This Selected Issues paper on Sri Lanka provides background information on economic developments and on selected policy issues facing Sri Lanka. The main economic developments in 1996 and the first quarter of 1997 are discussed. The paper highlights that in 1996, a severe drought, power shortages, and an escalation in the military conflict contributed to a sharp deterioration in the economic situation. With the end of the drought and power shortages, and a rise in investor confidence, macroeconomic conditions in 1997 were more favorable.

Abstract

This Selected Issues paper on Sri Lanka provides background information on economic developments and on selected policy issues facing Sri Lanka. The main economic developments in 1996 and the first quarter of 1997 are discussed. The paper highlights that in 1996, a severe drought, power shortages, and an escalation in the military conflict contributed to a sharp deterioration in the economic situation. With the end of the drought and power shortages, and a rise in investor confidence, macroeconomic conditions in 1997 were more favorable.

VI. Social Policies: Recent Developments and Future Priorities69

A. Social and Demographic Indicator

215. Over the last two decades, Sri Lanka has made important strides in the social aspects of development. Indicators of health, nutrition, and life expectancy at birth are significantly better than in other South Asian and low-income countries. In addition, school enrolment rates are high and adult literacy is nearly 90 percent, substantially above other countries in South Asia. The population growth rate has been stable at 1.4 percent per year, the lowest in South Asia.

216. There has also been some improvement in income distribution in Sri Lanka since end-1980s. According to the World Bank’s 1996 Social Indicators of Development, the proportion of income accounted for by the top quintile has fallen somewhat from 43 percent 15–20 years ago to about 39 percent more recently, suggesting an increasing share of total income of the middle-income population (Table VI.2). Most recent estimates show that the bottom quintile of the population accounted for 9 percent of total income, a substantially higher proportion than in Southeast Asian economies.

Table VI.1.

Sri Lanka: Selected Socioeconomic Indicators, 1996

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Source: World Bank, World Development Indicators; and Social Indicators of Development.
Table VI.2.

Sri Lanka: Social and Demographic Indicators

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Sources: World Bank, Social Indicators of Development, 1996; and Food and Agriculture Organization (FAO), Production, 1994; and the United Nations, The Sex and Age Distribution of the World Populations, 1994.

Average comparator countries that have GNP per capita between $460 and $520. These countries

Difference of total population and population between 15–64 years of age.

Fifteen years old or older.

B. Government Expenditure on Social Services

217. Social service expenditure constitutes an important part of budgetary expenditure in Sri Lanka. During 1992–96, it accounted for about 32 percent of the total expenditure and 9 percent of GDP (Table VI.3). These proportions have remained quite stable over this period. Nearly half of social expenditures are on welfare programs, while education accounts for 31 percent, and health for 17 percent. About 85 percent of expenditure on social services is current expenditure.

Table VI.3.

Sri Lanka: Government Expenditure on Social Services, 1992–96

(In billions of Sri Lankan Rupees)

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Source: Central Bank of Sri Lanka Annual Report 1996.

Provisional.

218. Turning to each subcategory, expenditure on social welfare programs rose steadily from 4.3 percent of GDP in 1993 to a peak of 5.1 percent in 1995. In line with the government’s effort to reduce the budget deficit, welfare expenditures were reduced to 4.4 percent of GDP in 1996. Expenditure on education was fairly stable at about 3 percent of GDP during 1992–96. Current spending amounted to over 80 percent of the total spending on education, as the emphasis has been on hiring and salary adjustments for teachers rather than the provision of inputs and maintenance. Expenditure on health has also been stable at about 1½ percent of GDP during 1992–96.

219. Although expenditure on housing and community services remained a small fraction of total expenditure on social services, there has been a notable increase in community services spending, both in current and capital categories, from 1.1 percent of total expenditure on social services to 3.6 percent. Expenditure on housing also rose from less than 1.5 percent of total spending on social services in 1993–94 to 2.3 percent in 1996.

