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The Sri Lankan economy grew by 6.3 per cent during the first half of 2013 compared

to the 7.2 per cent growth recorded during the first half of 2012. This was achieved

despite a number of challenges faced by the economy including the lagged effect of

tight policy measures introduced during the first half of 2012, the impact of unfavourable weather

conditions and weak global demand. The sluggish growth in private sector credit and the downward

revision in global growth estimates were main indicators of subdued domestic and external

demand respectively. The expansion in construction activities, transport services and increased

factory industry output were the main contributors to economic growth during the first half of

the year. However, growth momentum is projected to accelerate during the second half of the year

due to favourable weather conditions which will help to improve domestic agricultural output

and hydro power generation together with the expansion of domestic economic activities with

the easing of the monetary policy stance and improvements in the external sector with the gradual

recovery in advanced economies. Further, the continued expansion in construction, transport,

manufacturing and tourism sectors would also contribute to the growth during the remainder of

the year supporting to achieve the annual growth projection of over 7 per cent in 2013.

NATIONAL OUTPUT AND

EXPENDITURE

2


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CENTRAL BANK OF SRI LANKA

14

which includes vegetables, highland crops andfruits. Within the export agriculture sector tea

production recorded a positive growth, whilerubber and coconut production contractedduring the first half of 2013.

The economy is projected to grow at overy7 per cent in 2013 compared to the 6.4 per centgrowth recorded in 2012. Higher growth duringthe second half of the year over the relativelylow growth of 5.5 per cent in the corresponding

period of 2012 would be supported by an

increase in agricultural production, particularlydue to the higher production in both paddyand other food crops in the Yala season as aresult of favourable weather conditions. Withinthe Industry sector, the construction sub sectoris projected to grow at a healthy level whilethe growth momentum in the mining andquarrying sub sector is expected to continue.The factory industry sub sector is also expectedto grow at a higher rate during the second half

of 2013 with the expansion of industries suchas textiles and wearing apparels, rubber based

products, ceramics including floor and wall tiles,and ships and boats. Services sector growth isalso projected to increase at a higher rate thanin the second half of 2012 particularly withthe expected expansion in the external tradesector, which recorded a negative growth in the

previous year. Further, transportation, financialservices and hotels and restaurants sub sectors

are also expected to perform favourably duringthe second half of the year.

Sectoral Performance

Agriculture

The Agriculture sector recorded a marginalygrowth of 0.5 per cent during the first halfof 2013 over the high growth of 10.4 per

cent in the first half of 2012. This slowdownin the Agriculture sector was mainly due to

Developments in 2013

Output

Grossy Domestic Product (GDP) growth of

6.3 per cent registered during the first half of

2013 was well supported by the growth of the

Industry sector, with the continuous expansion

of construction and mining and quarrying sub

sectors. The Industry sector grew by 10.4 percent while factory industry, which is the largestsub sector within the Industry sector, recorded

a positive growth rate albeit at a marginallyslower pace than during the first half of 2012.The Services sector recorded a growth of5.5 per cent during the first half of the year.

Wholesale and retail trade sub sector, whichaccounts for the largest share in the GDP,slowed down during the first half of the yeardue to the contraction in external tradeactivities. However, the higher growth registeredin transport activities together with the healthy

expansion in domestic trade, financial services,government services and private servicessupported growth in the Services sector.Meanwhile, the Agriculture sector recordeda marginal growth of 0.5 per cent over therelatively high growth of 10.4 per cent recordedduring the first half of 2012. Unfavourable

weather conditions constrained the output inthe domestic agriculture sector particularlyin paddy production and other food crops,

Quarterly GDP Growth RatesChart 2.1

09

/Q1

11

/Q1

10

/Q1

12

/Q1

13

/Q1

09

/Q2

11

/Q2

10

/Q2

12

/Q2

13

/Q2

09

/Q3

11

/Q3

10

/Q3

12

/Q3

09

/Q4

11

/Q4

10

/Q4

12

/Q4

Percent

0

2

4

6

8

10


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RECENT ECONOMIC DEVELOPMENTS HIGHLIGHTS OF 2013 AND PROSPECTS FOR 2014

the significant decline in the value addedcontribution of coconut and rubber sub sectors

while output of paddy and other food crops alsoslowed down during the period. Fish productionincreased albeit at a lower rate than in 2012 dueto the adverse weather conditions that prevailedduring the second quarter of the year. However,the marginal growth in the Agriculture sector

was mainly due to an increase in tea, livestock

and minor export crops. The Agriculture sectoris projected to record a growth of around 4.5 percent during the year with the significant growthin paddy production during the Yala season byabout 37 per cent and increased output in otherfood crops. However, tea is expected to contractduring the second half of the year, while fishingis also projected to slowdown.

Export Agriculture

Tea production during the first half of 2013yincreased by 6 per cent to 173.8 millionkg with the highest growth of 6.5 per centrecorded in low grown areas. This was mainlydue to favourable weather in all major growingareas particularly during the first five months

with rain continuing even in months whichare normally considered dry periods. Despitethe setback recorded in tea production in June

2013, total production of tea during the firsthalf of 2013 was the highest recorded output

during the corresponding periods of the last fiveyears. The increase in tea production duringthis period was evident in all three elevations.The production of smallholders increased by 8

per cent to 123 million kg from 114 million kgduring the first half of 2013. The average yieldof smallholders also increased to 2,112 kg perhectare during the first half of 2013 from 1,960kg per hectare during the same period of 2012

supported by favourable weather conditions andhigh prices for green leaf. Total tea productionin 2013 is estimated to increase by 0.5 per centto 330 million kg in comparison to the previous

year.

