Can Sri Lanka's premature deindustrialisation be reversed?

As politicians and economists continue to proclaim that the Sri Lankan economy has achieved 'stability' since the 2022 economic crisis, the country's manufacturing sector seems to have not got the memo.

- BY SHIRAN ILLANPERUMA

A few salient points need to be made in this context.

First, Sri Lankan manufacturing output has been experiencing a secular stagnation that predates external shocks, such as the pandemic and the Easter Attacks. According to national accounts data from UNIDO, manufacturing output in dollar terms has basically flatlined since 2012. Without a manufacturing engine at its core, it is no surprise that Sri Lanka has seen some of the lowest rates of economic growth during this period. (See graph)

Second, factory capacity utilisation still remains below pre-pandemic levels. Total capacity utilisation stood at 62% in 2024, compared to 81% in 2019. For wearing apparel, the country’s main manufactured export, capacity utilisation was at a meagre 58% in 2024, compared to 83% in 2019. Given the uncertainty Trump's tariffs have cast on global trade, combined with the diminished consumer sentiment across the Global North, it is hard to imagine capacity utilisation recovering to pre-pandemic levels in the near future.

Third, new investment in manufacturing has been muted. From 2019 to 2024, only 26% of realised foreign investments in Board of Investment enterprises were in manufacturing. This indicates that foreign capital does not view the country as a desirable location for manufacturing investment. It also reflects a global trend according to UNCTAD, 81% of new foreign investment projects, between 2020 and 2023, were in services.

Taken together, these features paint an alarming picture of the state of Sri Lankan manufacturing and prospects for longer-term growth.

What makes manufacturing so special?

A critical reader may ask at this point, “So what? Why is manufacturing so special?”