Services-Led Growth: Is Sri Lanka Quietly Rewriting Its Growth Model?
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For much of its post-independence history, Sri Lanka’s growth narrative revolved around a narrow set of traditional sectors—tea, rubber, apparel, construction, and tourism. Official data indicate that apparel alone accounted for approximately 40–45 per cent of merchandise exports for nearly two decades, while tea and rubber together accounted for a further 15–18 percent. Although these sectors generated employment and foreign exchange, productivity growth remained weak, and export earnings were highly concentrated. The result was an economy vulnerable to global demand cycles and external shocks. The economic crisis of 2022, which culminated in a sovereign default and a collapse in foreign reserves, exposed the limits of this model and forced policymakers to confront a more fundamental question: what should Sri Lanka’s future growth model look like?
Guest Column by Prof. (Dr.) Dewasiri N. Jayantha
As the country emerges from stabilisation and enters a cautious recovery, an essential but under-discussed transformation appears to be underway. Services exports—particularly tourism, Information and Communication Technology and Business Process Management (ICT/BPM), logistics, shipping, and financial services—are increasingly outperforming traditional goods exports. While apparel growth remains subdued and goods exports face structural constraints, foreign exchange inflows from services have stabilised the external account and supported the balance of payments. This is not merely a cyclical rebound. It points to a more profound, structural shift toward a services-led growth model.
The question now confronting policymakers, businesses, and investors is whether Sri Lanka is consciously rewriting its growth strategy—or whether this transformation is occurring by default. More importantly, can the country deliberately scale services into a sustainable, high-value growth engine that generates jobs, productivity gains, and long-term resilience?
1.From Goods-Led to Services-Driven: A Quiet Structural Shift
Sri Lanka’s traditional growth model relied heavily on goods exports, with apparel at its centre. Official Central Bank data show that, at its peak, apparel accounted for 40–45 per cent of total merchandise exports for more than two decades and employed over 300,000 workers, the majority of whom were women. The sector played a critical role in generating foreign exchange and supporting employment. However, its growth momentum has weakened in recent years. Global competition from lower-cost producers, rising domestic wages and energy costs, supply-chain disruptions, and limited movement into higher-value segments have constrained expansion. Reflecting these pressures, apparel export earnings declined in 2023 amid weak global demand, and while a modest recovery is visible in 2024, the sector’s capacity to drive rapid export growth has diminished.
In contrast, services exports have demonstrated far greater resilience in the post-crisis period. According to the Central Bank of Sri Lanka, total services exports exceeded USD 7 billion in 2023, approaching pre-crisis levels despite continued global uncertainty. Tourism earnings rebounded sharply, rising from USD 507 million in 2021 to USD 2.1 billion in 2023, and provisional data indicate that earnings approached or exceeded USD 3 billion in 2024 following macroeconomic stabilisation and currency adjustment. ICT/BPM exports continued their upward trajectory, generating an estimated USD 1.6–1.8 billion in 2023, despite talent migration and a global technology slowdown. Transport, logistics, port services, and shipping also strengthened, contributing to a persistent surplus in the services account, which helped offset the merchandise trade deficit.
This shift is economically significant because services exports behave very differently from goods exports. They are far less dependent on imported inputs, generate higher value added per worker, and scale primarily through skills, technology, and connectivity rather than heavy physical capital investment. As a result, services have become an increasingly important stabiliser of Sri Lanka’s external sector. While manufacturing and infrastructure continue to command policy attention, services are quietly emerging as the backbone of foreign exchange earnings, supporting the balance of payments and signalling a more profound structural transition toward a services-led growth model.
2.Tourism’s Evolution: From Volume to Value
Tourism is often described as Sri Lanka’s “traditional” service export, but its role in the new growth model is evolving. Pre-crisis tourism was largely volume-driven, vulnerable to security incidents, pandemics, and price competition. The post-crisis recovery, however, presents an opportunity to reposition tourism toward higher-value, longer-stay experiences and diversified offerings.
