantially increased, this suggests that it has not become anymore restrictive.
139. Export promotion measures have been an important part of trade policyin Sri Lanka in recent years. Their presence is a recognition that theprevailing trade regime, on balance, severely discriminates against export-producing sectors. Available estimates of effective protection for 1980clearly show a concentration of manufacturing export activities within thegroups of low protection levels while highly protected activities weredominated by import-substituting activities.
1f Cuthbertson and Khan, op. cit.
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140. The Export Development Board (EDB) is the coordinating agency for theimplementation and promotion of export incentive policies. The EDB managesthe Export Development Fund which is partly financed from general revenue andpartly from a 10% cess on imports dutiable at more than 50%, and from asmaller cess on certain non-traditional exports. However, this mode offinancing export development, by increasing the tariff protection onactivities which are already highly assisted, contradicts efforts of reducingoverall protection as a means of encouraging exports. The most importantexport promotion programs administered by EDB are various concessionaryexport finance schemes and the duty rebates.
141. Although the export promotion measures are useful, in that theypartially correct for the anti-export bias of other policy variables, theireffectiveness is limited for several reasons: assistance is restricted bydesign to particular sectors; credit ceilings on export finance schemesconstrain access and confer rents; the discretionary judgement of officialsoften determines the incentives, reducing the clarity of investment signals;and the magnitude of the promotional assistance provided is dwarfed by theeffects of the current exchange rate and tariff structure. In short, selec-tive measures, which are limited by financial constraints, are a poor sub-stitute for exchange rate adjustment and tariff reform.
142. With regard to industrial policy the most important instruments arethe Business Turnover Tax (BTT), the income tax holidays, and investmentlicensing. While their effect on the structure of incentives has variedsince 1977, due to several policy changes, the evidence suggests that thesepolicy measures are not major factors in shaping relative incentives.However, the recent revision in BTT, introduced in the 1984 budget, appearsto have further reduced its undesirable effects on production.
(b) Manufacturing public enterprises
143. The poor performance of PEs continues to have a negative effect onthe overall output growth of the industrial sector. Although data inade-quacies prevent rigorous analysis of PEs performance, Tables 19 and 20provide some indication of the performance of PEs in relation to the privatesector. Table 19 provides a snapshot picture of one year using the Censusand Statistics Department industrial survey data for 1979. Table 20 providesan historical series indicating the relative movement of employment andoutpnt in both the private and public sectors.
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Table 19: CHARACTERISTICS OF PUBLIC AND PRIVATE SECTOR FACTORYINDUSTRIES IN 1979
Unit ofAccount Public a/ Private
Survey of Findings1. Gross Output Rs mil. 7,183 4,1752. Net Output (value added) 1,440 2,7383. Fixed Capital 2,883 1,3954. Employment Number 83,816 77,000
Indicatorsa. Capital/Labor Ratio (3-4) Rs 34,400 18,100b. Net Labor Productivity (2-4) Rs 17,180 35,560c. Capital/Net Output Ratio (3-2) Percent 2.0 0.5
a/ Includes Government business undertakings.
Source: Report on the Survey of Manufacturing Industries: Sri Lanka,1979, Department of Census and Statistics, Ministry of PlanImplementation.
Table 20: EMPLOYMENT AND OUTPUT TRENDS FOR THE PRIVATE AND PUBLICINDUSTRIAL STCTOR, 1976-81
144. The data presented in both tables indicate that Sri Lanka pays afairly high price, given the relative inefficiency of PEs, in order toachieve the development objectives set for PEs by the Government. Inaddition, it is far from clear how efficient PEs are in achieving theirnon-financial objectives. However, what can be said is that, with referenceto Table 19, the present combination of objectives and industrial policiesappears to result in PEs requiring twice the capital per employee as theprivate sector in order to achieve half the labor productivity. Furthermore,Table 20 indicates that whereas in the p=ivate sector output and employmentmove in the same direction, as one would expect, no such trend is observablefor PEs. Indeed, from 1976 to 1977, an increase of 18% in employment wasaccompanied by a 3% decline in real output, and over the period 1976 to 1979
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employment expanded by 59% whereas output grew by 8%. There is thereforeconsiderable evidence that the policy framework within which PE investmentand production decisions are made is extremely costly in terms of the effi-cient use of .he country's resources.
145. The Government realizes the high costs associated with using PEs toachieve social objectives and has recently instructed the managers of PEsto concentrate their efforts on credible financial performance and to de-emphasize progressively the non-financial objectives. The aim is to developa more efficient, more competitive, and less subsidy-dependent PE sector.
146. This transition in objectives obviously will entail complications andambiguity. To date, however, it does not appear that the policy intentionsof the Government have been translated into an explicit action program. Ifthe PEs are to meet the financial test of market competition, their manage-ment will need the same operational independence, and have to be equallyaccountable, as private managers. Currently, managerial independence in PEsis circumscribed in several ways. Almost all capital expenditures requiregovernment approval through a long and arduous process. Independence isfurther circumscribed by the political nature of managerial appointment andtenure, which dampens hopes of junior executives for advancement. Salariesand other financial inducements for performance are poor at all manageriallevels. And even for recruitment of low level employees the authority ofmanagement is circumscribed by the priority that must be given to workersnominated by members of Parliament from their districts. Thus, employmentbecomes dependent on political connections more than job qualifications. Theresulting high absenteeism, indiscipline, high turnover, and overstaffing areamong the consequences of this system.
147. To meet their financing, PEs have access to all commercial banks, theNational Development Bank (NDB), foreign suppliers' credit, and, of course,to the Government's budget in the form of transfers of both working andinvestment capital. To reduce its outlays to PEs and to instill in them thediscipline of market operations, the Government has been requiring theenterprises to obtain commercial loans. In addition, in a recent Cabinetdecision the Government introduced a claim on 50% of the after-tax profits ofPEs in lieu of a dividend. PEs have responded to the push toward commercialfinancing by relying increasingly on commercial banks, suppliers' credit andthe NDB, although they continue to depend on some budgetary transfers. Thequality of their operations, at least in terms of financial profitability,has, however, remained unchanged.
148. The cumulative effects of ineffectual management, unrealistic salaryand bonus policies, employment practices and the conditions under which PEsare financed and are expected to pay dividends has been highly detrimental totheir financial viability and to the maintenance of their capital assets. Inspite of the deterioration in their finances and capital assets, PEs havemanaged to remain in production on the strength of Governmental and commer-cial financing, and on pricing and protection policies that in many caseshave kept their prices above the world level.
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Adjustment Issues and Policies
149. The above would support the contention that the Government has notinitiated many of the policy measures required to stimulate efficientindustrial production. This relative inaction may well reflect the absenceof a consensus on future strategy. On the one side, there are proposals toprovide more protection for existing industries (particularly PEs) coupledwith selective measures designed to encourage the production of particularmanufactured goods which are considered, for a variety of administrativelydetermined reasons, to be appropriate for Sri Lanka. On the other side,there are proposals to move towards a more uniform incentive framework whichattempts to minimize the discretionary influence of public administrators.
150. Which strategy the Government is prepared to endorse may be clarifiedwhen the final report of the PTC is placed before the Cabinet some time inJuly 1984. The PTC report is expected to advocate an adjustment in allnominal tariffs to a ceiling of 60% and a floor of 5-10% as the first step ina phased program designed to move towards a low and more uniform structure.
151. While PTC's recommendations are in the right direction, the policymeasures discussed below are considered to be necessary parts of a morecomprehensive reform package. The underlying objective of the suggestedreforms is to establish an incentives' framework which promotes production inthose sectors of the economy where Sri Lanka has a comparative advantage.Should this policy objective be rejected in favor of protecting selectedactivities, the question of why one particular activity deserves to beprotected more than any other must be confronted. The point being that byprotecting one activity one necessarily disadvantages other activities, andunless the benefits associated with providing this assistance are identifiedand clearly shown to exceed the costs of discriminating against otheractivities, the end result will be an inefficient allocation of Sri Lanka'slimited resources which will reduce the rate of economic growth.
152. Restructuring the incentives system will inevitably take time andinvolve some painful choices in the short run as the economy adjusts.Existing inefficient industries can be expected to seek protection fromincreased competition and, to the extent that displaced labor will incuradjustment costs, some degree of compensation should be considered. However,while a practical approach to the design and implementation of the neededpolicy reforms needs to be taken, this must be moderated by an equal concernfor the potential activities which are unlikely to develop, unless policiesare changed. As emphasized in the balance of payments discussion, the futuregrowth of the Sri Lankan economy is dependent upon the expansion of non-traditional exports. And, to the extent that a share of these exports mustcome from industrial activity, this growth is unlikely to occur within thepresent policy framework. The following policy recommendations are intendedto address this issue within a reasonable time frame. Political and socialrealities may dictate the pace of reform, but medium-term growth is dependenton a commitment to reform.
153. Firstly, with regard to tariffs, the Government should adopt a time-phased plan to reduce further the level and variability of tariffs beyond thefirst step advocated by the PTC. In addition, the desire to tax luxury goodsat a higher rate should be accomplished via appropriate adjustments in the
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BTT rate so as to avoid the production distortions resulting from disparatetariff rates.