Average price of tea remained high at theyColombo Tea Auction (CTA) over the previousyear. In the first quarter of 2013, high andmedium grown tea prices increased by around

25 per cent (y-o-y), to Rs. 417.50 per kg andRs. 389.70 per kg, respectively and low growntea prices increased by 19 per cent to Rs. 441.70

per kg. However, the average tea price of highand medium grown teas declined to Rs. 354.65

per kg and Rs. 378.63 per kg, respectively, duringthe second quarter, while low grown tea pricesincreased to Rs. 452.27 per kg. The averagenet sales price of tea increased to Rs. 422.80

per kg during the first half of 2013 from Rs.

375.90 per kg during the corresponding periodof the previous year, enabling producers to

(a) The average values used for the base value in the

half year production index was changed from theperiod 1997-2000 to 2007-2010.

(b) Revised

(c) Provisional

Source: Central Bank of Sri Lanka

Table 2.1Agriculture Production Index

(2007-2010=100)a

Item2012

First Half(b)2013

First Half(c)% Change

Agriculture and Fishing

1 Agriculture

Tea

Rubber

Coconut

Paddy

Other Crops

Livestock

2 Fishing

124.6

122.3

105.4

123.0

105.6

145.3

129.9

114.1

135.3

125.0

122.2

111.6

93.1

90.0

152.2

128.0

125.8

138.4

0.3

-0.1

5.8

-24.3

-14.7

4.8

-1.5

10.3

2.2

Tea ProductionChart 2.2

millionkg

First half Second half Expected for 2013

Second half

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013


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withstand the increased cost arising from higherwages, revision to electricity tariffs and higher

green leaf prices. The average price received bysmallholders for green leaf increased from Rs.54.96 per kg during the first half of 2012 to Rs.61.82 per kg during the first half of 2013.

Total rubber production declined by 24 perycent to 62,451 metric tons during the first half

of 2013 compared to the corresponding periodof 2012. The decline in total rubber production

was largely due to torrential rainfall which

prevailed right through this period reducingthe number of tapping days. The relatively low

producer prices also contributed to some extentto the lower levels of production of smallholders.During the first half of 2013, sheet rubber

production declined by 13.6 per cent to 27,885metric tons and latex crepe rubber declined by60.8 per cent to 7,168 metric tons.

The declining trend in rubber pricesy

which started from the beginning of 2012continued during the first half of 2013 as well.

Improvements in supply from major producingnations leading to increased stockpiles, together

with a decline in demand from countries likeChina, due to a slowdown in growth in majorexport markets such as the Euro region havecontributed to the decline in internationalrubber prices. The price at the Colombo RubberAuction (CRA) followed the trend in global

markets. At the CRA, the average price ofRibbed Smoked Sheet 1 (RSS1) declined by 12

per cent to Rs. 383.30 per kg and latex crepe1X declined by 10 per cent to Rs. 383.70 perkg, during the first half of 2013 compared tothe corresponding period of 2012. During this

period, the export price of RSS1 and latex crepe1X also declined by 7 per cent to Rs. 426 per kgand 9 per cent to Rs.389 per kg, respectively.Domestic rubber consumption also declined

to 51,847 metric tons from 57,009 metrictons during the first half of 2013 reflecting the

contraction in industrial production partly dueto falling export demand as well as the lack of

availability of quality latex rubber.

Coconut production declined significantlyyby about 14.7 per cent to 1,275 million nutsduring the first half of 2013 from 1,495 million

nuts during the corresponding period of 2012.

The decline in coconut production was mainlydue to the lag effect of lower rainfall in majorcoconut growing areas during the previous

year. Accordingly, coconut oil production also

declined by around 33 per cent to 25,786 metrictons during the first half of 2013 from 38,498metric tons during the first half of 2012. Thedecline in coconut oil production in thedomestic market was met by an increase in

palm oil imports despite the upward revision inthe Special Commodity Levy (SCL) on palmoil imports to Rs. 115 per kg with effect fromFebruary 2013, as even after taxes, the average

palm oil price remained below the coconut

oil price during this period. Accordingly, theimport of palm oil increased by 30 per centto 39,537 metric tons during the first half of2013. Meanwhile, desiccated coconut (DC)

production also declined sharply by 54 per centto 11,186 metric tons during the first half of2013 due to the slowdown in export demandand reduced coconut supply. Given the presentcost structure, Sri Lanka has not been able toexpand its share of DC in the international

market. Therefore, it would be necessary to takemeasures to increase the production and exportof products such as virgin coconut oil, coconutmilk powder and coconut cream, in line with the

projected increase in coconut production overthe medium term.

The price of coconuts and coconut productsywhich include copra, coconut oil and desiccatedcoconut increased during the first half of 2013

due to the decline in coconut production.Theaverage auction price of coconuts increased


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to Rs. 36 per nut during the first half of 2013from Rs. 25 per nut during the same period in

2012. The average price of coconut oil increasedto Rs. 244.30 per kg from Rs. 211.40 per kgduring the corresponding period of 2012 largelydue to the shortage of coconut supply whichcaused copra prices to increase considerably.The average DC price at the Colombo CoconutAuction also increased to Rs. 218 per kg fromRs. 177 per kg during the corresponding periodof 2012. Despite the increase in DC prices, theaverage export price of DC declined during the

first half of 2013 to US dollars 1.36 per kg fromUS dollars 1.77 per kg during the first half 2012reflecting a contraction in the profit margins ofDC producers during the first half of 2013.