Tourist arrivals have recovered steadily, and, more importantly, average spending per visitor has increased, supported by currency adjustments and a shift toward experiential tourism. Eco-tourism, wellness tourism, heritage travel, adventure tourism, and digital nomadism are gaining traction. These segments generate stronger linkages to local services, SMEs, and regional economies.
Yet structural challenges remain. Skills shortages in hospitality, inconsistent service quality, weak destination management, and inadequate digital integration continue to limit tourism’s full potential. A services-led growth strategy requires tourism to move beyond arrivals and occupancy rates toward productivity, quality, and value creation.
3.ICT/BPM: The Most Strategic Services Export
Among all service sectors, ICT/BPM holds the most significant strategic importance for Sri Lanka’s long-term growth. The industry combines high productivity, export orientation, skilled employment, and technological spillovers. It also aligns closely with global demand trends in digital services, automation, data analytics, and remote work.
Sri Lanka has established a strong reputation in niche areas, including finance and accounting outsourcing, legal process outsourcing, software development, and knowledge services. Global firms continue to operate delivery centres in Colombo and other cities, and local firms increasingly serve international clients.
However, the sector faces critical constraints. Talent migration has intensified skill shortages. University output remains misaligned with industry needs. Research and development investment is limited. Regional digital hubs outside Colombo are underdeveloped. Without decisive intervention, ICT/BPM risks plateauing just as global opportunities expand.
For a services-led growth model to succeed, ICT/BPM must be treated not as a niche export sector but as a national productivity engine—one that supports digital transformation across manufacturing, agriculture, logistics, healthcare, and government itself.
4.Logistics, Shipping, and the Regional Services Advantage
Sri Lanka’s geographical location offers a natural advantage in logistics, shipping, and maritime services. Colombo Port remains one of South Asia’s key transhipment hubs, handling cargo well beyond domestic trade requirements. Logistics services, freight forwarding, port services, and supply-chain management generate foreign exchange and high-skill employment.
As global supply chains reorganise and regional trade intensifies, Sri Lanka has the opportunity to expand its role as a logistics and services gateway. Value-added logistics, bonded warehousing, maritime finance, ship repair, and digital trade facilitation could significantly expand service exports.
Yet policy fragmentation, regulatory delays, and infrastructure bottlenecks continue to constrain scale. A services-led growth strategy requires logistics reform to move beyond port expansion toward integrated, technology-enabled trade services.
5.Financial and Professional Services: An Untapped Growth Frontier
Financial, professional, and business services remain underdeveloped relative to Sri Lanka’s human capital base. Accounting, legal, consulting, actuarial, design, and engineering services have strong export potential, particularly in regional markets.
The challenge lies in regulation, global integration, and branding. Restrictions on cross-border service delivery, slow professional accreditation processes, and limited international marketing constrain expansion. With the right reforms, Sri Lanka could position itself as a regional hub for professional services, complementing ICT/BPM growth.
6.Why Services Stabilise the External Sector
One of the most significant macroeconomic implications of services-led growth is the stability of the external sector. Services exports generate foreign exchange without requiring heavy imports, reducing pressure on reserves and the exchange rate. Tourism receipts, ICT/BPM earnings, and logistics services have played a quiet but critical role in stabilising Sri Lanka’s balance of payments during recovery.
This stabilising effect matters because it supports macroeconomic confidence without relying on volatile capital inflows. In contrast to debt-financed growth or import-intensive industrialisation, services-led growth strengthens the economy from within.
7. Services-Led Growth in South Asia: Where Sri Lanka Fits
Across South Asia, a quiet but decisive shift is underway. As traditional goods exports face rising competition and global demand uncertainty, services have emerged as a stabilising force in several economies. A regional comparison offers essential context for Sri Lanka’s evolving growth model.
India provides the clearest benchmark. Services account for over 40 percent of India’s total export earnings, driven by information technology, business process management, professional services, and digital platforms. This service’s dominance has helped India stabilise foreign exchange inflows even when merchandise exports fluctuate. Similarly, the Philippines has developed one of the world’s largest business process outsourcing industries, with services accounting for nearly 40 per cent of export earnings and supporting millions of jobs.
