Sri Lanka Vision 2025 seeks to attain upper-middle-income status

In September 2017 the Sri Lankan government launched an ambitious development plan, Vision 2025. The eight-year strategy aims to turn the country into an upper-middle-income one “by transforming Sri Lanka into the hub of the Indian Ocean, with a knowledge-based, highly competitive, social market economy”. While the government and the country as a whole have since gone through many tribulations, these goals have largely retained their currency across the political spectrum, even if there is some disagreement as to how they should be achieved. Vision 2025 provided a list of the longer-term obstacles to achieving those goals while also proposing some key solutions.

Building Wealth

Sri Lanka’s GDP growth rate at constant prices has been in decline in recent years, falling from 5% in 2015 to 3.1% in 2017, according to the Ministry of Finance and Mass Media. Overall growth for 2018 was forecast to reach 3.7%. The reasons for this are both internal and external, but there is widespread agreement that with a relatively small domestic market of around 20m, exports should be given greater emphasis. Indeed, envisioning the country as the hub of the Indian Ocean illustrates the centrality of international trade to the country’s development.

Yet, Sri Lanka is known for being more protectionist than many of its peers when it comes to imports. Examples of this include a 90% tariff on imported tiles and ceramics, as well as an effective rate of protection of between 170% and 524% on the 10 most protected sectors in 2015, according to a 2018 IMF report. Such protectionism is widely thought to be behind sluggish foreign direct investment (FDI) flows, with FDI constituting around 2% of GDP in Sri Lanka, compared to 3-4% in Malaysia and 5-6% in Vietnam.

In recognition of these issues, the government eliminated 1200 para-tariff lines in its 2018 budget and is developing a three-year plan to phase out the remaining para-tariffs to create a more streamlined structure. Prior to the constitutional crisis that erupted in late 2018, the administration launched the National Export Strategy, which aims to boost nine priority sectors, including ICT, logistics, trade information and promotion, and infrastructure. By 2020 Vision 2025 seeks to boost annual exports from $11.1bn in 2017 to $20bn while raising GDP per capita from $4065 to $5000 and FDI from $1.6bn to $5bn.

According to Vision 2025, public finances have been weighing on economic growth. This is partly due to a decline in government revenue, but is also the result of government funding of state-owned enterprises (SOEs) with low-profit margins, high-cost foreign borrowing and subsidies. To help tackle these issues, in April 2018 the government passed the Inland Revenue Act No. 24 of 2017, which is aimed at raising tax collection. A new automatic pricing mechanism for fuel subsidies was also agreed upon and implemented in 2018.

Spreading Development

A notable challenge that Vision 2025 seeks to address, given the country’s decades-long civil war, is the distribution of the benefits of economic growth and reform. Although most of the country’s low-income cohort lives within 30 km of major cities, poverty rates are also high in the Northern and Eastern Provinces, on the tea estates and in the Monaragala district in the Uva Province.

The strategy outlines plans for tackling some of the structural impediments to regional growth, of which land reform is a key part. Major economic development zones are expected to create centres of growth in places such as Ruhana and Wayamba, as well as within the Western Region Megapolis project area.

At the same time, Vision 2025 addresses two growing demographic challenges in Sri Lanka: a rapidly ageing population and a relatively low female labour participation rate of about 36% as of the second quarter of 2018. To combat a shrinking labour force, the strategy aims to improve the structure of emigration policies and encourage Sri Lankans abroad to return home, as well as provide more child care and training facilities.