The share of manufacturing in the economy declined from 21 to 15 percent of GDP between 1977 and 1986. This fall is somewhat misleading because it resulted in large part from the rapid growth in the service sector and the decline in output of the state-owned Ceylon Petroleum Corporation. The latter accounted for as much as one-third of the value of manufactured goods in some years and thus strongly affected aggregate manufacturing statistics. These statistics fluctuated along with changes in the value of the output of the oil refinery, which in turn varied with oil price levels and the extent of plant closings for maintenance. Some manufacturing sectors grew rapidly during this period.

Manufacturing was dominated for most of the twentieth century by the processing of agricultural produce for both the export and domestic markets. The most important industries were engaged in preparing and packaging for outside markets the principal export commodities--tea, rubber, and coconuts--for which Sri Lanka is noted. Such preparation generally involved low technology, comparatively modest capital investment on machinery, and uncomplicated, sequential procedures. Tea leaves, for example, follow a four-part process of withering, rolling (to extract bitter juices), fermentation, and heating (or roasting), before being packed in chests for export.

The processing of coconut and of rubber also were important industries, although their ratio in proportion to all manufacturing fell in the 1970s and early 1980s. The processing of the latter two commercial crops generally involved refining the basic commodities into a range of semi-finished products to be used in manufacturing finished goods at home or abroad. Coconuts, for example, are transformed into copra, desiccated coconut, coconut oil, fiber, poonac (a meal extract), and toddy. Copra and desiccated coconut are used as oils or as ingredients in food such as margarine coconut oil is used to make soap coconut fibers such as coir are used to make yarn, rope, or fishnets, while poonac is used as food for livestock. The coconut palm flower is also used in the production of alcoholic beverages.

Rubber is also processed in various ways, including latex or scrap crepe and ribbed or smoked sheet, which together account for much of Sri Lanka's export of this commodity. Processing methods for rubber are outdated, however, and Western consumer countries have protested against the hardness, high moisture content, and inconsistent quality of the Sri Lankan product.

Manufacturing received a boost in the early 1960s when import controls, which were the result of shortages in foreign exchange, made it difficult for consumers to obtain or afford foreign products. The result was a protected and profitable ready-made home market. This situation led to an expansion of both privateand public-sector manufacturing, with the private sector concentrating on consumer goods. These new enterprises, however, depended heavily on imported raw materials, and when the country's balance of payments difficulties became even more serious in the eb3d early 1970s, industry suffered from the lack of foreign exchange. In 1974 it was estimated that only 40 percent of the capacity of the industrial sector was used. After the 1977 liberalization, raw materials were more freely available, and in 1986 capacity utilization was estimated at 78 percent.

In 1978 the government established the Greater Colombo Economic Commission primarily to serve as the authority for the free trade zones to be set up near the capital. The first investment promotion zone consisted of a large tract that was established in 1979 at Katunayaka, near the Bandaranaike International Airport. A second zone was inaugurated in 1986 at Biyagama, in Colombo District. Foreign companies that built factories in the zones received generous tax concessions. The commission succeeded in attracting some foreign investment, especially from Hong Kong and other Asian countries. At the end of 1985, a total of 119 enterprises had signed agreements with the commission, but only 7 were signed in 1986, when there were 72 units in production. The total number of people employed was nearly 42,000. Gross export earnings from the investment promotion zones in 1986 were around Rs5.5 billion, up 43 percent from 1985. Foreign investments outside the free trade zones were coordinated by the Foreign Investment Advisory Committee.

The principal change in manufacturing in the 1980s was the rapid growth of the textile sector, from 10.5 percent of output in 1980 to 29.2 percent in 1986 (see table 8, Appendix A). In the mid-1980s, the government was attempting to diversify foreign investment away from textiles. Most textile factories were located in the investment promotion zones.

During the July 1983 riots, 152 factories were destroyed, but there was little long-term effect. Some observers expressed the view that the equipment destroyed was inefficient, and that modernization was long overdue.

Data as of October 1988