154. Secondly, a lowering of tariffs without an adjustment in the exchangerate could exacerbate the short-run balance of payments problem. Thus, asimultaneous realignment of the exchange rate would need to be considered torestore the profitability of efficient domestic production, thereby reducingthe bias towards the production of non-traded goods, and providing an impor-tant boost to exports. The larger the reductions in tariffs, the largerwould be the realignment of the exchange rate to maintain equilibrium in thebalance of payments in the short to medium term.
155. Thirdly, the current array of export promotion measures put forwardby the EDB could be both rationalized into one or two simple measures andmade available to all exporters in an automatic and non-discretionaryfashion. Given the phasing of tariff reform, a continuation of export rebatesand export tax holidays is useful as a means to offset the existing bias
against export activities.
156. In addition, every effort should be made to eliminate distortions
resulting from particular circumstances. Thus, e.g., if the Governmentconsiders it undesirable to auction the current quotas for garment exports tothe USA and EEC, then it should at least allow them to be freely traded byrecipients, with no restrictions placed on entry to the garment industry.This should ensure that quotas are filled and encourage, via competition,efficiency gains which may provide access to alternative export markets. Forsimilar reasons, the Government should also limit the role of the InvestmentAdvisory Committees to strictly advisory bodies, removing any associationbetween their approval of a project and its subsequent access to subsidies,loans or any other preferential treatment.
157. With respect to manufacturing PEs, Government policy will have to
be flexible in order to address the special needs and circumstances of agroup of activities which span a wide range of potential economic efficiency.For the small number of PEs which are highly inefficient, unable now or inthe future to cover even their variable costs, the Government should considerthe possibility of shutting them down. The only obvious economic and socialcost from closure will be the resulting unemployed labor as for most of themthe physical capital is fully depreciated. It makes sense, therefore, forthe Government to find ways to soften the impact of manpower displacementduring the transition period partly for economic and social reasons, andpartly to moderate opposition to the suspension of PE operations. Suchcompensation could take the form of lump sum payments, to be paid over timeand regardless of whether or not the recipient remains unemployed or not,after he leaves the affected PE. Although precise estimates of the fiscalcosts of such payments are not known at this time, in all likelihood, theyconstitute only a small fraction of the recurrent losses of ailing PEs.
158. At the other extreme, in the case of PEs which already appear to beable to meet the market challenge, the Government should consider the optionof selling them to the private sector. This solution would have severaladvantages. Firstly, it would relieve the already overstretched governmentofficials of monitoring, advising and controlling such a wide range of PEs,allowing these officials to concentrate their attention on the PEs which need
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to be reshaped. Secondly, it would relieve the budget of the burden ofproviding the funds which will be needed in order to upgrade plants so as tomaintain competitiveness. Thirdly, it would allow the PE management tobecome truly free of those government controls aimed specifically at them,while at the same time, it gains a greater responsibility for ensuringproductive efficiency. Lastly, if for whatever reasons, the particular firmdoes not survive in the longer term, it would relieve the Sri Lankan taxpayerof the burden of subsidizing a loss-making activity.
159. However, for many PEs a transition period will be required in orderto bring them to the point where private investors would find the undertakingattractive. PEs have operated under an enormous burden of ad hoc policymeasures, the effects of which will take time to dissipate. Recent policyactions are pointing in the right direction, but their impact will need to bestrengthened by streamlining various operating procedures. For example,establishing management contracts, as has been done in some cases, is auseful first step, but it may prove insufficient if the managers contractedhave their actions unduly constrained by direct government controls on PEs.The introduction of firm-level experts to implement pilot schemes may alsoserve a useful demonstration function, but the effectiveness of these changeswill be seriously hampered if managers are unable to buy inputs, hire staffor determine wage levels consistent with profit maximization.
160. Furthermore, PEs will not be able to attract the financial andmanagement know-how of the private sector unless the rate of return on theirinvestments becomes worthwhile relative to other investment opportunities.As has been demonstrated in the trade and tourism sector, there is noshortage of venture capital or entrepreneurial talent in Sri Lanka in thepresence of incentives. Public share issues can be sold if the shareholdersexpect that the projects and their managers will be able to make profits.In sum, for those PEs which cannot be sold to the private sector in the shortterm, yet appear to be competitive in the medium term, a transition periodshould be allowed during which changes in the incentive structure are intro-duced so as to determine their long-term viability.
161. The changes required to put Sri Lanka's manufacturing PEs on a soundeconomic and financial footing have been discussed in a number of reports toGovernment. If a commitment to embark on a time-phased implementation ofthese broad policy measures is made, there may be a major need forassistance, in the form of technical, managerial and financial support duringthe adjustment period.
C. Enerxy Policies
162. In the past two years, Sri Lanka has taken significant steps tostrengthen the energy sector, paying particular attention to energyconservation, through appropriate demand management, and to institutionalreforms aimed at improving coordination between agenciep and overall sectorplanning. With these steps, Sri Lanka has succeeded considerably in managingthe short-term imbalance between commercial energy demand and supply, whichwas expected to persist through the mid-1980s until the first hydropowerscheme of the Accelerated Nahaweli Program, Victoria, would come onstream.At the same time, the institutional reforms have improved Sri Lanka'scapability for implementing a viable energy development strategy for the
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future. In order to strengthen the prospects in the energy sector, it willbe important to continue tne momentum which has been achieved up to thispoint, and to develop alternative sources of energy, in particular otherrenewable sources of energy such as fuelwood, solar power, small-scalehydropower plants and agricultural by-products. This section reviews majordevelopments in recent years and then outlines some prospects and prioritiesfor the future.
Energy Supply and Demand
163. In aggregate terms, primary commercial energy consumption grew evenfaster during 1980-82 (11% per annum) than it did during 1977-80 (9%). In1983, however, consumption is estimated to have declined by almost 8% inresponse to the drought, the mid-year civil disturbances, and the Julyincrease in petroleum prices. As may be seen from Table 21, most of thegrowth in 1980-82 was accounted for by petroleum products. Hydro-electricitygeneration was constrained by supply limitations; consequently, there was aneed to import larger amounts of petroleum to make possible increased thermalpower generation.
Table 21: PRIMARY COMMERCIAL ENERGY CONSUMPTION, 1980-83('000 tons of oil equivalent)
AverageGrowth (%)
1980 1981 1982 1983 a/ 1980-82 1982-83
Petroleum Products b 1,237 1,216 1,589 1,554 13.3 -2.2Hydroelectricity c 447 474 486 364 4.3 -25.1
Total 1,684 1,690 2,075 1,918 11.0 -7.6
a/ Preliminary estimates.Vf Net of exports and foreign bunker and aviation sales.c/ Converted at the rate of 12,000 BTU/KWh and 39.68 million BTU/ton
of oil equivalent.
Sources: Ceylon Petroleum Corporation, Ceylon Electricity Board, and Bankstaf. estimates.
164. Petroleum consumption grew at over 13% annually during 1980-82,compared to 10% per annum during 1977-80, reflecting its increasing role asthe main source of primary energy. Most of the increase in consumption camein diesel and furnace oil for thermal power generation. As Table 22 shows,this rapid growth in consumption had a large impact on the balance ofpayments, where net imports rose to the equivalent of almost one half ofnon-petroleum exports. Partly in response to the July 1983 increase indomestic petroleum prices, consumption in 1983 declined slightly; in conjunc-tion with lower prices and improved freight arrangements, the net oil importbill fell by about 12% in 1983.
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Table 22: NET PETROLEUM IMPORTS, 1980-83(US$ million)
1980 1981 1982 1983 al
A. Petroleum Imports 493 515 574 462B. Petroleum Re-exports 188 175 158 98C. Net Petroleum Imports 305 340 416 364D. Non-Petroleum Exports 877 891 857 945E. C as Z of D 35 38 49 39
a& Preliminary estimates.
Sources: Central Bank of Ceylon and Bank staff estimates.
165. In 1981, the Ceylon Petroleum Corporation had been considering twomajor investments. The first was a hydro-cracker which would convert furnaceoils, which were in surplus and currently exported, into middle distillates,which were in deficit and which Sri Lanka imported. However, detailedexamination of the proposal revealed that it was not economically attractiveand the proposal has been dropped. The second proposal considered was asingle-point mooring buoy, which would enable supertankers to discharge theirloads of crude oil via an offshore pipeline rather than continuing the prac-tice of lightering to smaller tankers which the Colombo port could handle.This project was found to have a high rate of return and would significantlyreduce the cost of oil imports; its implementation is sched;led to begin nextyear. Another area where significant savings were possible was in the areaof LPG distribution. Distribution through the antiquated pipeline(originally used for coal gas) was resulting in losses of 50% or more. Inresponse, the Government has reduced the pipeline substantially, to the pointwhere it is presently only 11 miles long, and serves only a few large users.
166. Electricity generation during 1980-82 grew at 11.3% per annum, orroughly the same rate as during 1977-80. However, as Table 23 shows, almostall of the growth was accounted for by thermal generation--hydro generationdeclined from 89% of total generation in 1980 to 78% in 1982; in 1983 it isestimated that this declined to below 60%. The bulk of this generation hasbeen on the 120 MW of gas turbines that were installed between 1979 and 1982,although the addition of a second 30 MW generator at the Canyon project inFebruary 1983 increased peak power generating capacity. Bank staff estimatesindicate that the cost of thermal generation in 1982 amounted to around $50million, including around $40 million to operate the gas turbines. Despitethe additions to thermal capacity, overall generating capacity remains inade-quate to meet demand. Since February 1983, private generation has beenencouraged, and about 6 GWh are estimated to be generated monthly by thismeans.