At the other end of the spectrum, Bangladesh remains heavily reliant on merchandise exports, particularly apparel, with services accounting for only approximately 12–14 per cent of total exports. While this model has delivered growth, it has also increased vulnerability to global price and demand shocks. Pakistan occupies a middle position, with services accounting for roughly 18–20 per cent of exports, supported by ICT services and transport, but constrained by macroeconomic volatility and policy uncertainty.
Smaller South Asian economies present both opportunities and risks. Nepal and the Maldives derive more than half of their export earnings from services, primarily tourism. While this highlights the power of services to generate foreign exchange, it also underscores the dangers of over-concentration in a single sector.
Sri Lanka currently sits in the region’s middle tier. Services account for approximately 20–23 per cent of total export earnings, with tourism, ICT/BPM, logistics, and transport services leading. This places Sri Lanka ahead of Bangladesh and broadly in line with Pakistan, but well below India and the Philippines. The regional evidence suggests that services-led growth is neither accidental nor automatic—it is the result of sustained investment in skills, digital infrastructure, regulatory clarity, and private-sector participation. Sri Lanka’s trajectory indicates clear potential, but realising it will depend on how effectively policy can scale and diversify services over the coming decade.
8.Policy Gaps Holding Back Scale
Despite clear momentum, several policy gaps threaten to limit the scale of services-led growth:
Skills and human capital: Education and training systems are not producing skills at the required speed or scale, particularly in digital, language, and analytical capabilities.
Digital infrastructure: Uneven connectivity, limited data infrastructure, and slow digitalisation of public services increase transaction costs.
Regulatory fragmentation: Services sectors face overlapping regulators, outdated rules, and inconsistent enforcement.
Urban concentration: Over-reliance on Colombo limits national participation and raises costs.
SME integration: Small and medium-sized enterprises (SMEs) face challenges in accessing export markets, finance, and technology.
Without addressing these gaps, service growth will remain incremental rather than transformational.
9. Beyond Fiscal Discipline: What Government Must Do Next
Fiscal stabilisation and discipline are necessary foundations—but they are not growth strategies. For services-led growth to succeed, government action must extend beyond budgets and macro targets.
Priorities include:
- Large-scale investment in digital and services skills
- Accelerated e-government and regulatory digitalisation
- Export facilitation for services, not just goods
- Urban and regional planning for service hubs
- Stronger public–private collaboration
- Targeted incentives for high-value services
Most importantly, services must be explicitly recognised as the centrepiece of the national development strategy—not a residual category.
10. Is Sri Lanka Rewriting Its Growth Model—or Drifting into One?
Perhaps the most critical question is whether Sri Lanka is intentionally pursuing services-led growth or simply drifting into it by default. A deliberate strategy would align education, infrastructure, regulation, and investment around services. A passive transition risks underperformance and missed opportunity. The evidence suggests that Sri Lanka stands at a crossroads. The foundations of a services-driven economy are emerging organically. The challenge now is to convert momentum into strategy.
Conclusion: The Growth Model Is Changing—Whether We Like It or Not
Sri Lanka’s economy is quietly transforming. Services are no longer supplementary; they are becoming central. Tourism, ICT/BPM, logistics, shipping, and professional services are stabilising the external sector, generating skilled employment, and shaping the country’s post-crisis recovery.
The question is not whether services will drive growth, but whether Sri Lanka can consciously design policies to maximise their potential. When implemented effectively, services-led growth offers a path to resilience, competitiveness, and inclusion. If neglected, it risks becoming another missed opportunity.
The choice now lies with policymakers, institutions, and industry leaders. Sri Lanka may already be rewriting its growth model. The task ahead is to ensure it becomes a strategy—rather than an accident.
The Author is a professor of finance at the Sabaragamuwa University of Sri Lanka, a Director at the PMF Finance PLC, and the President of the Sri Lanka Institute of Marketing.
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