C. Social Transfer Programs

220. Sri Lanka has been active in making social transfers to a large portion of the population, especially food subsidies, which have been ongoing for four decades. The high cost of these transfers, however, has placed an increasing burden on the country’s fiscal position. To help reduce fiscal costs, the welfare programs have over time shifted away from the provision of universal benefits to means-tested benefits. Social transfer programs, however, continue to be an important element in the government’s three-pronged approach to reduce poverty, which comprises sound macroeconomic management, welfare support programs, and rural development policy.

221. Prior to 1996, a number of separate programs were in place including cash transfers, food and kerosene stamps, and commodity subsidies. These programs accounted for about 16 percent of total government expenditure, equivalent to 5 percent GDP, in 1995 (Table VI.4). To help generate fiscal savings, several of these programs (e.g., food and kerosene stamps) were consolidated into a single social transfer program called Samurdhi (prosperity). In addition, the Janasaviya program (strength of the people), in place since 1989 and under which monthly cash grants were provided for a period of two years, was discontinued in 1996 and superseded by the Samurdhi program. Thus, following this consolidation, there are now two main types of social transfer programs in Sri Lanka, namely, the Samurdhi program of general transfers, and specifically targeted social transfers such as the provision of school uniforms and text books. In specific regions (especially in the north and east), programs such as food and kerosene stamps remain in place.

Table VI.4.

Sri Lanka: Social Transfer Programs, 1992–96

(In billions of Sri Lankan Rupees)

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Source: Sri Lankan Authorities.

These data are generally somewhat higher than the data on welfare expenditure in Table VI.3 because of different classification and coverage.

222. The Samurdhi program is now the cornerstone of the government’s social welfare scheme. The major components are a direct cash transfer, ranging from Rs 100 for a single person household to Rs 1,000 per month for a household with five or more members, and the provision of loans for beneficiaries at the village level. A total of 1.5 million households were covered by the program by end-1996. Beneficiaries exit from the program when their income exceeds Rs 2,000 per month for a continuous period of six months or when at least one family member finds long-term employment. The implementation of the Samurdhi program is conducted at the village level by “mobilizers” who screen beneficiaries and mobilize them to participate in development lending programs. Task forces of mobilizers (mostly new high school graduates) operate through Samurdhi’s network of 12,500 units in 75 districts. Each mobilizer receives a monthly payment of Rs 2,000. There are approximately 36,000 mobilizers (implying 42 beneficiary households per mobilizer).

223. The two new loan programs, Suratura Diriya and Sasana, were also established in 1996 to provide development financing for Samurdhi participants to undertake commercially viable projects. The loan programs are administered by the two state banks. Loan size ranges from Rs 2,500 to Rs 10,000 with a pay back period between two months and two years. Funding for these loan programs amounts to about Rs 500 million, of which Rs 400 million came from the 1996 budget and the remaining from savings generated by Samurdhi. Twenty percent of the cash transfer to households are subject to compulsory savings with the two state banks at an interest rate of 12 percent per annum. Over time, it is expected that reliance on budgetary resources will be reduced and the loan operations will be largely self-financed through these saving accounts.

224. In view of the need for fiscal consolidation, all Samurdhi programs will continue to be implemented subject to budget rationing. In the medium term, Samurdhi will likely evolve into a more diversified set of social transfer programs. An example of this is the Samurdhi social security program, which collects Rs 20 from each family per month and provides a lump sum payment of Rs 4,000 upon the death of each family member.

225. The subsidies on wheat flour and fertilizers have re-emerged as an important element of social transfers in recent years. The subsidy for wheat flour and bread was reintroduced in July 1994 in the run-up to parliamentary elections; this subsidy cost the budget 0.7 percent of GDP in 1995 and 1996. The subsidy is poorly targeted—the FY 1990/91 household consumption survey suggests that one-third of the subsidy accrues to the wealthiest 20 percent of the population. Furthermore, the subsidy has induced a large shift in consumption away from rice, which has adversely affected domestic production. The fertilizer subsidy was also reintroduced in June 1994. The initial intention was to target the subsidy to low-income farmers by issuing coupons, but the scheme was ultimately implemented as a general price subsidy.

