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Research Journal of the University of Ruhuna, Sri Lanka- Rohana 12, 2020

In general, the weak performance of investment and savings in the era of the ISI
caused a low growth rate. After prolonged economic stagnation, the government set

the stage for market-oriented policy reform in 1977. The government which came
into power in mid-1977 gradually reduced the restrictions on pricing, investment and

external trade and payments (Athukorala and Jayasuriya, 1994; World Bank, 1993).
Economic management was strengthened in order to create a stable macroeconomic

environment favourable to private investment and savings (World Bank, 1996). It

should be noted that even in the era of liberalization, saving effort in the domestic
economy was at a very low level. The saving ratio which had been on average 15

percent in 1985-1990 increased to 21.2 percent in 2018. In general, low income,
poor access to financial services, and low propensity to save hampered the saving

effort throughout the period under review. Sri Lanka’s further market-oriented
reforms under the enhanced structural adjustment programme (ESAP) at the turn of

the decade (1980) saw that the economy was stabilized and liberalized, thereby

improving the incentive structure enabling a sustained high growth rate. Economic
reforms under liberalization recognised the importance of foreign capital inflows as

a strategy of economic growth through export led industrialization. These

developments greatly caused increased FDI inflows to the country.

The rapid growth of foreign trade and large capital inflows demonstrate the
increasing integration of the Sri Lankan economy in the world economy. However,

comparable with economic reforms these capital inflows were not at the expected
level by the government. Despite the ten year period after the war, which the country

was engulfed in for a long period of time, FDI inflows into Sri Lanka is at very low
level. It should be noted that most FDI inflows is amongst developed countries.

Approximately 43 percent of world FDI was flowing to developed countries, and at

the same time, the top eight developing countries have been responsible for 72
percent of FDI inflows in 2018 (UNCTAD, 2019). In order to be compatible with

these new transformations, in the last decades, most developing countries have
designed optimistic strategies and policies with the idea of channelling a part of

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