Domestic Agriculture

Despite the significant crop damage, paddyyproduction in the 2012/13 Maha season

increased by 4.8 per cent to 2.846 million

metric tons mainly due to an increase inthe extent cultivated in the North Central,

Eastern and Northern provinces. The totalextent cultivated during the season grew by 11

per cent, to 779,635 hectares over the previousMaha season supported by favourable weatherconditions and an increase in the guaranteed

price of paddy in the government budget for2013. The provinces with the highest extentunder cultivation such as the North Central,

Eastern and Northern provinces also reportedsignificant crop damage due to floods and heavyrains. As a result, paddy yield of these provincesalso declined to 3,894 kg per hectare from 4,531kg per hectare during the previous Maha season.This also affected the national average yield of

paddy which declined to 4,281 kg per hectare inthe Maha season from 4,444 kg per hectare inthe previous Maha season. In the North WesternProvince, the extent sown increased by 35 per

cent, and accordingly paddy production grewsignificantly by 74 per cent supported by less

crop damage. Paddy production in the 2013Yala season is expected to increase significantlyby 37 per cent to 1.54 million metric tonsdue to sufficient rainfall and high water levelsin reservoirs in major cultivating areas andremunerative paddy prices. Accordingly, total

paddy production in 2013 is estimated toincrease by 14.1 per cent to 4.389 million metrictons from the previous year.

Total production of other field crops (OFCs)ydeclined by 7 per cent to 528,238 metric tons in2012/13 Maha season over the previous Maha

season. Although the Special Commodity Levy(SCL) on imports which continued from 2012helped many domestic OFC varieties to fetchhigh producer prices, the production of majorOFCs such as maize, green gram, cow pea, blackgram, gingelly, ground nuts, sweet potatoes,

potatoes, red onion and chillies declined during

the Maha season mainly due to adverse weatherconditions that prevailed from October 2012 to

January 2013, the period during which cultivationis normally undertaken. It is estimated that around8,358 hectares of lands of OFCs were affectedby floods during the Maha season. Further, high

paddy prices also encouraged famers to increasethe extent under paddy cultivation in some ofthe lands where OFCs are otherwise grown.Notably, the cultivated extent of OFCs declined

by 4,950 hectares in the 2012/13 Maha seasonfrom the 2011/12 Maha season. In anticipation

Paddy ProductionChart 2.3

millionkg

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2009 2010 2011 2012 2013

First half Second half Expected for 2013

Second half


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of a better harvest during the Yala season, theSCL on certain imports such as potatoes and big

onions was increased in May, June and August2013 in order to protect domestic farmers.

Vegetable production improved onlyymarginally by 0.4 per cent to 557,032 metrictons in 2012/13 Maha season due to flooddamage during December 2012 and also dueto heavy rains in January 2013 which resultedin a loss of harvest. As a result of the heavyrain from October 2012 to January 2013 along

with the flood in December 2012, the actualcommencement of cultivation in the Mahaseason was delayed by almost two months.This delayed the commencement of the 2013Yala cultivation to May 2013 in many major

producing areas. However, the heavy rains at theearly stage of the Yala season increased yields inall low country vegetable producing areas.

Fishing

Growth in fish production moderated duringythe first half of 2013. During this period, totalfish production increased by 2.3 per cent to230,860 metric tons. This was a combinedoutcome of an increase in marine fish productionby 5.6 per cent and a decline in inland fishingby 23 per cent. Of the increase in marine fish

production, deep sea and coastal fish productiongrew by 4.7 per cent and 6.1 per cent, respectively.

However, in the first quarter, total marine fishproduction increased significantly by 15.1per cent to 110,910 metric tons largely due tofavourable weather conditions in the Southerncoast. During the first quarter, marine fish

production in the Southern Province grew by34.5 per cent to 34,820 metric tons. However, inthe second quarter, total marine fish productiondeclined by 9.1 per cent to 93,770 metric tonsdue to extreme weather conditions in May and

June. The contribution of all the provincesdeclined considerably during the second

quarter except in the Southern Province, whichregistered a growth of 26.5 per cent to 31,510

metric tons, despite the destruction caused byadverse weather conditions. This was largelydue to the unloading of fish by multiday boatsoperating in the deep seas in the Southern fisheryharbours. The share of the Northern Provincein total marine production declined during thefirst half of 2013 partly due to adverse weatherconditions. During this period, marine fish

production of the Northern Province declinedby 17 per cent to 26,060 metric tons. During the

first half of 2013, inland fish production declinedby 23 per cent partly due to the lagged effect ofthe drought which resulted in a depletion ofresources in inland reservoirs.

Industry

The Industry sector continued to perform well,ygrowing by 10.4 per cent in value added termsduring the first half of 2013, over the growth

of 10.2 per cent during the correspondingperiod of 2012. Two major sectors namely,electricity, gas and water, and construction grewat higher rates compared to the first half of2012, while the other two major sectors, miningand quarrying, and manufacturing, recorded amarginal slowdown. The sector is projected toregister a growth of around 10 per cent duringthe year.

Mining and Quarrying

The mining and quarrying sub sector expandedyby 15.5 per cent during the first half of 2013,compared to the 20.6 per cent growth recordedduring the corresponding period of 2012.