D. Future Priorities

226. There is substantial room for reducing the costs and inefficiencies of the social welfare programs without jeopardizing the government’s long-standing commitment of assisting the poor. The main areas where tangible improvements can be made include:

  • eliminating the wheat flour and fertilizer subsidies and adopting free market pricing mechanisms;

  • improving the Samurdhi program by containing the number of mobilizers, maintaining them on one-year employment contracts, freezing budgetary allocations, and introducing time limits for transfers to beneficiaries;

  • consolidating the three schemes for the Northeast (food stamps, kerosene stamps, and emergency assistance) into one single program until the Samurdhi can be introduced in the region. In addition, the school uniforms and textbooks schemes could also be integrated into the Samurdhi.

227. Public expenditure on education also needs to be rationalized. Such spending, particularly in recent years, has focused on hiring and salary adjustments for teachers rather than on expenditure for inputs and maintenance. As a result of inadequate investments, World Bank studies have concluded that the quality of education in Sri Lanka has declined. In addition, the problem has been compounded by low teacher productivity, the weakness of the training system and lack of standards, and the mismatch of demand and supply for teachers across regions resulting from poor staffing and transfer policy. In view of this, reform on education spending should, therefore, focus on shifting away from increasing budgetary outlays, especially in current expenditure items, to reallocating the available resources toward increasing the supply of inputs and maintenance. Moreover, reforms should also aim at correcting distortions of incentives which underlie the problems of staff mismatch across regions and low teacher productivity.

E. Income Distribution

228. The most recent available estimates show that income distribution, as measured by the Gini coefficient, has improved slightly over the last decade (see Table VI.5). This improvement has occurred despite the fall in the share of the agricultural sector in total income from 23 percent of GDP in 1990 to 18 percent in 1996, as the sector’s share of employment also fell from 48 percent of total employment to 39 percent (see Chart VI.1).70 This development also took place during the period of falling unemployment, which implies that there is a pool of surplus labor readily available to accommodate the expansion of the nonagricultural sector.

Table VI.5.

Sri Lanka: Income Distribution in Selected Countries as Measured by Gini Coefficient

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Source: Hamid Tabatabai, Statistics on Poverty and Income Distribution: An ILO Compendium of Data (Geneva: ILO, 1996)
Table VI.6.

Sri Lanka: Comparative Income Distribution Classified by Quintile

(In percent of total income)

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Source: Hamid Tabatabai, Statistics on Poverty and Income Distribution: An ILO Compendium of Data (Geneva: ILO, 1996)
CHART VI.1
CHART VI.1

SRI LANKA: INCOME AND EMPLOYMENT IN AGRICULTURE, 1990–96

Citation: IMF Staff Country Reports 1997, 095; 10.5089/9781451823370.002.A006

Source: Data provided by the Sri Lanka authorities.

229. As Sri Lanka’s structure of output continues to diversify away from agriculture and toward manufacturing and services, the ability to maintain and improve the present level of income distribution will hinge importantly on progress in implementing reforms to raise the value added of agriculture, and also labor market reforms to provide the flexibility to meet the demands of the expanding industrial and service sectors.

230. In the case of agriculture, the priority will be to boost the role of competitive market forces and reduce government involvement in production, marketing, and distribution. The privatization of plantations over the last few years has been an important start to this process, and will now need to be supplemented by reform of agricultural commodity markets. Over the longer term, the problem of small structure of farms associated with poorly organized land markets will also need to be addressed.

231. On labor markets, amending labor legislations to give employers greater flexibility in retrenchment decisions would spur domestic firms to restructure in the face of changing conditions, as well as remove an important impediment to new investment in labor-intensive industries. Lax regulations with regard to job disruptions and inefficiencies in dispute settlement procedures, which have led to significant losses in economic activity and foregone earnings, also need to be addressed.

STATISTICAL APPENDIX

Table 1.

