Growth in provinces

One of the biggest challenges to Sri Lanka’s growth is its unequal distribution. In the latest Central Bank report on provincial GDP, the Western Province continues to be the biggest contributor, with other provinces lagging behind significantly. Given that many economic and political reforms proposed by the Government rely on inclusivity, broad-basing growth across all parts of the country is a critical element of sustainable development.

The Western Province accounted for 39.7% of Sri Lanka’s GDP in 2016, which is a value of Rs. 4,697 billion, in contrast the second and third largest values of Rs. 1,262 billion and Rs. 1,248 billion that were recorded from North Western and Central Provinces that accounted for only 10.7% and 10.5% of growth. The Southern province retained the fourth position contributing Rs. 1,190 billion to national GDP in 2016 but all these regions are growing at less than four times the rate of the Western Province. 

Understandably this gap is reflected in per capita income levels where a person living in the Western Province earns about 1.3 times the national per capita income. This means that when it comes to basic needs and wellbeing indicators such as healthcare, education, housing and purchasing power the Western Province leads the crowd. This is largely because industries and services sectors are concentrated in the Western Province while most other provinces rely on low productivity based agriculture.

Considerable variations in the structure of Provincial GDP can be observed across provinces. The agriculture sector accounted for only about 2.1% of the GDP in the Western Province, whereas it accounted in the range of 7% to 13.5% of the GDP in other provinces. North and East Provinces continued to be the lowest on the table with the latter accounting for 5.7% of GDP and the north just 4.2%. Neither province had recorded much improvement when compared with 2015 but the Eastern Province had edged closer to North Central’s 5.8%. 

Interestingly industry had recorded marginal growth in both north and east but services had eased. Both services and industry had dipped slightly in the Western Province suggesting that investors are moving towards provinces but perhaps not fast enough. Even though the Inland Revenue Act has preferential taxes for investors willing to move to less developed parts of Sri Lanka many other elements such as skills, land, capital, market access and infrastructure have a role to play in attracting them. Releasing labour from underproductive sectors such as agriculture and the public service will continue to be challenging unless attractive alternative employment opportunities are generated in the provinces. Further liberalisation of the economy and winding up subsidies for agriculture, as outlined by the Government, would also have deep, possibly adverse, impacts in provinces, especially southern and Uva regions that have the highest contributions. Implementing incremental change by communicating clear policies, working to reduce the skills gap, encouraging investment and giving labour the freedom to move up the value chain will be crucial elements in a reform process to reduce protectionism. 

The provinces have been left out of Sri Lanka’s growth story for far too long. Economic policy should be underpinned by governance reforms that push the provincial councils and other political layers to be accountable for achieving more growth and attracting investment. They have to become viable contributors to the economy if disparity between the Western and other provinces are to be bridged.