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

liberalization adopted in 1977 had profound effects on the Sri Lankan economy
(World Bank, 2004). This policy package unshackled the economy from rigid

quantitative import controls, cut down high level tariffs, and formed a unified
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exchange rate system . It should be noted that these policy reforms were bolstered
by the ESAPs in the first half of the 1990s. As we have seen above, the major aim of
restructuring the trade system was to redirect the economy away from ISI and

towards the world market. Sri Lanka has become an export-oriented economy and

trade policy has gradually been liberalized creating a healthy environment for export
promotion and strengthening competition. Figure 04 shows the patterns of FDI

inflows (% of GDP) with the degree of trade openness measured by the ratio of
exports and imports to GDP in Sri Lanka from 1985- 2018. As indicated from the

figure, the country saw significant improvements in the degree of trade openness
during the period from 1989 to 1993 (the period of ESAP). During this period, FDI

inflows shows a positive pattern. As a whole, Figure 04 demonstrates a systematic

pattern between these two components.

3.5 100
3 80
FDI (% of GDP 1.5 2 60
2.5

40

0.5 1 20 Exxport + Imports % of GDP
0 0

Axis Title

FDI(%GDP) Trade Openness

Figure 04: FDI Inflows and Trade Openness (1985 – 2018)

Source: World Development Indicators-2020

13 Two exchange rate policies namely, Foreign Exchange Entitlement Certificate (FEEC), at a
premium of 45% above the official parity and Convertible Rupee Account (CRA) scheme to promote
non-traditional exports (allowing CRA account holders free access to 20% of their export earnings),
were put in place until the late 1970s.
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