Since independence, despite low levels of per capita income, Sri Lanka has achieved an impressive human development record, with many of Sri Lanka's social indicators comparing favorably to those of more advanced economies. The country has broken away from a public-sector -dominated, highly regulated economic system and has laid the foundation for dynamic growth based on a free market, liberalized trade and exchange rates, and deregulated foreign investment. This transition has led to rapid economic growth, a significant reduction in the level of unemployment, and a rise in the level of per capita income. However, the impressive growth of the economy evident during the 1977-1982 period has generated increasing economic inequality. The soaring inflation fueled by the deterioration of the value of the Sri Lankan currency has worsened the relative position of the poor. Despite the reduced levels of unemployment and the increased opportunities, nearly half of the population depends on government subsidies to meet their basic needs. The balance of payments, a fundamental problem of the economy that has persisted since the 1950s, has continued to worsen. Mounting foreign debt and the debt servicing obligations has added further burden to the already critical balance of payments.
The slowdown in the pace of economic growth over the last 2 decades, coupled with the rising costs of the civil war, seriously threatens the economy's ability to meet the challenges and changing socioeconomic needs of its population. With a rapidly aging population, the need for more resources to provide health care and income support will exert considerable pressure on the government's fiscal resources and the tax system during the coming decades. The solutions to most of the burning problems, and those bound to emerge in the near future, lie in the country's ability to achieve sustained levels of long-term economic growth. The continuing civil conflict poses the biggest obstacle to the country's growth prospects. The need for an immediate solution to the 18-year-old civil war is imperative. Given that the Sri Lankan economy managed to realize an average growth rate of about 5 percent during the last decade in spite of severe interruptions caused by the civil war, lasting peace would undoubtedly bring prosperity to the nation.