Gem and other mining activities grew by 4.8 percent and 19 per cent respectively. The growthobserved in other mining activities was mainlydue to the expansion in extraction of construction

related materials including sand which grewin line with increased demand associated with


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growth in the construction sector. Meanwhile, theslowdown in growth observed in this sub sector,

was due to the decline in production of mineralsand, graphite and phosphate. Further, the lower

value added contribution in gem mining wasassociated with the decline in gem exportsduring the first quarter of the year.

Manufacturing

Processing

The processing sub sector, which consistsyof tea, rubber and coconut processing, grewmarginally by 0.9 per cent, compared to thegrowth of 6.5 per cent recorded during thefirst half of 2012. This slowdown in growth inthe processing industry was mainly due to thedeceleration of rubber and coconut productioneven though tea production expanded duringthe first half of 2013. The contraction of therubber processing industry was mainly due to

the reduction of rubber production on accountof adverse weather conditions together with

price reductions, which discouraged producers.The coconut processing industry also contractedduring the first half of 2013 owing to the declinein coconut production due to the lagged effect ofthe drought that prevailed during the last year.

Factory Industry

In terms of value addition, factory industryywhich is the major contributor to themanufacturing sub-sector grew by 6.2 per centduring the first half of 2013. Food, beverages,textiles, wearing apparel, rubber and plastic

products, cement, ceramic products andfabricated metal products largely contributed tofactory industry output during this period. Theimproved external environment for Sri Lankanexports together with favourable domestic

demand, buttressed by increased tourismactivities and sustained infrastructure

development initiatives, supported the increasein value addition of factory industry duringthe first half of 2013. Food, beverages andtobacco products and non-metallic mineral

products categories, which mainly focus onthe domestic market, grew by 6.2 per centand 4.9 per cent, respectively while the textile,

wearing apparel and leather products categorycatering to demand from the export market,grew by 6.5 per cent during the first half of

2013. Meanwhile, chemical, petroleum, coal,rubber and plastic products and fabricatedmetal products categories, which focus on bothdomestic and international markets, increasedtheir value addition by 6.1 per cent and 6.0 percent respectively, during the first six months of2013.

Factory Industry Production Index

Factory Industry Production Index (FIPI),ya leading indicator of industrial output,showed a mixed performance during the firsthalf of 2013. Textile, wearing apparel, basicmetal products, fabricated metal products andelectrical equipment are the major sub-sectorsthat positively contributed to factory industryoutput during the first half of 2013. However,food products, beverages, tobacco products, cokeand refined petroleum products, chemicals andchemical products, rubber and plastic products

and other non-metallic mineral productssub-sectors negatively contributed to the output

Value Added in Manufacturing SectorChart 2.4

Rs.million

0

100,000

2009 2010 2011 2012 2012 2013

200,000

300,000

400,000

500,000

600,000

Cottage

IndustryFactory

IndustryProcessing

(Tea, Rubber and Coconut)

H1 H1


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of the factory industry. Accordingly, year-on-year change of FIPI declined by 2.2 per centduring the first half of 2013.

Export oriented industries continued toyfocus on quality and productivity enhancinginitiatives to maintain competitiveness in theinternational market.Wearing apparel and shipbuilding and repairing industries which focus onexport markets contributed positively towards

increasing factory industry output during thefirst half of 2013. The wearing apparel sub-sector index recorded an increase of 0.8 per centduring the first six months of 2013 reflecting thedemand for niche Sri Lankan products which are

produced utilising ethical and environmentallysustainable production processes. Moreover,the focus on innovation and design capabilitiestogether with the sourcing of materials anddelivery of garments in short time cycles atlower cost has enabled the apparel industry to

maintain its competitiveness. Meanwhile, thetextile industry benefited from the demandarising from the wearing apparel industry andincreased demand for local fabrics from tourists.The shipbuilding and repairing industry also

performed well with increased export ordersduring the first half of 2013.

Domestic market oriented industries wereysupported by increased economic activities

including construction and renovation ofhousing and business places. Better tourist

demand for leather based products andexpanded sales of leather based footwear

products especially in the Northern and Easternprovinces helped to enhance the output of leatherand related products which recorded a 2.9 percent increase during the first six months of 2013.The indices of basic metal products and wood

products, except furniture, recorded increases of1.4 per cent and 12.1 per cent during the first halfof 2013 compared to the corresponding periodof 2012, respectively, supported by increasedhousing and construction activities including in

the Northern and Eastern provinces.

Food, beverages and tobacco productsy

sub-sectors, which contribute more than 40

per cent to factory industry output, recorded

a mixed performance during the first half

of 2013. According to the FIPI, productionof preserved fish and meat, prepared mealsand dishes, noodles, and similar products,manufactured cocoa, chocolate and sugar

confectionery contributed positively to theoutput of the food product sub-sector duringthe first half of 2013. However, indices of a fewsub sectors such as starches and starch products,dairy products and bakery products recordeda decline during the first six months of 2013,

which was partly reflected in the lower outputof wheat flour during the first half of 2013 incomparison to the corresponding period of the

Factory Industry Production Index (FIPI)

(2010 = 100)Chart 2.5

Jan.

Feb.

Mar.

Apr.

May

Jun.

Jul.

Aug.

Sep.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

Jun.