Sri Lanka: Gross Domestic Product and Expenditure Components, 1992–96 1/

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Sources: Data provided by the Sri Lanka authorities; and staff estimates.

At market prices.

Includes investment by public corporations not financed through the government budget.

Capital expenditure and net lending by the central government, excluding privatization proceeds.

Table 2.

Sri Lanka: Saving, Investment, and the Current Account, 1992–96

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Sources: Data provided by the Sri Lanka authorities; and staff estimates.

Current revenue minus current expenditure.

Includes investment by public corporations not financed through the government budget.

Capital expenditure and net lending by the central government, excluding privatization proceeds.

Includes net factor income and transfers from abroad.

Table 3.

Sri Lanka: Gross Domestic Product by Industrial Origin at Current Prices, 1992–96

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Sources: Data provided by the Sri Lanka authorities; and staff estimates.

Including forestry and fishing.

Tea, rubber, and coconuts.

Based on factor costs.

Table 4.

Sri Lanka: Gross Domestic Product by Industrial Origin at Constant Prices, 1992–96

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Sources: Data provided by the Sri Lanka authorities; and staff estimates.

Including forestry and fishing.

Tea, rubber, and coconuts.

Based on factor costs.

Table 5.

Sri Lanka: Basic Data on the Tea Sector, 1992–96

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Source: Data provided by the Sri Lanka authorities.

Provisional estimates.

Estimated; includes depreciation and overhead cost, excludes finance charges.

Average Colombo auction price minus cost of production.

Table 6.

Sri Lanka: Basic Data on the Rubber Sector, 1992–96

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Source: Data provided by the Sri Lanka authorities.

Provisional estimates.

For RSSI category of rubber.

Combined figure for both public and private sectors.

Average Colombo auction price minus cost of production.

Table 7.

Sri Lanka: Basic Data on the Coconut Sector, 1992–96

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Source: Data provided by the Sri Lanka authorities.

Provisional estimates.

In nut equivalent per metric ton; desiccated coconut = 6,800 nuts; oil = 8,000 nuts; and copra = 4,925 nuts.

Estimated on the basis of per capita consumption of 90 nuts per year; excluding industrial use.

Average Colombo market price minus cost of production.

Table 8.

Sri Lanka: Paddy Production and Other Agriculture, 1992–96

(Volume in thousands of metric tons, area in thousands of hectares, and yield in kilograms per hectare)

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Source: Data provided by the Sri Lanka authorities.

Provisional estimates.

November-May season.

May-November season.

One bushel is 20.9 kilograms.

End of period.

Table 9.

Sri Lanka: Consumption and Prices of Petroleum and Electricity, 1992–96

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Source: Data provided by the Sri Lanka authorities.

Including use for electricity generation.

End of period.

Price includes taxes. From December 1995, taxes consist of a 20 percent turnover tax on gasoline, a 6 percent turnover tax on all other petroleum products, and a 4.5 percent defense levy on all products. There are also exercise duties of Rs 7 per liter.

Period average.

Unit cost of production including customs duty (all customs duties are charged to domestic sales), turnover taxes, and all other expenses.

Basic rate on household consumption of electricity between 50 and 500 kilowatt hours per month, excluding fuel surcharge levied on all users of electricity exceeding 150 kwh per month.

Table 10.

Sri Lanka: Price Indicators, 1992–96

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Source: Data provided by the Sri Lanka authorities.

Based on market prices.

Data between brackets are weight in overall index.

Low-income housing is under rent control.

Table 11.

Sri Lanka: Selected Wage and Employment Developments, 1992–96

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Source: Data provided by the Sri Lanka authorities.

Weighted average nominal wage for workers covered by Wage Boards; weights are based on the number employed in each trade as of end-December 1978.

Average of initial salary grades for nonexecutive and minor employees, skilled and nonskilled; excludes school teachers.

Takes into account the changes since 1987 owing to the Government’s privatization program.

Includes employees of government ministries, school teachers, and defense personnel.

Includes universities, public corporations, boards, and state-owned banks.