Posted on April 3rd, 2021


The 1956 government attempted to radically reform the economy. It was the first Sri Lanka government to try to do so.   It was also the first government, and the only government to date, to see the need for a modern policy of Industrialization for Sri Lanka.

There were no local industries when MEP came to power in 1956, everything was imported. The country was importing everything, from a pin, comb, pencil, and biscuit to mammoties, water pumps, agriculture and industrial machinery, reported economists.

MEP had a long term plan for industrialization. The state would lead with a few basic industries whilst the rest were left to the private sector. There were three lists. The first list consisted of items reserved for the state. They included iron and steel, cement, chemicals, fertilizer, salt, mineral sands, sugar, power alcohol and rayon. 

The second list had industries which were open to both state and private sectors. They included textiles, tyres and  tubes, tiles, asbestos products, bicycles, industrial alcohol, acetic acid,   sugar, vegetable oil, ceramic ware, glass ware, leather products, plywood, paper, electric bubs, dry cell batteries, accumulators, barbed wire, lumber, agricultural implements, wood working, furniture and cabinetry,  and concrete products. 

There was a third list of 82 industries ranging from motor car assembly to activated charcoal, reserved exclusively for the private sector.  Persons embarking on these industries would receive tax concessions and tariff protection. Meegama observed that this period therefore saw the beginning of a private sector in industry with government encouragement. Industrialists promptly asked the government to stop imports in the goods they are producing. The first industrial estate was established at Ekala in 1960. 

MEP planned to diversify its overseas trade and build up new markets. Under Bandaranaike foreign policy was linked to trade policy. Bandaranaike entered into   agreements, mainly trade,  with  US, Hungary,  Bulgaria,  Germany,  Czech,  India,  Canada,   UK, Italy,      china,  USSR,  Sweden,   Australia,       Burma,

When MEP took over, external trade was confined to 25 countries,   mostly the white dominions of the British Commonwealth.  And that   trade was dependant on the goodwill of those countries.  

But the MEP government was never able to break this monopoly. The only new addition was trade with Russia.  Imports from non-Commonwealth countries went up to 51.9% in 1959. But exports continued to go to Commonwealth countries.

 Sri Lanka’s import and export trade was dominated by expatriates. They came during British rule, and stayed on. The traders were all non- Ceylonese, mainly British but also Indian. Non Ceylonese were allowed to free transfer of their entire holdings.  The trading houses   were all foreign owned.  Their profits were   sent abroad.

The MEP government restricted this outflow. In 1956, profits and dividends sent out was  52.4% for foreign capital and   83.3.% for profit and dividends. In 1957 Central Bank restricted the repatriation of money and in 1959, the figures were13.6% and 58.4%.

MEP government encouraged locals to engage in external trade. The number of registered Ceylonese traders  increased from 772 in 1955 to 1179 in 1960. Import of certain goods, such as textiles, motor cars, watches and export of certain commodities like timber were  reserved for Ceylonese traders.

 Trade with certain countries was also  reserved for Ceylonese traders. The countries were  Austria,. Bulgaria, China, Czechoslovakia, West Germany, Hungary, Japan, Poland , Rumania,  USSR and Yugoslavia . (HSS Nissanka. The foreign policy of Sri Lanka  under SWRD Bandaranaike .  p  106 )

Bandaranaike’s  foreign policies  angered the British who controlled most of Sri Lanka external trade. His Non-aligned policy also worked against western trade. This led to a sharp decline in export trade. There was a huge drop in export to Commonwealth countries, such as Australia, Canada, Britain,  but fortunately, trade with other countries such as Germany continued satisfactorily.

 Sri Lanka’s balance of trade fell drastically  in the period 1957-1959. In 1956 there was a surplus of 102 million rupees, but by 1959 there was a record deficit of 252 million culminating three years of deficits in foreign trade.

In 1955 external assets were Rs 80 million in 1959 it was Rs 15.2 million. This means that Sri Lanka was in great financial difficulties during MEP rule. But this was common to all newly independent countries in Asia and Africa, at the time, observed Nissanka.

It was the same with foreign investment. During Bandaranaike’s rule,  Ceylon attracted only Rs 141 million in investments.  Assets worth  Rs 427 million were taken away by private investors.