80

90

100

110

120

130

140

IndexValue

2012 2013

Composition of Factory Industry ProductionIndex (FIPI) - First Half 2013

Chart 2.6

Food

Products

22%

Beverages

8%

Tobacco Products

8%

Wearing

Apparel

26%

Refned Petroleum

Products

1%

Chemicals and

Chemical Products

6%

Rubber and Plastic

Products

11%

Non-metallic MineralProducts

7%

Fabricated Metal

Products 5%

Other 6%


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previous year. Meanwhile, based on the FIPI,the output of milk powder also declined during

the first six months of 2013 with continuedinstitutional support given for increasing thelocal production of fresh milk. Similarly, indicesrelated to beverages and tobacco sub-sectors alsodeclined reflecting the contraction of demandduring the first six months of 2013.

Several geo political developments andydomestic factors such as increased cost ofproduction and contraction of demand also

influenced the output of factory industryduring the first half of 2013. Refined petroleum

products and chemicals and chemical productssectors contracted during the first half of 2013mainly due to the sanctions imposed by the USon Iran, which led to disruptions in the supplyof crude oil to Sri Lanka, resulting in a declinein oil being refined by the CPC and a decline inthe production of fertilizer. Even though gloves

production posted a strong growth during the

first half of 2013, manufacture of the rubberand plastics products sector declined by 3.3 percent due to the deceleration in the production oftyres, tubes and plastic products resulting fromthe decline in demand from both domestic andinternational markets. Further, high energy costsaffected production of glass and glass productsand non-metallic mineral products which led toa decrease in the production level during the firsthalf of 2013.

Government initiatives to promote regionalyindustrialisation continued during the first

half 2013. Industrial estates play a significantrole to support investors including small andmedium entrepreneurs. At present, there are 26industrial estates in operation island wide whichcontribute towards regional industrialisation.Entrepreneurs who were affected by theconflict in the Northern and Eastern provinces

were supported by the Wadakkil Wasanthamand Nagenahira Navodaya programmes of

which, stage I of the Trincomalee industrialestate has been completed and 3 industries

are now in commercial operation, providing450 employment opportunities. Meanwhile,Thiraimadu has been identified as a location toestablish an industrial estate in the Batticaloadistrict. Considering the potential for salt basedindustries, manufacturing fishing gear, boatmanufacturing, fish processing and palmyrahbased industries, the government has takeninitiatives to establish industrial estates inMannar and Mullativu districts in the NorthernProvince. Meanwhile, BOI has approved

the establishment of a garment factory inthe Northern Province with an investmentcommitment of Rs.506 million which isexpected to provide around 2,500 employmentopportunities.

Several incentives were given by theygovernment through the budget and its lineministries to promote domestic industries.Small and medium enterprises (SMEs) wereexempted from the Nation Building Tax (NBT)

and the Value Added Tax (VAT), if their turnoverwas less than Rs.12 million. Meanwhile, creditfacilities were extended to small and mediumenterprises through several participatingfinancial institutions at concessional interestrates. Further, the government has recognisedthe importance of encouraging local cannedfish and vegetable oil producers. With a viewto supporting them, the Special CommodityLevy (SCL) on imports of canned fish and

vegetable oil was increased in the budget for

2013. In addition, to facilitate the expansionof export oriented industries, the 2013 budgethas given tax relief to export oriented industriesby allowing a deduction of fifty per cent of thecost of acquisition of any plant, machinery orequipment from their assessable income per yearover a period of two years for the calculation ofcorporate tax.

SMEs were encouraged by the government inyorder to support employment generation and

livelihood development in rural areas. TheSME sector was strengthened by the activities


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of the National Enterprise DevelopmentAuthority (NEDA) through its District

Enterprise Forums and Gamata Obina Viyaparaprogramme. Further, NEDA conducted businessdevelopment service fairs in regions with thesupport of regional chambers to establish therelationship between business developmentservice providers and SMEs. In addition theMinistry of Traditional Industries and SmallEnterprise Development has taken the initiativeto reactivate the Achchuveli small and mediumscale industrial estate in the Jaffna District to

facilitate small and medium industries.

Cottage Industry

The value added in the cottage industry subysector expanded by 4.4 per cent during thefirst half of 2013, compared to 5.5 per centgrowth observed in the first half of 2012. Thissub sector largely benefited from the growth inthe construction sub sector and the activities

undertaken by the cottage industries promotionsegment of the Divi Neguma NationalProgramme.

Electricity, Gas and Water

The electricity,y gas and water sub sector grewby 13.6 per cent during the first half of 2013,compared to a growth of 5 per cent during thecorresponding period of 2012. The growth in

the electricity, gas and water sector was largelysupported by a 15.2 per cent increase in the

value added of the electricity sub sector, whichwas mainly due to the increase in hydro powergeneration. Hydro power generation increasedsignificantly by 142.6 per cent due to favourable

weather conditions as well as the low base ofthe previous year. Meanwhile, thermal powergeneration decreased by 38.6 per cent due toincreased reliance on hydro power for electricity

generation. The addition of Upper Kothmalepower plant to the national grid during the

second half of 2012 and the Uthuru Jananiproject that commenced operations during

the first half of 2013 contributed to theincrease in generation capacity and a morecost effective power generation mix. However,

with the reduction of gas sales, valueadded from the gas sub sector declined by

1.2 per cent while the water sub sectorcontributed to the overall growth expanding by3.9 per cent.

