**10 |** P a g e

2002 and 2003 from US$72 million in 2002 to US$171 million in 2002 and US$245 in 2003. In 2003-09 they grew at an annual LSG rate of 2.8 percent and peaked in 2005 at US$566 million. In 2009 they were at 59 percent of this peak value. Exports to other countries of the region were stagnant (China) or contracting (Singapore).

# **1.3. In defiance of global trends: The puzzle of falling openness**

Cast against comparator countries, Sri Lanka’s foreign trade performance in the 2000s has been characterized by several idiosyncratic features: faster growth of GDP than of exports; lackluster exports growth by regional standards; declining level of openness as measured by total trade in GDP; and persistent foreign trade imbalances. These characteristics set Sri Lanka aside from other comparator countries on most counts. While most other comparator countries—except for Mauritius and to a lesser extent Malaysia—experienced export-led growth, domestic demand appears to have been the driver of Sri Lanka’s growth since 2002. LSG (least square growth) rate of Sri Lanka’s GDP in 2002-2010 was 6.9 percentage points higher than its exports LSG rate (Table 2).

**Table 2: Aspects of external performance of Sri Lankan economy against selected other countries in 1995-2001 and 2002-10**

||LSG rate|of GDP|LSG rate of<br>goods an|exports of<br>d services|LSG rate<br>ofgoods a|of imports<br>nd services|Ex<br>impor|ports in %<br>ts of goo<br>services|of<br>ds and<br>|Total tr|ade in pe<br>GDP|rcent of|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Country|1995-01|2002-10|1995-01|2002-10|1995-01|2002-10|1995|2002|2010|1995|2002|2010|
|Bangladesh|3.6|9.0|9.3|14.6|6.2|14.6|63|75|74|28|33|51|
|India|4.7|14.7|8.2|19.4|7.7|21.6|90|94|79|23|30|46|
|Pakistan|3.0|11.4|-0.2|8.1|-2.7|15.8|86|99|68|36|31|32|
|**Sri Lanka**|**3.3**|**13.8**|**4.5**|**6.9**|**3.6**|**9.4**|**77**|**84**|**71**|**82**|**76**|**53**|
|Memorandu|m:||||||||||||
|Korea, Rep.|-1.1|6.3|4.2|12.2|1|12.5|96|105|106|59|65|105|
|Malaysia|-0.9|10.9|3.7|9.2|-0.5|7.7|96|119|121|192|199|153|
|Mauritius|1.6|8.4|3.1|6.3|1.6|9.9|96|105|81|120|121|114|
|Thailand|-7.6|11.5|1.8|12.7|-3.7|12.4|86|112|110|90|122|136|

Sources: IMF BOP data and World Bank WDI database.

The shift from export-led growth to that driven by domestic demand took place in the 2000s. In 19952001 Sri Lanka was a shining star among comparator countries lagging only behind Bangladesh and India, in terms of real GDP growth and export growth. Sri Lanka largely escaped the East Asian Crisis of 1997-1998, which deeply affected growth performance of the Republic of Korea, Malaysia, and Thailand, among others, during this period.<sup>5</sup> But, after the 1997-98 crisis, export-led growth took East Asian economies back to the pre-crisis levels while export performance in Sri Lanka stagnated. However, strong real GDP growth meant its GDP in current US dollars was around three times larger in 2010 than in 2001 and was the second fastest growth performer in the group.

The fortunes reversed in 2002-10, albeit only in export performance in which Sri Lanka had the second worst record being slightly ahead of Mauritius by 0.6 percentage points. The deterioration in exports performance coincided with the reversal of liberal foreign trade policy that began in 2001 with the imposition of a Customs Surcharge of 40 percent levied on the value of calculated duties followed by the introduction of significant charges or para-tariffs with similar effect as duties (Pursell and Ahsan, 2011). But it did not have impact on the GDP growth as Sri Lanka continued to be a strong performer in 2002-

> 5 For an examination of sources and their impact on external performance of these countries, see Cognato and Kaminski (2009).