Sri Lanka: channelizing human capital for diversification in the knowledge economy

Sri Lanka’s economic crisis has left its population faced with shortages in essential commodities, including life-saving medicines, and basic food items like rice and milk. While any crisis may be turned into an opportunity, for Lanka, this might be a watershed moment in its quest to make a name for itself in the new knowledge economy that is emerging in the post-pandemic world. Sri Lanka has a competitive edge in different areas other than its current key export earning segments like tea, spices, rubber, tourism and so on. With its dwindling foreign exchange reserves, the government has to aggressively diversify and promote new sectors like IT/ITES, health, and medical tourism and promote its small and medium sector enterprises to exploit their competitive advantages.

Competitive advantages: Sri Lanka

On the Global Innovation Index in 2020, Sri Lanka is rated among the top 20 Asian economies and ranked second in the doing business index in the South Asia region. The new Digital Nomad visa scheme that allows foreigners to work remotely from Sri Lanka is another feature that makes Sri Lanka an attractive location.   All of these suggest an enterprise-friendly environment, second in South Asia, despite the current financial turmoil, which is a temporary development.

When it comes to social development It can boast of the region’s greatest degree of social development. Sri Lanka ranks 72 out of 189 nations in the Human Development Index (HDI) and per capita income at US $ 4053.

Sri Lanka: Key socio-economic variables 2018 2019 2020
GDP growth (annual %) 3.3 2.3 -3.6
GDP per capita (constant 2015 US$) 4,157.3 4,225.1 4,052.7
Literacy % 91.9% 91.7% 92.3%
Life Expectancy 76.8 77    
Govt expenditure on Education (% of GDP) 2.1%    
School enrolment ( Primary net) 99.1%    
Educational attainment, at least Bachelor’s or equivalent, population 25+, total (%) (cumulative)   4.4 4.5  
Population, total 21,670,000.0 21,803,000.0 21,919,000.0
Source: World Development Indicators

It has a literacy rate of 92.3 percent and a life expectancy of 77 years. Furthermore, it has the highest primary school enrolment rate in the region, as well as a significant pool of educated and skilled manpower, particularly IT-digital technologies as well as advanced financial and management training, necessary ingredients for success in a knowledge-based global economy. Sri Lanka stands to benefit from these, notably in the IT, ITES, and new economy sectors and it has its reflection in ICT service exports recently that gone up as a percentage of total service exports from 12% in 2016 to 33% in 2020.

Digital entrepreneurship and exports from the sector could be an area where Sri Lanka can benefit in the future. The IT/ITES industry contributes around USD 1.2 billion to the economy. Further, it is to be noted that Sri Lanka is the first country in South Asia to test 5G technology, and the government is gradually moving toward smart infrastructure deployment. According to a 2019 estimate, the IT/ITES sector in Sri Lanka employs about 113,000 people. Sri Lanka’s potential in IT/ITES may be used to emerge as a regional ICT hub, with a highly skilled-talented and cost-effective workforce, which is a crucial factor and provides a competitive edge to Sri Lankan digital & knowledge economy potential.

Doing business climate in Sri Lanka: select variables

  2018 2019 2020  
New businesses registered (number) 10,510.0 .. ..  
Start-up procedures to register a business (number) 7.0 7.0 ..  
Time required to start a business (days) 9.0 8.0 ..  
Time required to register property (days) 39.0 39.0 ..  
New business density (new registrations per 1,000 people ages 15-64) 0.7 .. ..
Source: World Development Indicators

Balance of payments crisis

However, this socially developed nation with such a ‘strong knowledge-IT workforce’ is in the grip of a balance-of-payments crisis. Growth in goods and services exports has been negative since 2019, however, this might be due to a variety of causes, the key one being falling demand in its primary markets as a result of the epidemic.

The export economy of Sri Lanka is driven by clothing and cash crop exports. Ceylon is well-known in the worldwide market for diverse spices such as cinnamon, Ceylon tea, and a variety of other agricultural goods. Cylon tea, cinnamon, Lankan spices, and coffee are unquestionably the greatest and most popular. Other sectors that will receive a lot of attention include technology items, software, and electronic goods. While Lanka has been able to expand into textiles in recent decades, its success has been modest.

An abrupt restriction on the use of chemical fertilizers in April 2021 resulted in a decrease in agricultural production, although a progressive adoption and transition to organic techniques would have been preferable. With food production declining, the nation has to suddenly resort to imports. Since 2005, Sri Lanka has been virtually totally reliant on rice cultivation. Crop yields plummeted as a result of the fertilizer import restriction, causing inflation and crushing output in rice, tea, and other crops. Six months after turning organic, Sri Lanka had to import it from outside. The consequence of the abrupt change from fertilizer-dependent agricultural to organic farming was certainly severe. According to agricultural scientists and organic farming advisors, the change should have been gradual. The impact on Sri Lanka’s tea industry, which was its main export, was $573 million.