Construction

During the first half of 2013, value addedy

in the construction sub sector expanded

by 18 per cent, continuing the growth

momentum of 17.9 per cent recorded during

the corresponding period of 2012. Thekey indicator of growth in this sub sector,construction material availability which ismainly represented by cement availability, grewby 9.9 per cent during the first half of 2013.

The growth in this sub sector is also reflected inthe import volume indices of building materials

which grew by 15.7 per cent. Meanwhile,credit granted by banks to the private sector

for construction activities increased reflectingthe momentum of private sector constructionactivities. According to the price index compiledby the Institute of Construction, Trainingand Development (ICTAD), the cost of

construction activities marginally slowed downduring the first half of 2013 when comparedto the corresponding period of 2012. Publicsector construction projects which includes

road developments such as the Outer Circularhighway and the Colombo-Katunayakeexpressway as well as other road networkimprovement and rehabilitation projects, theconstruction of bridges and development of

rail roads together with regional development

programmes contributed substantially to thegrowth momentum in this sector.


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Services

The Services sector, which has the largestycontribution to the economy, recorded a

growth of 5.5 per cent during the first half of

2013 compared to the growth of 5.1 per cent

during the corresponding period of 2012.

This was achieved amidst an unfavourableexternal trade environment; spearheaded bythe persistently sluggish recovery of the globaleconomy. However, the deceleration in externaltrade was more than compensated by strong

domestic growth especially in transport andcommunication, hotels and restaurants anddomestic trade. Nevertheless, better performancein the Services sector could be expected duringthe second half of the year with support fromexternal trade activities.

Wholesale and Retail trade

Wholesale and retail trade sub sector, they

major contributor of the Services sector,expanded by 3.5 per cent during the first half of

2013 against a growth of 5.3 per cent recorded

during the corresponding period of 2012.

This sub sector was experiencing restrainedgrowth for the second consecutive year afterachieving double digit growth in 2011.The slowdown in external trade due to theslower than anticipated global recovery wasthe main cause for the slow growth of this sub

sector. This was also reflected in the export andimport trade indices during the first half of the

year. Consequently, both import and exporttrade sub sectors contracted by 0.2 per cent and0.4 per cent, respectively in value added termsduring the first half of the year. Conversely, thedomestic trade sub sector continued its growthmomentum expanding by 7.2 per cent duringthis period. With the recovery of external tradetowards the end of the second quarter better

performance in this sub sector is expected duringthe second half of 2013.

Hotels and Restaurants

Hotels and restaurants which is one of theythriving industries in post-conflict Sri Lankakept up to its expectations by recording asubstantial growth of 19.8 per cent duringthe first half of 2013. The growth achievedby this sub sector during the first half of 2013

was marginally below the 22.6 per cent growthin the corresponding period of 2012. Despitethe slow recovery from the world economicdownturn, both tourist arrivals and earnings

from tourism grew during the first half of theyear. The momentum continued to the secondhalf of the year, increasing the total number oftourist arrivals during the first three quartersby 15.5 per cent to 801,210 resulting in anencouraging growth in cumulative earningsfrom tourism by 24.2 per cent to US dollars883.1 million. Hotel occupancy levels continuedto be low in city hotels reflecting an increase inoccupancy in unregistered hotels, guest housesand home stays; particularly outside Colombo.

Meanwhile, hosting of the 23rdCommonwealthHeads of Government Meeting (CHOGM)in Sri Lanka in November would be a keyopportunity to showcase the tourism industry.

Transport and Communication

The transporty and communication sub sectorrecorded a 9.5 per cent growth during thefirst half of 2013 against the 6.1 per cent

growth recorded during the correspondingperiod of 2012. This growth was largely dueto the 9.9 per cent growth in the transport subsector, which includes railway, passenger andgoods transportation. The passenger kilometresoperated by the Sri Lankan Railways and boththe Sri Lanka Transport Board and private busoperators grew by 27.8 per cent and 7.4 percent, respectively during the period. Further,significant improvements could be seen in

domestic air transport with an increase inpassenger kilometres operated domestically


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by airlines, supporting the tourist industry.Passenger kilometres operated by the two

national airlines also expanded by 8.6 per centduring the first half of the year.

Cargo handling - ports and civil aviationysub sector grew marginally by 1 per centduring the first half of 2013 compared to thegrowth of 8.8 per cent recorded during thecorresponding period of 2012. The Port ofColombo transshipment throughput (excludingre-stowing) in terms of twenty-foot equivalentunits (TEUs) improved by 4.4 per cent duringthe period. However, domestic containerhandling slowed down to 3.6 per cent. Further,the total cargo tonnage handled in the portsof Colombo, Galle, Trincomalee and MagamRuhunupura Mahinda Rajapaksa (MRMRP)recorded a marginal improvement.

The posty and telecommunication sub sectorgrew by 9.8 per cent during the first half of2013 compared to the growth of 6 per cent

in the corresponding period of the previousyear. Telephone density (fixed and cellularconnections per 100 persons) marginallydeclined to 108.8 at end June 2013 from 111.7at end June 2012 mainly due to the change inclassification of a valid subscriber from this

year. The main reduction was in Wireless LocalLoop (WLL) phone subscribers, as fixed access

wired subscribers and cellular mobile subscribersgradually increased. Further, considering the pasttrend and density levels, the industry could be

reaching saturation level indicating a low level offuture growth. However, there is a further scopefor improvement in the industry with industrialinnovations.

Banking, Insurance and Real estate

Value added in the banking, insuranceyand real estate sub sector improved by6.2 per cent during the first half of 2013

compared to the 6.8 per cent growth achievedduring the corresponding period of 2012.