In 1957 there were 12 banks in Sri Lanka of which 11 were    foreign owned. The exception was Bank of Ceylon (est. 1939) . The foreign owned banks were  Chartered Bank of India, Eastern bank, Hatton bank,   HSBC, State bank of India,  Indian Bank, Indian Overseas bank, Mercantile bank of  India,  National overseas and Grindlays bank, Oriental bank of Malaya, Habib bank.

These banks did not bring in any capital. They did their business using rupee deposits and then  sent all the profits , around Rs 5 or 6 lakhs, out of the country.  In 1961,  the banking situation improved. Bank of Ceylon was nationalized and a second national  bank, the Peoples Bank was  started.

Up to 1956 Sri Lanka had profited greatly from ships that entered its  harbor. Sri Lanka had harbor facilities which other countries did not possess. But from  1956- 1959, there was a sharp decline in shipping revenue. The number of vessels dropped from 13,000 in 1955 to 8400 in 1959. This was due to the crop of dock workers strikes set up by the Left. This non cooperation by the Left to a fledgling  progressive government must be placed on permanent record and condemned.

Sri Lanka did not have her own shipping lines, she depended heavily on British shipping. Bandaranaike was considering  an independent shipping line for Sri Lanka, but  he  did not live long enough to pursue the matter.

Bandaranaike seems to have juggled his foreign policy well. His  Non aligned  policy gave  him, leverage  and Bandaranaike was able to get aid from western bloc as well.

MEP  got  457.3 million in aid from 1957-1963  of which, Communist bloc gave 373.8  million.    Foreign aid from Commonwealth countries in 1956-1960 had  declined sharply. But the   contribution from USA  trebled. The earlier  government was not able to secure such a quantity of   foreign aid.

From 1956-1959 Sri Lanka entered into 45 agreements, relating to  trade, aid, technology, economic cooperation and cultural relations with different power blocs. 19 with western bloc 15 with communist, 5 with non aligned countries.

There was a loan from China of 75 million rupees for a period of five years. There were also economic and technical cooperation agreements with Sweden and Italy. An agreement with Germany.  provided , inter alia, steel superstructures of ten bridges, and one substructure for one bridge, equipment for dismountable bridges, design and technical equipment for a roofing tile factory, and qualified German staff.

UNP complained that in 1953, USA only   provided a cook for Kundasale Girls’ school when they asked for  USA’s point four aid”(1950)   in 1955  Prime Minister Sir John  said  we received no aid from US.

But USA  had a ‘general agreement’ with MEP government . It included,  in the form of grant, a large amount to wheat, the sales of which were to be converted to local currency. But USA put many condition for their wheat flour even  on a commercial basis,  said Sarath Amunugama. PL 480 which provided  subsidized flour shipments to Sri Lanka  was a highly contentious issue with the Bandaranaikes,  he said.

Bandaranaike  saw  that it was unwise for newly emerging states to rely only on foreign aid. He said it was not good  for third world countries to be too dependent on foreign aid. Another mechanism was needed.  Bandaranaike thought that maybe, the solution lay in an Asian Economic Community.

 He called for a meeting of African and Asian nations to discuss the idea. The first session of the Afro Asian Economic Conference was held in Colombo in May 1959. Bandaranaike was the convener.  He  addressed the Conference and spoke of the need for commodity trade in the region, diversification of exports, and establishment of national regional banks.

Bandaranaike brought in world renowned economists to advise on a new economy for Sri Lanka. HSS Nissanka had quoted some recommendations given by Gunnar Myrdal in 1958, to the National Planning Council. His recommendations are relevant even  today .Myrdal said 

  • Immediate takeover of foreign owned  enterprises such as  plantations would not be wise. Sri Lanka should instead work out a 15 or 20 year scheme through which foreign asset would pass into Ceylonese hands.
  • Sri Lanka needs both foreign capital and knowhow for industrialization.
  • Sri Lanka should not rely on the inflow of foreign capital  on government to government basis only. That would restrict her capital imports to countries for whom government lending was good Cold War business
  • Sri Lanka should have a system like a management contract with which she could have agreements between her government and foreign firms
  • The foreign policy should link with Sri Lanka development efforts. There must be measures to regulate the inflow of non essential imports and maximize the amount of foreign exchange available for the import of capital goods . ( continued)

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