Since 1977, the government's market-oriented economic policies have encouraged industrial growth in the private sector, particularly in textiles, food and beverages, wood products, rubber and plastics, and other consumer goods. While most small- and medium-sized enterprises are now privately owned, state ownership continues to predominate in basic industries such as oil refining, and electric power generation. In the period 1990 to 2001, 38 manufacturing companies were privatized including Lanka Lubricants (sold to Caltex in 1994), Colombo (bottled) Gas Company (sold to Shell Oil in 1995), Ceylon Steel Corporation (sold to Hanjung of Korea in 1996), and Sri Lanka's only flour mill (built on a build-operate-transfer (BOT) basis in 1977 by Prima Ltd. of Singapore and converted to a buy-own-operate (BOO) arrangement in 2001 with a further investment from Prima of $65 million) In 2001, industry accounted for about 26.5% of GDP, of which manufacturing were 15.8%; construction, 7.5%; mining, 1.9%; and electrical power and water, 1.2%.
Textiles and apparel is the largest industrial sector, accounting for 40% if manufacturing output, and, with 350,000 textile workers, the largest industrial employer. There are about 800 textile factories, the largest 100 accounting for about half of production. The sector is the leading net earner of foreign exchange, surged ahead 16.2% in 2000 after growing 7.5% but then declined 8.6% in 2001 as export demand fell. Apparel, which accounts for about 35% of industrial output and 34% of manufacturing employment, makes up 50% of total exports. Export earnings from the garment industry dropped 15% in 2001 as opposed to a 23% increase in 2000. The United States is Sri Lanka's main apparel market, buying about 64%, helped by quota allotments under which 70% of apparel exports to the United States fall. The EU lifted quota restriction for Sri Lanka in 2001. In 2005, when quotas under the Multi-Fiber Agreement (MFA) are due to be phased out, Sri Lanka's garment industry will face the challenge of a more competitive world market, although only the largest operations appear presently to have the technological and marketing capacities to effectively compete.
Food, beverages and tobacco, the second-largest manufacturing sector, accounting for 22% of industrial output, depends more on the domestic market and registered growth of3.1% in 2001 despite the overall downturn after a modeler 6% rise in 2000. The third largest industrial sector— chemicals, petroleum and rubber products, accounting for 19% of industrial output—has been more volatile, growing 13% in 2000 and declining 5.6% in 2001. Sri Lanka's only oil refinery is a state-owned facility with a 68,000 barrels per day capacity. The nonmetallic mineral sector, which had grown 2.2% in 2000, declined in 2001, but two other non-traditional sectors—smaller fabricated metal products and basic metal products—grew by about 3% in 2001 after increases in 2000 of 4.5% and 5.6%, respectively. Paper industries also grew about 3% in 2001. The outlook for manufactures in Sri Lanka depends largely on the outlook for exports, particularly to the United States. In the first quarter of 2002, exports were down 16%. A more positive development was the restoration of a reliable power supply in May 2002 with the end of drought conditions.
The government's industrial policy includes encouraging investment in industries in which it believes Sri Lanka has a comparative advantage. The Board of Investment (BOI) offers various incentives for investment in five industry segments: electronics and components for electronic assembling, industrial and machine tools (a new emphasis), ceramics and glassware, rubber-based industries, and light and heavy engineering. Another key policy element is deregulation, and in 2001 a committed on deregulation was formed to study regulatory impediments to Sri Lanka's industrial development.