167. The situation in early 1984 is especially precarious because of theextremely poor rainfall level in 1983 which led to a 25% drop in hydro-generation. To help alleviate this situation, 80 MW of diesel generatingcapacity is being added to the system in 1984-40 MW in April and 40 MW inAugust. Unlike the gas turbines, used normally for peaking capacity, the newplant is designed for base-load generation and will be fueled by relativelylow cost furnace oil. These should help provide a less hydro-dependentgenerating system over the longer run. The other two large hydropowerprojects under the Accelerated Mahaweli Program-Kotmale (180 MW) andRandenigala (132 MW)-are likely to be commissioned on schedule in 1985 and1986 respectively, and should eliminate the need for major thermal generationthrough the end of the decade.
Energy Conservation
168. Conservation to improve the economic efficiency of energy use was amajor area for action. Not only was conservation warranted by the need toextend available energy supplies as far as possible in the current energycrisis, but given Sri Lanka's heavy dependence in the future on importedenergy at considerable cost, efficient energy use would also be important forensuring sustained, high rates of economic growth. Two avenues for tacklingthe problem were available--the adoption of energy prices that reflected theeconomic cost of energy supplied which would encourage more efficient use ofenergy generally, and specific measures designed to improve energy utiliza-tion by large consumers.
169. Since 1980, major adjustments have been made in the pricing of bothpetroleum products and electricity. Petroleum prices were raised in January1981 and again in July 1983, the latter adjustment primarily dictated by thedepreciation in the exchange rate. In the process of raising petroleumprices, however, a major improvement in the pricing structure was achieved byvirtual elimination of the general subsidy on kerosene. This increase in theprice of kerosene had the effect of discouraging the use of kerosene for
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other than household purposes, and permitted the CPC to increase diesel fuelprices to their economic levels. To protect the purchasing power of thepoor, for whom kerosene is an important energy source, the value of thestamps provided under the Kerosene Stamp Scheme was raised commensurately.As a result of these price changes, petroleum prices in Sri Lanka are nowbroadly in line with international prices.
170. In 1982, major changes in the electricity tariff were introducedwhich brought the price of electricity into line with long-term supply costs.The average tariff was raised by 36% to cover the costs of additions beingmade to the system, especially those under the Accelerated Mahaweli Program,and to allow a reasonable rate of return on the CEB's assets. Maximum powerdemand charges, V'.ich had been artificially low, were tripled to reflect theactual cost of delivering peak power requirements../ This encouraged majorconsumers to install power factor correction equipment, thereby improvingtheir consumption efficiency.2/ In addition, the CEB has a fuel adjustmentsurcharge which is added on to the basic monthly energy charges to recoup thefuel costs associated with thermal power generation. In late 1983, thesesurcharges were increased to as much as 185%.
171. Among the large industrial and commercial users, a number of corpora-tions have implemented several (the easier and low cost) efficiency measures.One area of particular importance where energy savings are possible is elec-tric power transmission, where losses currently amount to about 20%. The CEBhas identified a program of technical improvements which would permit lossesto be reduced to about 15%, more in line with international norms. Also, aconservation program for the 30 largest energy consuming industrial andcommercial corporations was initiated. These have included conservationtraining and a series of energy audits. These in turn were to be followed byfeasibility studies and actual implementation of the conservation measures;it is estimated that the whole process will take two to three years. In thetransport, small industry and household sectors, conservation programs arebeing initiated, though progress has been slower.
Institutional Developments
172. In the past two years, considerable progress has been made in theorganization and functioning of institutions in the energy sector. Prior tothat, coordination between energy suppliers and consumers was limited andcar- ad out on a purely ad hoc basis; in addition, there was no mechanism fortackling such important tasks as energy conservation. There was also littlein-depth knowledge of the sector as a whole or long-term planning capability.In December 1982, an Energy Coordinating Team (ECT) was established in the
I/ This affected mainly large industrial and commercial users who paymaximum power demand charge in addition to energy charges.
2f Although power factor correction equipment does not reduce energyconsumed, it does, especially for users running large electric motors,reduce the amount of power that needs to be delivered.
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Ministry of Power and Energy (MPE) under the supervision of the newlyappointed Senior Energy Advisor to the Minister (who at present is thePresident).
173. The principal objective of the ECT is to coordinate work among therelevant ministries and prevent duplication of effort. The ECT comprisesthree coordinating task forces, descriptions of whose functions follow.
(i) Energy Planning and Policy Analysis (EPPAN) is attempting tointegrate all energy sector activities. EPPAN activitiesinclude identifying the overall objectives of national energypolicy in order to define an energy strategy that meetsthese objectives within the goals of maximizing Sri Lanka'sdevelopment in the coming decades. The setting up of acomprehensive -aergy data base, including energy balanceswhich feed into energy policy analysis and modeling, isalready underway.
(ii) Energy Efficiency, Demand Management and Conservation (EDMAC)includes a number of activities that are of short-termimportance in the area of energy conservation, especially inindustry, but also in commerce, households, transport, andagriculture. EDMAC has also been instrumental in setting upa special cell in CEB to reduce system losses, and inreviewing electricity and petroleum pricing policies.
(iii) New, Renewable, and Rural Sources of Energy (NERSE) aims atcoordinating activities in the renewable energy subsector,assessing the economic and technical feasibilities of some ofthese technologies as they apply to Sri Lanka and promotingand financing the commercialization of these technologies.
The three task forces meet on a regular basis and they include repre-sentatives of the major energy-related ministries, departments, and publiccorporations. The task forces also have access to a small technical staffwho have been recruited for this purpose by the MPE.
Prospects in the Energy Sector
174. From the above discussion, it may be seen that Sri Lanka has takensignificant steps towards addressing the major weaknesses in the energysector. Even though the current energy situation remains precarious, it -iaslargely foreseen and should improve dramatically within a short period.During the 1984-86 period, hydro-generating capacity will more than double,with the addition to the system of the three projects under the AcceleratedMahaweli Program. As a result, electricity should once again be abundant andrelatively cheap. Net petroleum imports should also drop sharply with thedecline in thermal power generation. However, the progress presently under-way should not lead to complacency; in fact, the cost of meeting thecountry's energy needs is likely to rise considerably by the the late 1980s.
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175. It is critical that Sri Lanka not slacken its efforts to get energyconservation programs into place and to develop alternative sources ofenergy. Regarding future electric power generating schemes, it is important,given the long lead times required that planning and implementation beginsoon. Otherwise, Sri Lanka could once again be placed in the early 1990s inthe same situation it was in in the early 1980s, having to depend on short-term, costly thermal power generation. Historically, although Sri Lankaimported its petroleum needs, it had met almost all its power needs by domes-tic hydropower generation; by the 1990s, however, this situation is likely tochange. With the commissioning of the projects under the AcceleratedMahaweli Program, Sri Lanka will have exploited almost all the large-scalehydropower possibilities, with the exception of the attractive Samanalawevaproject. The country will thus have to begin relying increasingly onimported energy to meet its long-term power needs. Pre-feasibility andfeasibility studies have already been conducted for a coal-fired powerstation, and detailed design work is currently underway. It is desirablethat Sri Lanka should also convert some of the more energy-intensiveindustries currently based on petroleum to relatively less expensive coal.Despite efforts to shift towards relatively cheaper forms of imported energysuch as coal, it is clear that in the long-run the cost to the economy ofmeeting energy needs is going to rise. In this context, efforts to conserveenergy and improve the efficiency of its use are critical.
176. To help minimize imported energy needs, it is also important tostrengthen further efforts to develop other renewable sources of energy suchas fuelwood, solar power, small-scale hydropower plants (for instance, fortea factories in the hills) and agricultural by-products. Afforestationactivities, in particular, warrant high priority. Not only is there sig-nificant scope for converting from oil to fuelwood in a number of industries(especially in the tea industry where fuelwood would also serve importantshade and soil conservation functions), but fuelwood is likely to remain theprimary fuel for cooking in rural areas for many years to come. Despite somedonor assistance in the forestry sector, reforestation activity is still wellbelow the level required to meet the country's long-term fuelwood needs. Inthis regard, the preparation of a forestry master plan, which is being under-taken with assistance from FINNIDA, is expected to define development targetsfor the next 20 years and include a detailed investment program for the firstfive years.
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6 t
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STATISTICAL APPENDIX
Standard Tables
Table 1: Sri Lanka - National Accounts Summary (Millionsof Rupees at Current Prices)
Table 2: Sri Lanka - National Accounts Summary (Millionsci US$ at Constant 1982 Prices)
Table 3: Sri Lanka - Balance of Payments (Millions ofUS$ at Current Prices)
Table No.
