Sri Lanka’s parliamentary election gave the United National Party (UNP) an overwhelming majority, creating political space for major economic and institutional changes. The new government argued that the previous highly controlled economy had produced shortages and unemployment. This election is widely treated as the starting point of the country’s “open economy” era.
As part of liberalization, Sri Lanka reworked its foreign-exchange system by unifying exchange rates and moving toward more market-based management. A major devaluation made imports more expensive but was intended to correct an overvalued currency and support exports. This was a key early step in shifting from a closed economy to an outward-looking one.
The government narrowed eligibility for subsidized rice, moving away from broad-based benefits. This change reduced the fiscal cost of welfare but increased pressure on households not covered by the targeted threshold. It reflected a wider reform approach that combined market liberalization with more selective social support.
Constitutional changes during the reform period strengthened the executive branch, with the presidency becoming a powerful executive office. Supporters argued this would speed up decision-making for large reforms and development projects. Critics warned that the new structure could weaken checks and balances in government.
The government created the Greater Colombo Economic Commission (GCEC) to lead investment promotion and support export-oriented industrial activity. The GCEC was designed to offer a more business-friendly environment, including special rules and incentives. This institution became central to early foreign direct investment strategy under the open economy reforms.
Sri Lanka launched its first major export-processing zone at Katunayake, aimed at attracting export manufacturers with infrastructure and incentives. This helped shift employment and investment toward export industries such as garments and electronics. It also marked a visible move away from import-substitution toward export-led growth.
Sri Lanka’s 1978 Constitution came into force, formalizing the new governance framework associated with the post-1977 changes. The constitution entrenched an executive presidency and reshaped how political power was organized. This institutional context influenced how economic liberalization was implemented and contested in later years.
The government created a dedicated authority to implement the Accelerated Mahaweli Programme, a large irrigation and hydropower initiative. The project was intended to raise rice production, expand settlement in the dry zone, and generate electricity for industry. It also increased public investment during a period otherwise associated with market reforms.
Sri Lanka replaced long-running rationing with a Food Stamp Scheme, aiming to target assistance more narrowly while continuing basic support for poorer households. The policy shift reduced the government’s direct role in controlling staple-food distribution. It became a major example of how liberalization interacted with social protection.
A constitutional amendment allowed the president to call an election earlier than the original schedule after a set part of the term. This change mattered politically because it helped shape the timing of elections during the reform era. Stable control of the executive was important for sustaining controversial economic reforms.
Sri Lanka and India signed an agreement intended to reduce fighting and create a political framework for devolution of power. The accord aimed to reshape governance in conflict-affected regions, with major implications for security and public spending. Ongoing conflict and instability complicated economic policy goals like investment growth.
The government introduced Janasaviya as a poverty reduction program combining transfers with a planned shift toward productive self-employment and savings. It signaled an attempt to respond to inequality and hardship that could accompany market-oriented reforms. The program became a major welfare initiative of the late UNP period.
Sri Lanka expanded and restructured its investment promotion system by establishing the Board of Investment (BOI), building on the earlier GCEC framework. The BOI became a key institution for approving projects and offering incentives, reflecting a more mature phase of liberalization policy. This helped consolidate an export- and investment-focused development model into the early 1990s.
The People’s Alliance won the parliamentary election, ending about 17 years of UNP-led government that had launched and shaped the open economy reforms. The transition marked a political endpoint for the 1977–1994 reform period and opened debate about how to adjust liberalization, welfare, and state involvement. It also set the stage for a new leadership and policy mix in the mid-1990s.
Economic liberalization and the 1977 UNP reforms (1977-1994)