Restrictive monetary policy measuresimplemented in 2012 to stabilise the economy

slowed down private sector credit reducing theprofitability in the banking sector. Moreover,narrowing of interest margins, an increase in

provisioning and write-offs together with higheroperating expenses further reduced bankingsector profits during the first half of 2013.Similar impact was observed in the performanceof non-bank financial institutions during the

period. Further, profit of the insurance industryalso declined during the first half of 2013

compared to the corresponding period of 2012,despite the increase in gross written premiums ofboth life and general insurance segments.

Expenditure

According to the expenditure approachyestimates, aggregate demand is projectedto increase in nominal terms in 2013 but ata lower rate than in the previous year. Bothconsumption and investment expenditure

would slowdown, particularly with theanticipated deceleration in prices as reflectedby an expected growth of around 7 per cent inthe GDP implicit deflator when compared tothe 8.9 per cent during 2012. As a result GrossDomestic Expenditure (GDE), which is the totalexpenditure on consumption and investment inthe economy, is expected to expand by around13.1 per cent in 2013. Further, GDP at market

prices given by the sum of GDE and net exports

is estimated to grow by 15 per cent to Rs. 8,716billion. The relatively higher growth in GDP,compared to GDE, is due to the expectedfavourable performance in external trade, whereexports of goods and services are projected toincrease at a higher rate than imports in valueterms during the year.

Consumption expenditure which includesyboth private and public spending is projected

to record a growth of 11.9 per cent in 2013.Private consumption expenditure (PCE) which


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accounts for a share of around 82 per cent oftotal consumption expenditure would increasealbeit at a lower rate than in 2012. This wouldbe as a result of a slowdown in price levels andreal expenditure on private consumption during2013. Further, indicators such as consumergoods imports and banking sector credit forconsumption purposes also reflect the lowerlevel of growth in PCE to some extent as well.Increasing domestic income levels would also

lead to changes in consumption patterns. Asreflected by the preliminary report of theHousehold Income and Expenditure Survey2012/13 which reveals that the share ofconsumption categories, such as transport,

personal care and health, and clothing, textilesand footwear, in household expenditure hasincreased.

According to provisional budget estimates,y

government consumption expenditure during2013 is projected to increase at a higher ratethan in 2012. Current expenditure of thegovernment on salaries has risen by 11 per centduring the first half of the year. The increasein the Cost of Living Allowance from thebeginning of the year and the full impact ofthe 2012 salary increase together with theabsorption of graduate trainees accounted forthe increase in the wage bill during this period.However, it is expected that public sector

spending would remain in line with budgetestimates for 2013.

Investment

Investment, which pry ovides an impetus forfuture economic expansion, is projected toincrease during 2013. Gross domestic capitalformation (investment) is projected to growby 16.3 per cent during 2013 over the growthof 18.5 per cent in 2012. The constructionsector which recorded a significant growthduring the first half of the year is expectedto provide the highest contribution to theexpansion in investment activities withcontinued growth during the remainder of

the year as well. Meanwhile, machinery andequipment imports that grew significantly in

volume terms during the first nine months ofthe year also reflects the positive expansion ininvestment activities. Hence, investment as a

percentage of GDP is expected to be around31 per cent as projected.

Private sector investment activities, whichyaccount for over 78 per cent of totalinvestment, are expected to sustain investmentgrowth in 2013. Investment on constructionactivities which account for a share of over60 per cent of total investment, would besupported by private sector participation asreflected in the growth of credit for housingduring the first half of 2013. Foreign directinvestment have also improved reflecting higher

private sector investment activity during the firsthalf of the year. Meanwhile, the lower interestrates in the domestic economy and the decline in

Composition of Domestic Demand - 2013Chart 2.7

Investment Public6%

Investment Private

21%

Consumption Public

13%

Consumption Private

60%

Investment and Savings as a

Percentage of GDPChart 2.8

Investment National Savings

Proj.

Percentage

0

5

2009 2010 2011 2012 2013

10

15

20

25

30

35


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26

prices of investment goods in the internationalmarket would be contributory factors towards

the expansion of investment activities. Animprovement in these indicators together withan increase in credit growth would furtherdevelop investment prospects during the latter

part of the year.

Foreign Direct Investment

Infrastructure projects, manufacturing andyservice sectors are the major sectors attracting

Foreign Direct Investment (FDI) absorbedUS dollars 540 million during the first half of

2013. FDI registered an increase of around 28per cent during the first half of 2013 comparedto the corresponding period of the previous

year. More than 50 per cent of total FDI (USdollars 284.2 million) was on account ofinfrastructure development projects suchas the construction of the Colombo SouthPort container terminals, telephone and

telecommunication network development,housing property development and constructionof office complexes. Meanwhile, around 32 percent of total FDI inflows (US dollars 174.4million) were on account of investments insectors relating to chemical, coal and petroleum

products; rubber based products; food,beverages and tobacco products; textiles, wearingapparel and leather products; and non-metallicmineral products during the first half of 2013.

The Services sector which includes hotels andrestaurant and IT and BPO sub-sectors absorbed

US dollars 79.1 million of FDI during the first sixmonths of 2013. In terms of origin, China (USdollars 125 million), Hong Kong (US dollars79 million), Singapore (US dollars 54 million),Netherlands (US dollars 48 million) and India(US dollars 47 million) contributed the largestFDI inflows during the first half of 2013.