1.01 Population and Vital Statistics, 1963-831.02 Employment in the Tublic Sector, 1970-83
2.02 Growth Rates of GDP and Its Coponents, 1970-832.03 National Product and Expenditure, 1970-832.04 Percentage of Total Income Received by Each Tenth of Income
Receivers, 1963, 1973, and 1978/79
3.01 Balance of Payments, 1970-833.02 Composition of Exports, 1970-833.03 Industrial Exports, 1975-833.04 Composition of Imports, 1970-833.05 Selected Food Imports, by Source of Finance, 1970-833.06 Imports of Selected Consumer and Capital Goods, 1976-833.07 International Liquidity, 1970-833.08 Aid Commitments, 1970-833.09 Aid Disbursements, 1970-833.10 Aid Group Non-Project Assistance, 1965-833.11 Overall Aid Pipeline, 1982-84
4.01 External Public Debt Outstanding Including Undisbursed asof December 31, 1982
4.02 Service Payments, Commitments, Disbursements and OutstandingAmounts of External Public Debt as of December 31, 1982
5.01 Summary of Budgetary Operations, 1970/71-845.02 Budgetary Revenue, 1970/71-845.03 Current Expenditures, 1970/71-845.04 Government Budgetary Subsidies and Transfers, 1970/71-845.05 Capital Expenditure and Net Lending, 1970/71-845.06 Central Government Budget Debt Services, 1970/71-845.07 Government Enterprises, 1970/71-845.08 Current Transfers to Public Corporations, 1970/71-845.09 Capital Transfers to Public Corporations, 1970/71-84
Tabit No.
6.01 Interest Rates of Major Credit and Savings Institutions, 1970-846.02 Monetary Survey, 1971-84
7.01 Volume of Agricultural Production, 1970-837.02 Paddy Cultivated Area and Production; Rice Availability,
Procurement and Distribution, 1970-837.03 Cultivated Area and Production of Subsidiary Food Crops, 1972-837.04 Tree Crops Production Statistics, 1970-837.05 Tea Producer Margin, 1970-837.06 Tea in the Public Sector, 1982-837.07 Rubber in the Public Sector, 1982-837.08 Fertilizer Issues by Crops, 1970-83
8.01 Growth of Industrial Output, 1976-838.02 Manufacturing Survey, 1981 and 19828.03 Performance of Major State Industrial Corporations, 1977-838.04 Annual Physical Capacity and Output of Major State Industries,
1976-838.05 Industrial Investments Approved and Contracted by Greater
Colombo Economic Commission, 1979-838.06 Industrial Investment Approvals by Foreign and Local Investment
Advisory Comittees, 1979-83
9.01 Petroleum Imports, 1970-839.02 Imports of Crude Oil by Country of Origin, 1970-839.03 Petroleum Product Exports, 1970-839.04 Domestic Production of Petroleum Products, 1970-839.05 Local Sales Volume of Petroleum Products, 1970-839.06 Production, Trade, and Apparent Consumption of Energy
10.01 Minimum Wage Rate, 1968-8310.02 Colombo Consumer Price Index Numbers, 1976-8410.03 Wholesale Price Index, 1977-8310.04 Cost Indices for Selected Building Materials and Different
Construction Activities, 1972-8310.05 Administered Prices of Basic Consumer Goods, 1977-83
11.01 Selected Social Indicators, 1946-8211.02 Major Social Expenditures in Relation to Total Current
Budgetary Expenditures and to GDP, 1969/70-8411.03 Health Statistics, 1969/70-8311.04 Lducation Statistics, 1970-8311.05 Tourism: Arrivals by Regions, 1975-83
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Table 1: SRI LANKA - NATIONAL ACCOUNTS SUMARY(Millions of Rupees at Current Prices)
12. Domestic Saving 6,510 7,222 7,453 9,965 11,878 16,61213. Net Factor Income -234 -234 -430 -1,713 -2,019 -3,17614. Current Transfers 343 747 2,249 3,907 5,494 6,40015. National Saving 6,619 7,735 9,272 12,159 15,353 19,836
Average Exchange Rates:16. Rupees per US$ 15.608 15.569 16.534 19.246 20.812 23.52917. Rupees per SDR 19.541 20.115 21.527 22.693 22.982 25.161
Note: The exchange rates shown above are the official rates and were used inconverting from US dollars to national currency terms, items 3, 4, 13and 14.
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Table 2: SRI LANKA - NATIONAL ACCOUNTS SUMMARY(Millions of US$ at Constant 1982 Prices)
Note: Underlying data from Central Bank of Ceylon except for lines 18-20which are from World Bank's Debt Reporting System, and lines 26-28from the IMP.
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TaLle 1.01: POPULATION AND VITAL STATISTICS, 1963-83
Net AnnualPopulation Birth Death Migration Natural
Year Mid-Year Rate Rate Rate Growth Rate('000) --- (per '000)---
A/ The employees are classified according to categories and status, and include temporary and casual workers.I/ Clerical workers.&/ Semi-skilled and unskilled workers.Al Growth of employment in this category (public corporations, universities, research institutions, etc.) was
eSaggerated ia the period by the nationalisation of agricultural lands.A/ Principals, teachers and other education workers.
maue: Central Bank of Ceylon.
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Table.2,ls ROSS DOMESTIC PRODUCTi COMPOSITION AND SICTORAL DEFLATORS, 1970-53(Current Factor Prices)
9 1976 11 1 1 1951 al 9 1983 LRe Iof e 1ot Is S of as Sof Is ISof as lot a tot as ot . Is Sof Is sof
C. DP Bsx GDP IL GDPl SLu ARLf HIL GOuP HA L GO I GOP &La SAL hL. 91.. ELL ML
Memorandum Items:Gross National Savings _/ 14.1 7.4 13.2 17.9 15.6 14.8 13.9 14.1 15.3 16.2External Current Account Balance LI -4.8 -8.1 -3.0 3.5 -4.5 -11.1 -19.8 -13.7 -15.3 -12.4
I/ Provisional.h/ Estimates.c/ Includes Railways, Ports, Harbor, Warehouse, Posts and Telecommunications. Since 1979, the Ports, Harbor, and Warehouse have becnme
Public Corporations and are no longer included under Public Enterprises.4/ Autonomous state-owned enterprises.e/ Equals Gross Fixed Capital Formation plus Change in Stocks plus External Current Account Balance.f/ External transactions during 1970-77 converted to rupee values using FEEC rates.Z/ Net imports of goods and non-factor services.
Sogrcq: Central Bank of Ceylon.
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Table 2.04: PERCENTAGE OF TOTAL INCOME RECEIVED BY EACH TENTH OFINCOME AECEIVERS, 1963, 1973, AND 1978/79
� ! Provialoul figur н for 1982 р ев[is в[ ев far 198 Э.� I веl идев егтоs в адд овi и i одs.g/ 8qw1� ehao8e in м с i д[ егы гi оы l кеветvев.д/ I10' Ткивс Fund бorrovia8 в аге вЬаv д ипдег lовав i д аоа- вом t агу eapital; сЬеве т адсед to 5S1 в illi од ia 1978,
5 З8 aillio д ia 1974, 533 вillion i д 1980, впд 50.4 sillioo i д 1981.
8otr. Tбfa саЫ е i в ргервгед Ьу t Ье СедСгвl Ьвдk ивi �ц идвдj ивСед Сивt оы дв[ а for векеЬвддi ве iaport адд екрогС ев[l авt ев.7. Ъе сгвде дивb екв in C6i � t вЬl е , вв ve11 вв t Ьose io СаЫ ев 7.02 адд 3.03, [h ив di[fer f тоо СЬове ивед еl веv Ьеке Ьу t ЬеСео[ та1 8адk.
Sоиг[ ев: Седств l Dank of Сеуl оир адд IIfF Iater ы tia ы l Fi двд[i в1 Stati вt' � в Еог IMF Ттвди сti оы двt а.
Table 3,02: COMPOSITION OF EXPORTS, 1970-83
1970 1971 1972 1973 1974 1975 1976 It _ 1978 1979 1M V 1981 _&/ 1982 a/ 1983 a/
IL/ 1980-82 data revised, 1983 data are provisional.1L/ Other exports include coconut by-products, spices, minor agricultural crops, precious and semi-precious stones, manufactured
goods, minerals, sad petroleum re-exports.c/ The approximate conversion ratios for nuts into kilograms for major coconut products are as follows: 4.93 nuts - I k& of
copra; 13.33 nuts - I kg of coconut oil; and 6.60 nuts - I kg of desiccated coconut.
Note: Due to rounding off, components may not add up to totals. Data not necessarily consistent with exports data as compiled onpayments basis (Table 3.01).
Source: Adjusted Sri Lanka Customs data as reported by the Central Bank of Ceylon.
A/ Based on information supplied to the Ministry of Finance and Planning by the main food importing agencies and,therefore, not necessarily consistent with Table 3.04, which is based on Customs data.
k/ January to August only.
S.oue: Ministry of Finance and Planning.
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Table 3,06: IMPORTS OF SELECTED CONSUMER AND CAPITAL GOODS, 1976-83
Boilers and Engines, other than InternalCombustion Piston Engines 0.2 0.2 6.7 5.2 2.5 7.2 2.0 9.5
Air Conditioning and Refrigeration Equipment 2.0 1.0 3.4 6.3 9.4 7.7 8.3 11.8Hand Tools and Implements 1.8 1.4 6.0 6.6 7.9 3.6 4.3 5.7Excavating, Levelling and Turfing Equipment 2.8 5.9 5.9 10.5 24.6 18,2 17.4 16.8Agricultural and Horticultural Machinery - Other 1.7 1.3 2.5 10.0 8.8 2.6 1.3 1.0Communications Equipment 5.1 2.0 5.1 14.6 n.a. 14.7 11.4 16.4Electrical Machinery and Equipment (includingaccessories) 9.0 8.2 21.9 31.2 n.a. 28.3 26.0 35.4
1 The exchange rates used for 1976, 1977, 1978, 1979, 1980, 1981, 1982 and 1983 were US$1.00 * Re 8.46, Re 9.15,Re 15.61, Re 15.57, Rs. 16.53, Re 19.24, Rs 20.81, and Re 23.53, respectively.
n.a. - nc available.
