**11 |** P a g e

10: in fact, Sri Lanka experienced the second, after India, fastest GDP growth among comparator countries: its GDP in current US dollars was around three times larger in 2010 than in 2001.

Hence, it comes as no surprise that openness of Sri Lankan economy fell in the 2002-10 period: its total foreign trade in percent of GDP declined from 82 percent in 1995 to 76 percent in 2002 and 53 percent in 2010 (Figure 4). Furthermore, relative to other countries, except for India and Bangladesh with respective populations many times larger than that of Sri Lanka, foreign trade in percent of the GDP has remained very low. The contraction in openness as measured by total trade in percent of GDP was not solely the result of the GDP growing faster than exports but also faster than imports. Exports of goods in terms of the GDP fell from 31 percent in 2000 to 18 percent in 2010, while imports fell from 34 percent to 24 percent during this period.

But the contraction in the level of openness as measured by total trade in goods and services in GDP between 2000 and 2009 was astounding although there was precedence of huge volatility in trade vis-àvis GDP in Sri Lankan economic history (see Figure 3). Except for two periods in 1972-80 and 1986-95, domestic demand rather than foreign trade drove Sri Lanka’s GDP growth in 1972-2010. The level of openness in 2009 of 49 percent was barely 3 percent points above this level in 1972, which was the lowest over the whole period of 1970-2010. Furthermore, this was before the reforms in 1978, which marked the departure from import-substitution strategy. But between 1972 and 1980, foreign trade expanded faster than GDP except in 1976. The 1980-86 period witnessed the contraction in openness from 87 percent in 1980 to 59 percent followed by strong expansion over the next decade to 82 percent in 1995. In 1996-99 the growth of foreign trade moved in tandem with that of the GDP. A steep decline began in 2005. Although trade rebounded strongly in 2010, it remains to be seen whether this trend will continue.

**Figure 3: Openness of Sri Lankan economy in selected years over 1972-2010 measured in terms of total trade in goods and services in percent of GDP**

<!-- Start of picture text --> 89<br>87<br>82 81 76 75 79 74<br>79 80 78 79<br>71<br>69<br>63<br>59 53<br>49<br>46<br><!-- End of picture text --> <!-- Start of picture text --> 89<br>87<br>82 81 76 75 79 74<br>79 80 78 79<br>71<br>69<br>63<br>59 53<br>49<br>46<br><!-- End of picture text --> Source: derived from the World Bank WDI database.

The reasons for the falling openness of Sri Lankan economy, which defies trends observed across the majority of developing economies, cannot be fully explained without examining foreign trade and supply-side policies. Beyond policies and institutions, two factors may contribute to this phenomenon: foreign currency revenue from tourism and remittances from labor working abroad. Remittances were huge amounting on average to around 7 percent in 2001-10 with an absolute deviation of 1.1 percentage points. Since they have been increasing at a similar pace as the GDP, they could not have been responsible for the fall in openness. Similarly, foreign currency earnings from tourism did not