Economy

Sri Lanka is a lower-middle income developing nation with a gross domestic product of about $41 billion. This translates into a per capita income of $2,000. Sri Lanka's 91% literacy rate in local languages, and life expectancy of 72 years rank well above those of India, Bangladesh, and Pakistan. English language ability is relatively high but has declined significantly since the 1970s.

Sri Lanka's income inequality is severe, with striking differences between rural and urban areas. About 15% of the country's population of 20.2 million remains impoverished. The effects of 26 years of civil conflict, falling agricultural labor productivity, lack of income-earning opportunities for the rural population, high inflation, and poor infrastructure outside the Western Province are impediments to poverty reduction.

In 1978, Sri Lanka shifted away from a socialist orientation and opened its economy to foreign investment. But the pace of reform has been uneven. A period of aggressive economic reform under the UNP-led government that ruled from 2002 to 2004 was followed by a more statist approach under former President Chandrika Kumaratunga and current President Mahinda Rajapaksa.

Despite a brutal civil war that began in 1983, economic growth has averaged around 4.5%. In 2001, however, GDP growth was negative 1.4%--the only contraction since independence. Growth recovered to 4.0% in 2002. Following the 2002 ceasefire and subsequent economic reforms, the economy grew more rapidly, recording growth rates of 6.0% in 2003 and 5.4% in 2004. The December 2004 Indian Ocean tsunami killed 32,000 people, displaced 443,000, and caused an estimated $1 billion in damage. The tsunami's overall economic impact was less severe than originally feared, with the economy growing by 6% in 2005 and 7.7% in 2006 as the damage was offset by the reconstruction effort.