Sources: Sri Lanka Customs and Ministry of Plan Implementation except 1980 data which are Bank staff estimatesbased on Customs data.
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Table 3.07: INTERNATIONAL LIQUIDITY, 1970-83($ million)
End of Period1970 1971 1972 1973 194 1)] jj2 19Jj J j .iZi J12g J 1982 l
gJ Annual comitments of Pm 4. 13, 25. 45 and 50 million respectively during 1980 through 1985.h1 Annual comitments of Shr. 15. 32, 40. 45, 50 and 65 million respectively during 1977 through 1982 and akr.65 million
each year during 1983 through 1985. An additional comiment of Mkr. 45 million (1SS7.0 million) was made during 1982for Reral Developma Project, Habantoca District, with annual allocation of Ikr. 12 million (1982) Mr. 12 million(1983) and Mr. 15 million each year during 1984 through 1986 including the carry forward balace of Nkr. 24 millionfrom previous year's comitments.
J Ecluding the debt cancellation of USS51.7 million.If Excluding the following comitmesa: Euro-currency Loan of USS50 million in 1979
Euro-currency Loan of US$75 million in 1981Euro-currency Loan of USSIOD million in 1982Swedish Export Credit for Kotmle Project. Sr. 256.2 million in 1980.Nenufacturer's Manover Trust Company Loss for Victoria Project, L 20 million in 1980.Jarsoese Ten Bonds amounting to Ten 3,000 million in 1982.
If Including Iraq oil subsidy loan of $5.5 million.11 Cycloe relief assistance.A/ Ezcluding the Wousing Guarantee I.es and IMS Loma of US321 and US$2 million, respectively.11 Including emergency relief assistanca, USS11.8 million.
fOSM: Department of External Resources. Ministry of Finance and Planning.
A/ Excludes USS2.92 million disbursed under Swedish Export Credit for Kotmsle Project./ Excludes USS14.43 million disbursed under Soloman Brothers Incorporation (USA) loan for low cost Hosing Programe.5- Excludes USS6.18 million disbursed under Soleman Brothers Incorporation (USA) loan for low cost Housing Programme.4/ Excludes the following loans: Euro-currency loan of VSS50 million disbursed in 1980
Euro-currency loan of USS75 million disbursed in 1981Euro-currency loan of USS109 million of which USS40 million was disbursed in 1982.Japanese Ten Bonds of Ten 3.000 million ($2.14 million) disbursed in December 1982.
gl Includes Iran loan of USS32.0 million.V1 Includes 9AE convertible currency loan of USS12.0 million.Al Includes Libya! loan of USS15.0 million.8f Represents the Iraq for oil subsidy.Ji Including emergency assistance of US$11.8 million.
SumAHe: Department of External Resources. Ministry of Finance and Planning.
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Table 3.10: AID GROUP NON-PROJECT ASSISTANCE, 1965-83VALUE OF COHNITMENTS, INTEREST RATE, GRACE PERIOD, AND SEPAYMENT PERIOD
COHNITHTS ( million)
Contry ILsA IIRI 1 A 11. 1WIl 969 1L0 j=1 1972 1971 1974 197 121 1.917 191A 1177 1M AM 11W. 1281 111 lsa1l
Al $2 million classified an project aid in Tables 3.06 and 3.11.1/ $12.2 million (FF 50 million) for Telecomunication project is classified as project aid in Tables 3.08 and 3.11.r/ Classified as project aid in Tables 3.08 and 3.11.4/ Under 1978 Loan of Do 31 million, De 26 million used for Import of locomotives and classified as project aid in Table 3.11.Ay Including debt relief grant of $1.6 million.V Including debt relief grant of $1.4 aillion.
Represent@ debt relief grant of $1.6 million.Includes debt relief grant of $0.66 million, food production grant (1981/82) $9.7 million, food production grant (1982/83)$10.22 million.
1/ Includes debt relief grant of $1.29 million and emergency assistance $2.38 million and Food Production Grant (1983/84) of $10.3 million.J1 Hit 5.5 million out of Hit 34 million loan claseified as project aid in Table 3.11.k/ Import support which is being utilised for projects., and clasifted as project aid in Table 3.11.J/ Debt cancellation.g/ Eacluding VFP and UN Technical Assistance comitmants which are classified as project aid.
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OffTSEST RATE (Z)
Contzy ILIA 196 1%7 IM 1 6 nM I= n M 'IM IM In 197 In 7 'M IMa LM 'il
A/ Represents weighted average of the interest rates of the public and private components of loans.hi Rate of interest during grace period is 4.15%.t/ Rate of interest during grace period Is It.41 Rate of Interest during grace period ia 22.t/ PL 480 food assistance against local currencies.Ll Service charge.
j/ Represents veighted average of the repayment periods for public and private components of loans,h/ See footnote r), page 2 of this table.r/ US$100,000 each during the first three years and the balance in 16 equal installments.
Sggrge: External Resources Department.
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Table 3.11: OVERALL AID PIPELINE, 1982-84(US$ million)
HahaveliNon-Mahaweli (Accelerated) Of which:Project Project Commodity Food Total Non-Hahaweli
&/ Cancellations during 1982 amount to $5.6 million.b/ Includes $11.8 million in relief assistance._q/ Estimates.d/ Balance of US$0.1 million treated as lapsed under ADB for Urea Fertilizer Project.A/ Following balances treated as lapsed:
US$0.66 million under Netherlands Grant No. 77/02 (HFL 35.0 million)US$0.584 million under UK Grant for import of lorries.U840.942 million under UK maintenance Grant No. 6 of 1977US$2.186 million
f Balance of approximately US$2.4 million treated as lapsed under aid lines described in d/ and e/ above.A/ Forecasts.
Source: Ministry of Finance and Planning.
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Table 4.01: EXTERNAL PUBLIC DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF DEC. 31, 1982
INCLUDES ONLY DEBT COMMITTED uAN. 1. 1900 - DEC. 31. 1982DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS
(IN THOUSANDS OF U.S. DOLLARS)
DE BT 0 UTSTANDING IN ARREARS
TYPE OF CREDITOR ------------------
CREDITOR COUNTRY DISBURSED :UNDISBURSED: TOTAL PRINCIPAL INTEREST
TOTAL EXTERNAL PUBLIC DEBT 1.968.815 1.585.243 3.554.058
NOTES: (1) ONLY DEBTS WITH AN ORIGINAL OR EXTENDED MATURITY OF OVER ONE YEAR ARE INCLUDED IN THIS TABLE.(2) DEBT OUTSTANDING INCLUDES PRINCIPAL IN ARREAQS BUT EXCLUDES INTEREST IN ARREARS.(3) THE FOLLOWING UNCOMMITTED PARTS OF FRAME AGREEMENTS AND STANDBYS ARE NOT INCLUDFD IN THIS TABLE.
TOTAL UNCOMMITTED FRAME AGREEMENTS AND STANDBYS 59.299
Source: World Bank.
BEST COPY AVAILABLE
Table 4.02: SERVICE PAYMENTS, COMMITMENTS, DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNAL PUBLIC DEBT
PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF DEC. 31, 1982
INCLUDES ONLY DEBT COMMITTED JAN. 1. 1900 - DEC. 31. 1983DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS
(IN THOUSANDS OF U.S. DOLLARS)TOTAL
YEAR DEBT OUTSTANDING AT TRANSACTI 0 NS DURING PERID 0 D OTHER CHANGESBEGINNING OF PERIOD
******** :..........-.- - .----- --------------------------------------------------------- *:-----------------------DISBURSED : INCLUDING COMMIT- DISBURSE- 5 E R V I C E P A Y M E N T S CANCEL- ADJUST-
ONLY :UNDISBURSED: MENTS MENs :T--------------------------------: LATIONS MENT *PRINCIPAL INTEREST TOTAL
* THIS COLUMN SHOWS THE AMOUNT OF ARITHMETIC IMBALANCE IN THE AMOUNT OUTSTANDING INCLUDING UNDISBURSED FROM ONEYEAR TO THE NEXT. THE MOST COMMON CAUSES OF IMBALANCES ARE CHANGES IN EXCHANGE RATES AND TRANSFER OF DEBTSFROM ONE CATEGORY TO ANOTHER IN THE TABLE.
� / ев[ оЧ ll71/72, tht Гi вЧ l Тввг w в [ ее� Оеt аЬвг 1 to еврt евЬвг 30. ti ы aei вl гввт 1971I71 ееv егвд в 15- воаt Ь рвгi од [ тов ОесоЬег 1, 1971,throueh DееевЬег ]1, l97 к. Ав [r и Н 1], tбe Eiru1 Теаг еоп евреедв ео the eal гsdar ги г. Ie еЬ iв аад еЬе [ollovIue u Ы u, еЬв дасвLee 1911/7 к Ьввв Ьвве рге- гвед т � 1к- вооt Ь period. Ca1ws t оt вl в вq eot вдд ир enetlr дие со rouedine о[[.