Public investment programme has beenycontinuing in 2013. According to provisional

information, public investment increased by9.3 per cent during the first six months of2013. Government investment was mainly ininfrastructure development projects such as roaddevelopment and bridges, irrigation and watermanagement and water supply and sanitation

projects. Meanwhile, the government continuedits investment in improving power generation,distribution facilities and transmission systems

with the target of achieving 100 per cent access

to electricity. Further, investments to improvethe transport system were also undertakenduring the first half of the year.

Savings

On the resource side, the domestic savingsyratio is projected to improve further in 2013

to around 19.2 per cent as a percentage ofGDP. The positive contribution from private

sector savings together with the improvementin government dis-savings are expected tocontribute to this growth. The enhancement indomestic savings will be sustained through theexpected lower growth in imports during the

year, as in 2012. Meanwhile, national savings arealso projected to improve as a percentage of GDPto 25.8 per cent. The improvement in foreignremittances and the lower rate of deteriorationin net factor income from abroad are expected

to contribute towards achieving this improvedlevel of savings.

Foreign Direct Investment of BOI Enterprises(USD million)

Chart 2.9

Agriculture

Manufacturing

Services

Infrastructure

First Half 2013First Half 2012

4.5

2.6

110.9

174.4

112.9

79.1

194.8

284.2


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Prospects 2014

The Sri Lankan economy y is projected toreturn to a higher growth trajectory of around8 per cent in 2014. Growth is expected tobe broad based with all major sectors of theeconomy contributing to this growth withconducive conditions in both the domesticeconomy and the external sector. Relatively lowinterest rates and low and stable inflation onthe domestic front together with the gradualrecovery in the external front would supporteconomic growth in 2014. Further, domestic

output particularly in the manufacturing sectorwould expand with the continuation of thegrowth momentum in construction activities.Meanwhile, exports of apparel, food andbeverages, and rubber products are also expectedto increase in 2014 together with a significantgrowth in services exports particularly from high

value added information technology and relatedindustries.

Agriculture output is envisaged to grow aty

a higher rate in 2014 with the continuouscommitment of the government to improvethe agriculture sector and favourable weatherin 2014. Remunerative producer prices and

productivity improvements appear to be the wayforward for developing the agriculture sector.Domestic production of many field crops suchas Maize, Potato, Red onion, Black gram andBig onion etc, would continue to grow therebyreducing the imports of such crops. Externaldemand for major agriculture crops like rubber

and desiccated coconuts are expected to recoverwith the recovery in major export destinationssuch as USA and European countries. Thedomestic dairy industry is expected to enhanceinvestment in the sector to increase supplycapacity to cater to the increased demand formilk products. It is also likely that fish productionand exports of sea foods would move to a highgrowth trajectory from 2014 supported by theexpected increase in offshore sea fishing with theexpansion of infrastructure facilities, strategic

investment and increasing demand for sea foodexports.

The growth momentum ofy factory industry

observed in the later part of 2013 is expected

to continue in 2014 with the improvementin international and domestic markets. Therecovery of crisis stricken economies in theEuropean region, benign inflation outlook,lower interest rates, stable exchange rates,development of infrastructure, economic and

political stability and improved institutionalsupport for investment are expected to increasethe output of the factory industry in 2014. Taxconcessions which have been provided in the

recent budgets are also expected to contributeto growth in both domestic and export marketoriented industries during 2014. Domestic

policy measures taken to open up free portsand bonded areas are also expected to increasethe volume of factory production with expectednew trade opportunities with neighbouringcountries especially assembling of electric andelectronic based industries. Meanwhile, marketdiversification, increasing competitiveness and

productivity are the major areas which need to beaddressed by stakeholders to expand the marketshare in the international market. Benefits whichare expected from the Nanotechnology andScience Park are expected to increase the qualityof factory industry products through enhancedresearch and development (R&D) activities.

The Services sector is projected to grow atya higher rate thus sustaining overall growth

in 2014. The external trade sector, which hasbeen growing at relatively lower levels duringthe first half of 2013, is expected to expand ata higher rate with the expected recovery inglobal markets. The growth momentum of theService sector would be further supported bythe healthy growth in the tourism sector. Thedemand for private services would also expandas rising purchasing power leads to changesin the lifestyles of people while services such

as transport and financial services would alsoexpand in line with the increase in demand.


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The continuous growth in the constructionysector and imports of machinery and

equipment would help the high growthmomentum of investment in 2014. Theconstruction sector that has been experiencinga boom during the past couple of years wouldbe the main driver of investment with higheractivity from both private and public sectors.Meanwhile, increased investment in machineryand equipment would also contribute towardsthe expansion of the capital stock in the countrytogether with advanced technology coming withforeign direct investment.

Government sector investment activitiesywould continue in 2014 with significantemphasis on rural and regional infrastructuredevelopment. Major construction projectssuch as road development, short term projectson rehabilitation and improvement of the road

network, construction of bridges and railwaylines together with water supply improvement

projects and energy transmission and generationprojects would continue to be the main areas ofpublic sector investment.

Savings would have to increase in order toysustain the higher growth in investmentduring 2014. The negative savings - investmentgap could further widen if savings do notsupport the required level of investment, which

would lead to more external financing to sustain

investment activities. However, the expectedhigher growth in exports compared to imports

would improve domestic savings. Meanwhile,continued growth in net private transfers throughforeign remittances and the improvement in netfactor income would improve national savings in2014.

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