                                    Sri Lanka select macroeconomic variables(2018-2020)

2018 2019 2020
GDP growth (annual %) 3.3 2.3 -3.6
GDP per capita (constant 2015 US$) 4,157.30 4,225.10 4,052.70
Gross capital formation (annual % growth) 3.6 -10.5 -10.1
Current account balance (% of GDP) -3.2 -2.2 -1.3
Foreign direct investment, net inflows (% of GDP) 1.8 0.9 0.5
Exports of goods and services (annual % growth) 0.5 7.2 -9.6
Inflation, consumer prices (annual %) 2.1 3.5 6.2
Tax revenue (% of GDP) 12 11.6 ..
Trade (% of GDP) 53.5 52.4 39.5
Trade in services (% of GDP) 14.8 14.4 6.5
Exports of goods and services (% of GDP) 23 23.1 16.6
International tourism, receipts (% of total exports) 27.7 24 8.2
Manufactures exports (% of merchandise exports) .. 70.2 66.8
Manufactures imports (% of merchandise imports) .. 67.4 67
Manufacturing, value added (% of GDP) 15.4 16.4 16.2
Manufacturing, value added (annual % growth) 3.6 1.8 -3.9
Medium and high-tech exports (% manufactured exports) 10.5 10.5 ..
Fixed broadband subscriptions (per 100 people) 7.3 7.8 9.3
ICT goods exports (% of total goods exports) .. 0.3 0.3
High-technology exports (% of manufactured exports) .. 1.1 1.3
ICT service exports (% of service exports, BoP) 11.9 14.1 32.8
ICT goods imports (% total goods imports) .. 4.6 5.4
Mobile cellular subscriptions (per 100 people) 142.7 133 138.8
Research and development expenditure (% of GDP) .. .. ..
Food exports (% of merchandise exports) .. 23.7 26.6
Food imports (% of merchandise imports) .. 11.6 15.7
Agriculture, forestry, and fishing, value added (% of GDP) 8 7.5 8.4
Fuel imports (% of merchandise imports) .. 17.6 13.4
Fuel exports (% of merchandise exports) .. 2.9 2.7
Imports of goods and services (% of GDP) 30.5 29.3 22.9
Imports of goods and services (annual % growth) 1.8 -5.8 -11.4
Created from: World Development Indicators

Country: Sri Lanka

Tourism draws visitors from all around the world. However, technology services exports are increasingly becoming important contributors. However, as previously said, agricultural exports and tourism earnings are impacted. While borders are being opened, tourism traffic may increase in the following days. Tourism earnings have decreased dramatically from 24 percent to 8 percent of overall export receipts since 2019. When it comes to tourism, security perception is equally important. Domestic security views changed as a result of the Easter Sunday event in 2019 and may have had a factor in it. Tourism revenues have fallen since 2019, particularly following the Easter Sunday incident. With the global outbreak of Covid-19 and lockdowns, inward remittances plummeted by half from their pre-pandemic level.  The Sri Lankan rupee has devalued considerably.

SMEs are key for Sri Lanka’s export competitiveness

The small and medium enterprises account for 80% of all businesses. They account for 52% of GDP and constitute the backbone of the Sri Lankan economy. SME performance is crucial for alleviating the crisis and pulling the economy back from the brink of collapse. Increased regional collaboration among small and medium-sized businesses in the South Asian Free Trade Area will benefit all regional partners. It is critical to strengthen engagement with the region’s SMEs for diversification, trade, and technological collaboration.

 Sri Lanka: Micro, small and medium enterprises

It is time for Sri Lanka to capitalize on its competitive advantages by diversifying its economy and enabling its small and medium-sized firms (SMEs) to strengthen its reach out to the regional South Asia market as well as the global destinations more aggressively. This goal could be attained by:

  • identifying SMEs with the potential products for exports;
  •  strengthening the capacity of SMEs to export by providing training and equipping its manpower in export procedures
  • Training in digital marketing and digital transformation programs in SMEs could be another area that needs urgent
  • In order to strengthen regional economic collaboration between SMEs specific programmes involving associations and federations of SMEs and chambers could be encouraged.
  • While Sri Lanka has a competitive advantage in IT/ITEs, and medical tourism it’s important to create a global level of awareness to project Sri Lanka as a destination for digital solutions & health tourism

To conclude, it is time for Sri Lanka to capitalize on its competitive advantages by diversifying its economy and enabling its small and medium-sized firms (SMEs) to generate additional possibilities.



Columnist|Entrepreneur|Development Professional. Believes in freedom and human potential. Writes on #SMEs, #Entrepreneurship #Industry #Politics #Agriculture #Agri-tech #RuralBusiness&EconomicDevelopment. He can be reached at Linkedin: Twitter:

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