� / ТЬе � ucбorit И � t свв[ t Ьем и гевеы е , hut t Ьу вге вЬа кп Ьеге ав [i ы seiee [ еевв [ ог риероее о[ еоврагi вее uich рн вi оив гевгв.
eol.eetv. ти а о. e.ry1r.. ц� 1s 2ь 2я п � 4 � е ья ья :о - - - - - . .ь1 а.... г. ее +ь я se s я ь4 ь4 s4 24 еа и яs 24s 1 ео 1 ее 1 ы 2ооеивis ви ь Гго! � ulo м l Ll его и . j/ с2 ь) иы с: я) с3:) 1� ь> с� 3) с2 е) с2я) cw) cw) t1» си > с2» t1e) i21> .... ек2. ьl е. ов. Тв. в.аоее.г с2о) с: я) ае) с2» г:е) с:» с: ы c+s) с4» се3) cie) с12 ы tlsu иlоа Ч42) ., �
4. Твевв оо L роги 2ei Т},� ц j ]jj � � }}р 1. � 69 7. г)1 t.9l3 ].776 Ljei 4.6 � б ;� � � � S.SeS У'Сивеавв еисИ в оо,vоневыоггоав�ев � 2 rs я 2ь 2е 2ь s4 �е 2s 2оя so и2 1s> >13 24 о ,.
Ггорагод / оодвt иll е, epirlt.,а� оц ве во1 ТоИ еео �а » ц 2о ьо 2и 12I 2» s н 4о1 414 ия яs о 2 и еоо .,иt. огвl ны. еев 1ь : о � ь 4 4 я 2 � и : е 4е ьs sao 23) еоо .,ce..tr.t ггое. еее � ) а1 �ь ы s: �о :я и и ио us и2 1ео :2 � )ео � 'p.pee..tta ьwarte2. е 12 11 и 1 е 1 е 21 ss ы es пе ио яs ие 2ьо ,.
товеt и веа товеll. Areleto. � s и ц �е » so s ь 141 :ь2 �2о 4so 4es аоо ь:1 ыs �евв. Мвt ви . о� и и wи t � геt еl н 1ь ю 1ь :3 a � 3 3: us ие 2s � ц � зоь � is ць 4ео 'w еы. ог, �, и� 1 р... евоагвгев :3 a :1 2> >4 s1 ы 2ео � 2о » ь � 2s s п 2so е2 е �во :�тг... роге< а.1 р. в. е 2о a 2s 3 о �ь ь: я2 2 ео �4ь 3�) +ы �s1 soo s21 ьsо ,.оеиг 3о :я 21 31 41 4s +s 1еь 21 о 43 о 4ья ыя 1, о2я ьоо �w ,.
11, Теи 2 с. гг. ве /. ввоио 7,s76 :,97е s,6o1 1,761 ь,цб s, ояг а,о71 1а,я7я )1, пб 12,1s1 1s,o7 � 16,1э1 u,17s 7о,97 я 76,6s/ 2е, иs17. Gpital Ч r вsw а/ _ji ___ц � 64 , 69 _ � � , _j,4 _� 21] !ое ! ев l11 к]S � }: 170 f70и , тееоl eaesa � :,sfs :,1s6 7,66s 1, � з7 1,s6s s,1Ч б,ояs и ,и 7 и , о:! 1 � ,:6[ 1s,и я 16,ы о ::,71 о 71, ои 76, И / 7� ,us
.. be а� .il. Ы � .
.., Lви t Ьво / е ! вl Ч l ов,
� / fl ц и ва t ооевоев �J ео l вЫ в S.o1 toe [l вевl 7овn.у ti/ игве вгв рго и ев вдJовЧ д [ег а 17- � овеЬ prtod,�,,/ t гввЬдевав вее вrвil в� 1в, �j/ / овввив р вl в 1.1 (вкеl одl ц 1.7,5) вод !0,� / 2ееlодl а/ eio рге[! а о[ дггаеЬ lfoooplp вад вв/1!/1 Ы в rа оаев [та ввt сЬ t в+,j/ lfвisl7 рто[L ев о[ Аги аk fа вор l7 еЬгооеб е173, в[t вг vlle � t Ьв resepl7 r вв wd. ielopood вet о! еЬг tsei гo Dврагев. аt и е6.
lсвев D!вlilloeiu Соер и еiов,V Lвtiod ое бoth вl р еt в ввд 1аев1 гв1в.� / lf вiвLp 1воЬв двЫ te t вs (i ев. вw l овд 1,1.5).j/ lhidy 1[`иое li еи ви ,� / Iaetodiolf еЬо e вruw. [ га а: р те доеl ее ий вг t Ьв 1(адl евl Уа t в огдi и оЧ , вЬi еЬ вео и гввй од [ ог huleh и п i н в [ог
овеасв rегlиев.kJ [ Ч iutoo вррsовi ввt е УтввЫ еr вв.j/ /selydiц п t Св р м н евд 1 � {еввt еwве t ои !/ в Ч � е и rviei вe,
� hior to 1!1lI12, рго[ie. wro kвpt ts еЬв вдввs ев вееоивt.. / аv. в. г� рге[it. [or t Ы е prlol вте вlво Iadi н t вd,l ввввов д аl в 5.2.6 ввд 6,1.
4/ t вв. авв р вд. 6,7 ввд /.l . кеlодi ц /.l,7.2. ввд е,1, � ,1.� / h воаов i< овд. 7 ввд 1.l.1.l. �� / tви вав р аде ! вЧ !2.
1� tfllt Gвt тв! / ввk о[ G71ee1 овЧ гв! l и ввоs р.
4 и � Овбег 6[ го Utun [ гп i вi оов j/ .. .. .. .. ,.14. Оей г АбJ иееи вt в б;! .� 4 __I _ц -11 _.19. ...i1 � � � l � 4 _!.R 111 .. . .. .. ..1s. l � j ы tвl тоевl l, и s 7, ооя 7,s1e ь,11о ь, еея s,:oe 6,17 о 1 о, о1 � 1о, яы 1:,eto 1s,7бs . .. .. ..
[l ов� аh и ев ьеееr ве I вl асеев �,_j( 1ьf ,� г Jj � ¢ _aL � 4¢ _.1,Zц .1 вQ11 .3.4.4Q 1. ьее .. .. .. .. ..и, тои l Сиггnе espaaleara l,tu 7, ц: 7,3es 4,1 � : б, е17 3,su 6,1 яб и , �бя и, яи ц ,еs о 1 б, ея ., .. ,. ,. .. �
.. /ot вwil вЫ е. �
е/ [ео l ооевен е/ to тв� 1в 3.01 [вг [i вгвl fuu.� / еваl вевв в nв о[ ев 130 в1llLa � iв 11 Н , t в 11S вlllia в 1д И 1S, 11в 363 в1111 оа io 1!1! и 1 t в 76 ев1111 ое
iв 1110 ва� t в 100 вllli ее i в N1l у яем И авtl авt: в, Rв 4l1 alllioe la llel рrавИ (ои l, аед И 1,000 dllioe 1е 1! б! еавесеввt о[ еУв вр еl вl вll еv ввсв te вt вев s � l е� ввв, все.
9/ евеi Ч l ее RiCв ве lollav вi 1l70/71 1ef1� 11 Jlj,г jtj � , j:j,Z j ц L 1,l1i JlI,(!б 7! Ч 6S S7 f1 � S 7б
� / Ii � ен в вitt ввt вгit Ув !в1 i вгt аl в в prt еМагр б ее Ч vвоее Aeeewb.а/ [веlr Ч в варве� itr гв ов / ее1 еt м ев lгов 1f7! owcrl � [ и в твЫ о 5.04).j/ Ов1и apa � tt ы о ев геа п го е веЧ в ад cqie вl го евв Уввв Ьц о вбJ ивЧ 1 [ ег lt м в сгвав[п и д [r ав Ч Р1 Ч l vоевв ваб вi ее гп и .е/ Ор гвti вб te[ieit в et ти � l ве hqqei ц в./erreli Gвегвl euL et Су 1 ев.
е/ еЧ Leetoot в е/ to 7 вЫ в S.OI ( ог [1 воа1 7и и .� / eequieitloo о[ lloaaeial аеи t в.£/ Oeallae вt вd еоее ot Rl Се вод t Ьв deeeotc в3ie.d ! ид{et. Гог 1980-61 рогl од, eht dвtalle огг и [olloret
19 е: t9e: t9e] 1яе4j� Q j � 1 Aeeeerad Pr дvi вia ы l Aeereved jy � tej
О. ео. ег. иидеидбое ие 4б 47о 46 ь2о 1: оеиррl вв. оt ае7 hpie вl
7er м t и et Рго еги 24 - 300 - SSO 30[seqr вeN lor вl
j/ Могв aeeueetel � , "Gpie вl бвроадl еигое" 67 Свеегаl 0аеУ oL Cq1oa dвplsleioo 1м е loao гора7в. пе гоевi ре.. ТЬо Coetral бвеk дои �eot Уев t Ьа eaR "р е L. бд1ц ."
е/ евр r о ео овt ебеабв 1 о 7 си еиq дерееl и (1. е. 7noaler. oet ot д t Ьди r вl в).j/ 2аеl иl и ев э06 вll эiоо бeiee t бe герарвоеt оЕ epwi вl вдввеево Ьр еbв Сго t гаl eaek.
� � t CвateaL бваk е1 Gp1ee.
BEST С�РУAUAILABLE
Table 5,06: CENTRAL GOVERNMENT BUDGET DEBT SERVICES, 1970/71-84 A/(as Million)
1970171 1971/72 1973 1974 1976 1977 1979 IM IM IM 1982 1993 1984Budget Budget Revised
!/ Оп а еавА аавi в. Рое fi вeal уввrв, r ев t ооеооев !,/ ео i вЫ в 5.01.¢f 8авsд on th в гвеl аввlll вд даt в ивед ia the Своегаl 8веk Anoual laport.f,,/ t врl аевд 6r 8ri Lвeka ?оее Auehortey and Bri Lвaka Свг8о Corporatioo in 1979.
е.а. - aot аvаil аЫ в.
8аиеев: Св¢esal taak ot Свуl ое.
BEST С®РУA�IAOLABLE
т. ы. s.oe: сv иеиттииs} иетоРи�ьесw� ro мтl0 иs, 1970/71- еьl/( � в Mil1[ ов)
Peevi в ieeal I вгlваее� leevi вieeal Qв tiutu Ч tl ввt вв
е{ гl еи l еии б teeioetoo 11 е .1 116.1 1а1.7 �9s.e 2]4.2 197.1 165.2 � ,,� j,}j,},,,s з.бо:. о а.аев.б 1.97 а.6 е.бьа.е е.::].1 I.729.1 7.9 ое.1wьвгцl Овr вl ор. евееовгд а7. ь sа. з s9.9 1 и.9 1 ы.1 и 1. о 1а .е ыs.9 1, и 7.1 ],; ео.9 а, е1ь.1 7,1ао. б б,т . о ь,9 п . е ь,о17. о ь,l яь.оигегv.t1.r. оегоlор� ееееовгд ье.s бе.: 7я.7 7:. о еа.е se.e u.s аs. ь бо.о и .1 з5. о п .s - - -ееви гl воевеlоов Сегреи еl оо 1.о 2.6 е.ь я.9 :.з з.о - - б.: ие.1 ео.а 2а2.э з:е.э 1ае.5 2]9.6 ];9. ьеае. Аег. Dl гвкв(li евеiоо вод
ап еt.. вое Аиебогl е� - - - - - - - - - 7ь.s 1е.9 15. е 1s.o :4. о :о.о :о.оСоеооие ll ввввгеЪ еевгд - - - - � . б 1.) а.е 9. а 11.7 12.9 10. � 11.2 9.7 17.1 17. е 17. еСоеооие Culeiv вeloe еовгд - - - - - - - - 12. л :7.7 ]э.9 е.а s.ь s.o .;. � ,у.чУвеег еи оигеи бовгд - - - - - - - 2. е 10.6 � . е 4. а 5.0 2.5 2.S ].2 7.2JвsвеЬв l вевев Der вlep и oe еовед - - - - - - - 2.0 176.7 Т9.6 11;.0 102.6 75. а 115.0 1aS.0Тев ева11 Celdio{ bеv вl орввое Autpori[ � - - - - - - - - O.S 2.S 11.9 27.0 � 5.9 16. е 75.6 ]S.6vп м еиррl � б Dгвlов{ е еовгд - - - - - - - - - - ]а2.5 лб.] 1,]7 я.9 яаб.7 1,1оа.б 1,1оа.баеьеn � 1. о 1.1 а.1 - 1. а ;. о и.1 е.ь ь.5 а. е s.s ].s :.] :. з :. а :. �
ц l йкц 9t 1L4 1L� . L! � � 2 Lь4 l3s4 l. г,.i !l,.4 44,.4 l4.4 ]L.t , 1.1 Q 1l..2 1l3 1� ,£Cq1eo гi вЕвеl и Согрогц l одвод ti вheeT ввгЬои ц. о п.б 7. е 9. о 2e.s 17.9 1ь. я зs. а а5.9 9а. б :е. е 1:.7 11. о 1а.7 1]. о и . о
тоти, 2е1. а 25 е.1 зм.2 27 е.: 77 о. о 9ь].: ебе.2 2, о7 о.о э,1 и. е ь, оеб.: 7,17 а.1 10,4ьо.7 11,s01.e 1o,es2.9 и,2 ая. д 12,] яь.аЕ/ рl и ве вее [еоеооев {/ ео Твl1 о S.O1 ! ег li вевl Ти н .� / totleia rA1eh геевl и д И и t рве Rв 10 вillioe виееу уевг ie ебе pesiad еои н д.g/ Севрlвt о бrulde.e оее аr вil вЫ е.
Nae{ одвl eвvinp Ввдka.vtne. Mpoaiu з.s о-4. оо� � 7.2о 7.2 о е. ао б. ао 8.4 о и.оо 12.оо 12.Оо и .оо и . оо11 lbntb в Вi к. д Dвравit в 4.30 � / 7.30 7.50 13.00 15.00 15.00 20.00 20.00 70.00 20.00 10.0010- Т, вг BвviaBa Свгt1li еаеев 3.00 11.00 11.00 11.00 11.00 ' 11.00 L1.00 1l.0 о 11.00 11.00 11.00 '
g:
><ед0l деитееСов вксi вl евпt в
Ввеигед 6.50-12.00 6.S0-17.00 6.30-14,00 10.00-Z0.00 10.00-20.00 10.00-20.00 11.00-2].00 11.00-]0.00 11.00-]0.00 11.00-70.00 11.00-]0,00Uдевеигед в.s о-12.оо 9.3 о-14.оо 9.3 о-14. оо 1 е. оо-по. оо 16. оо-2 о. оо 16.o0-s1.ao 1 я. оо- эо.0 о 19.оо-з:. оо 1а. оо- з2. оо 11. оа- зо. оо и . о0-] о. оо
Lапв- тв л Ce вdit I дгеl еиеi ад�
ене. Иогt8 ц в e.nk � / s.oo-1o.s0 s.oo-1:.0o s.ao-12.0o s.oo-12.0o s.oo-1:.ao s.oo-16.00 3. оо-: о. оо 1:. оо-24.оо 12.оо-: а. оо 12.оо-: а. оо 12. оо-24. ооAдrieultural аад l одивt тi вl
� / бдд о[ ввЬеивеу 19б4.k/ Rвi8 Ьевд вvетвее ot bill в i веивд од евддвг .g/ 4t в ве vbich h дtral Ввдk providu вдv вдееа to еоа вга i вl banb � ееиевд Ьу Соv вгптвпе � дд Сеv оr пввпе gu вranteed eeeuricies. деfi двпее
Eвailieie в toc produetire ригрои в агв еикеедеl у аvвц вЫ в вt гвt м rao8ie8 Егав 1.S0-17.00x.д% l девтм t таt ве ! от th в Сеуl од Bavinef Ввд1<, the Уове Oi11ee 8avin8 в l апУ, апд tlte 8вvi п8в Certllie вte Fuad. Theae in вtleueiona иеге
и гr ед vieh ehe двеiооаl Ваvl д8в eank од Арг11 1, 1972.!/ Оп � впw су 1, 1979, t Ьв АВН еиlt иевl впд I ддиц тi аl Credit Corporatioas v агв wl8 ш t вд inco eha Bcate Xortg ц e Ввпk.
длигсв: Свпtr вl еадk оЕ Сеуl пд.
1 �� � �?сC�DP� AVa1LA� LE
Table 6,02: MONETARY SURVEY, 1971-84 1/(Re Million-, end of period)
I/ This table is not consistent with the Country Data sheet, which uses as a source the IMF's International Financial Statistics.Jl/ Eod-February 1984..q/ Adjusted for amounts in Suspense Account Paddy Marketing Board and/or Goods Receipts.
A/ Revised.Provisional.Leveled and bunded land suitable for paddy cultivation.Based on conversion factor of I metric ton of paddy = 0.68 metric tons of rice.
A/ Equals rice production less seed and wastage, estimated at 122 of total production.11 TC * Food Commissioner.aj PKB * Paddy Marketing Board.i Total rice imports not adjusted for 2.52 slackage lose.
L1 Apparent consumption, estimated as net domestic rice supply plus imports, adjusted for slack, plus change in thestocks held by TC and PHB. Change in stocks of private traders is ignored.
j/ Does not take into account changes in stocks of PmB.
SiMEAAs Food Commissioner; Agricultural Implementation Programme; and Central Bank of Ceylon.
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Table 7,03: CULTIVATED AREA AND PRODUCTION OF SUBSIDIARY FOOD CROPS, 1972-83
l Revised.I/ Provisional.g/ Harvested area excludes area under immature tee and, effective 1974, abandoned tea lands. Data for 1974 onwards are calculated
on the basis of the new definition of harvested area and thus are not strictly comparable with those of earlier years.At Total includes "other" rubber not shown separately,I/ In out equivalent converted at I st. ton oil * 8,000 nuts.
I et. ton Desiccated coconut * 6,800 nuts.
n.s. * not available.
Suce: Central Bank of Ceylon.
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Table 7.05: TEA PRODUCER MARGIN, 1970-83(Ra per kg)
A/ Provisional.b/ The specific export duty on tea was raised to Rs 15.50 per kg in November 1977 and then lowered in July 1979
to Re 10.50. The average specific duty shown for 1977 and 1979 is calculated by dividing revenues from thespecific duty by total exports. On November 13, 1981, the export duty was lowered to Rs 8/kS. The figureshown above is the estimated average for the year.
./ Residual.A/ Ad valorem tax receipts divided by total amount of tea sold at Colombo auctions.
Source: Central Bank of Ceylon.
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Table 7,06: TEA IN THE PUBLIC SECTOR, 1982-83
Cost ofExtent in Yield per Production at Net Sales Producers'Bearing Total Output Hectare Aj Estate Level Price Margin
A/ Derived from yields obtained at the production level and differ somewhat from the output data indicated above.k/ For 1983, thiu does not include details of Estates which were transferred to Lanka Estates Development Ltd.
n.a. a not available.
Note: 1. C.O.P. is at estate level.2. Excludes administration charges interest, lease rent to LRC, depreciation, audit fees and bonus.3. Includes a crop charge of Rs 0.35/kg.
JEDB a Janatha Estates Development Board.SLSPC - Sri Lanka State Plantation Corporation.
Sources: Ministry of Janatha Estates Development; and Ministry of State Plantations.
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Tabie 7,07: RUBBER IN THE PUBLIC SECTOR, 1982-83
Cost ofExtent in Yield per Production at Net Sales Producers'Bearing Total Output Hectare A Estate Level Price Margin
a/ Derived from yields obtained at the production level and differ somewhat from the output data indicated above../ For 1983, this does not include details of Estates which were transferred to Lanka Estates Development Ltd.
n.a. * not available.
Note: 1. C.O.P. is at estate level.2. Excludes administration charges interest, lease rent to LRC, depreciation, audit fees and bonus.3. Includes a crop charge of Ru 0.35/kg.
JEDB a Janaths Estates Development Board.SLSPC - Sri Lanka State Plantation Corporation.
Sources: Ministry of Janatha Estates Development; and Ministry of State Plantations.
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Table 7.08: FERTILIZER ISSUES BY CROPS, 1970-83('000 tons)
Value Added, Current Prices 2,462 2,688 3,109 3,437 4,893 6,030 6,760 n.a. 4.8
Value Added, 1970 prices Al 1,039 790 953 964 1,187 1,320 1,413 n.a. 4.8
A/ As covered in the Central Bank's Annual Survey under which questionnaires are sent to all firms believed tohave an output of Re 500,000 or more. Around 5,000 questionnaires are sent out, but there have long beenaround 1,500 responses only, employing in 1978. 136,000 (almost half of these in the public sector), orapproaching 40Z of total manufacturing employment.
b/ Provisional.c/ Revised.!I Implicit deflator for manufacturing, 1970 - 100.
n.a. - not available.
Source: Central Bank of Ceylon.
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ТаЫ е д , п2= HAN1' РАС� � 'Rl � C ti1 �R��FY, 1991 АЧП l982
Чвпеv Рл l.1Уа 1ив оЕ Vдl ие 1�� l пе Аддед пв t о Г Сдрлеl еу of i прпr ь �:oneene ! п
Al Provisional.b/ Capital investment is defined as capital reserves and long-term liabilities - accumulated losses.c/ Physical production as percent of nominal physical capacity, main products only (where appropriate, weighted) according
to their contribution to turnover.d/ Less than one percent.g/ Excludes National Textiles Corporation and State Flour Milling Corporation. For Textile Corporation complete data are
not available. State Flour Milling Corporation ceased milling activities from end-August, 1982.V Estimates.jL Excludes State Flour Milling.
n.a. - not available.
Sources: Central Bank of Ceylon; and Ministry of Industries and Scientific Affairs. BEST COPY AVAILABLE
Tabilt...,04: ANNUAL PHYSICAL CAPACITY AND OUTPUT OF MAJOR STATE INDUSTRIES, 1976-83 a/
Свевеее� е,в бвг а ( eelt в глгд ве [ еви t вго t (t в в lllieel тоевl leveauet {l в в [lliee) Ь лl в� ввее tee в eeial ( ее� )1414 i9l4 19� 1 1l� 2 14l1 !/ 14Z4 1144 14l.1 J1Qi 1441 в! 19ц 1L Sl11 144I 3� l1 ll ' UIY !}44 1l41 1У11 11D.2 !/!OltICM l11 Уl еЛLLУг АDУ160етQOjqJ[l гее ,SfLC)
Рооа, и . ео ев, вид ? е6вe ге е s ь s � �е иб )о9 1+: :: 7ь м9 119 sse :ys и: еа7 з4 о s:7 Ioe?ввlLlu, Уввеl об Аррвевl, � вди + е6 вг гкодигев te е е 1: ее as � и зо � 9 so бе: х7 sy 7ь: 1. о ь,7 зб 7,s �o t,I91 � ,: ы е,)79Уоед вад Уоод Ргодиеt в ((ioeludloe П�го{wr.) { э п � з б s 1 бу у :а 1: б 1so 7 1: � ьь: s: аи 1,о:е se:hper вод Н рве � гsдиеев {
Сbм l евl в, htrol в� , 7... ь,lиьь. гвваn в,etr ргодигев 7 по 1s )о � �9 a1 1оь и : � е: sa 1v 1s1 б� 7,1 б� :, ь:з 79 е ), озо )9 еКее- веt вlli е Мt аегвl h одиеев{ввeвре Геегеl вю . иасе. и б б � � б б sm бь : � ье 1л хье 91 7 о tб� 1 е� е,о� : » о уы � ts� вбгl евевд 11вЧ 1 9 гедиe и , Уве6(n вгувед тгвевроге lq иlрвние е 9 )1 s 1: п :1 :�� бе зе ь9 � 7 з91 1эь ��: 497 ы1 7,s �o �е9 1, у:�Мвеnt вееии д ргедиеев { е . е . в .) 3 � 1 1 � � Q � j,j _._Lг � � 1. . � , � � 7 � 1 17 � г SOI ]]) ее7 ]76 :. е9 е
Mote: ). Due te т иедl ее otl, еоароавеев ви Р еее адд ир ео еоевl � tn еьв l1AC tвы а,� . ?Ье рц С двt в вкеl идвв eir11 вееi оввгl ае вед wo вtruetios uetor.
еs игеввг роЧ 1 р i иv ввt вго е Advlwry Совв l еt ее; Lесв1 Iеw п и ое Ad�ri вerr Coriteee в; вед Сееен l евеk ее СеР1еа.
j/ Provisional.h/ Since March 1977, reflects transfers to Colombo Gas & Water Company.c/ Includes Marine Gas Oil, Marine Diesel Oil and Heavy Diesel.4/ Other than marine and aviation lubricants.
Source: Ceylon Petroleum Corporation.
Table 9.06: PRODUCTION, TRADE, AND APPARENT CONSUMPTION OF ENERGY PETROLEUM PRODUCTS, 1970-83('000 tons)
Al Prices are Colombo spot prices; a margin to cover transport costs is added to out-station prices for all products except gasoline,which as of April 1981, sells at a uniform price island-wide.
h/ Although Sri Lanka has officially gone metric, prices for petroleum products continue, for the time being, to be specified inimperial gallons terms. Liter prices have been obtained by dividing imperial gallon prices by 4.5461.
i/ Marketing of regular grade gasoline was discontinued in early 1979.SL Industrial diesel is often referred to as heavy diesel; the two terms are used interchangeably in Sri Lanka. Prior to 1972,
low sulphur industrial diesel was not marketed.gI Differentiated furnace oil was not marketed prior to 1972.V/ As of January 1981, low sulphur industrial diesel is marketed as Super diesel.
Bour.e. Ceylon Petroleum Corporation; and Central Bank of Ceylon.
WRFT COPY AVAILABLE
Table 9.08: CEB ELECTRICITY GENERATION, 1970-83
Generation Capacity (W) ------------------------- Energy Generated (GWh)-----------------Thermal Energy Components
Installed Effective Hydro Thermal Total Kelanitissa GasSteam Turbines Other a/
Table 11,02: MAJOR SOCIAL MENDITURES IN RELATION TO TOTAL CURRENT BUDGETARY EXPENDITURESAND TO GDP, 1969/70-94
2 of Total Current Expenditures Adiusted Total Social I of GDP (current market price) Total SocialTotal Current Total Services and Total Services andExpenditure social Net Food Not Food Health Education Social Not Food Net Food
YM (MI11111") R61 Health h/ Education ki Services b/ Subsidies I/ Subsidies h/ TotalHe
JI/ Total IV Services b/ Subg1dies SJ Submi ies k/
IL/ Total current expenditure adjusted total current expenditure gross food subsidy + net food subsidy.k/ Expenditures an current account only.el In 1963/69, Sri Lanka introduced a dual exchange rote. However, food imports, which determine much of
of the cost of the food subsidy, were valued at the official exchange rate and not at the FEEC ratethus understating the true cost to the budget. The gross food subsidy. valued at the now He 16 exchangerate, would amount to 6.42 of GDP in 1977.
A/ Not consistent with figures shown in the budget tables (5.03-5.04).
Source: Calculated from Statistical Appendix Tables 2.01. 5.03. and 5.04.
I/ Tourist nights in Graded Accommodation.h/ Data not consistent with the foreign travel receipts date presented in Table 3.01 which are based on Central Bank ofCeylon data.
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