Macroeconomic Analysis of Poverty and Inequality in Sri Lanka

: An Integrated Approach Using a Computable General Equilibrium (CGE) Model Based on a Social Accounting Matrix (SAM) and Econometric Model

Abstract

Since independence, Sri Lanka has implemented many programs to eradicate poverty, but there is still no way to break the vicious cycle of poverty properly. When considering regional disparities in poverty levels, poverty is higher in the country's estates, rural areas, and conflict-affected regions. Many social, economic, and political reasons have affected the country's poverty and income distribution disparity. Meanwhile, there are contradictions in the principles of equity justice in welfare policies, resulting in high levels of inequality and the progressive widening of the income gap between the richest and poorest households. Therefore, this research will study the fundamental factors that cause poverty and income inequality. The information obtained from this study can be extrapolated to formulate favourable economic policies to eliminate poverty and income inequality.

When considering the external account structure of Sri Lanka, it appears that the primary external sources of income generation in the Sri Lankan economy are: 1) Foreign remittances; 2) tourism; and 3) export revenues. In 2019, revenue from all the above sources declined significantly, mainly due to the Covid 19 pandemic. The impact of this was catastrophic to the Sri Lankan economy when the country deep-dived into the worst economic crisis in its history. This evidence underscores the paramount significance of external sources of income to the nation's economy. Furthermore, it suggests a gauge of the impact of external shocks on the economy of the country.

At the outset of this research process, the Sri Lankan National Accounting Database of 2017 was analysed, and a Social Accounting Matrix (SAM) was constructed. The resultant matrix represented the economic structure of Sri Lanka. This matrix depicts the flow of goods, services, and income between different sectors of the economy. This also provided a comprehensive picture of the economic interactions between different sectors and domestic households. Extensive research identified and experimented with the most sensitive indicators affecting the Sri Lankan economy, such as export prices, import tariffs, and foreign remittances. In these experiments, using the SAM CGE model, each of these indicators was subject to external exogenous shocks of different magnitudes. The impact of these external shocks on the country's poverty was identified and analysed using the SAM CGE model. The systematic analysis of these outcomes will guide the formulation of economic policies to help eradicate poverty.

This research direction can be used to identify areas of potential growth and development and areas of government intervention to address imbalances and/or disparities. The thesis aims to present a few essential strategies to remedy poverty and inequality in Sri Lanka. The SAM CGE model can evaluate the impact of economic policy changes on different sectors of the economy and different income groups, providing valuable information to policymakers to determine how to eradicate poverty and inequality using fair and ethical welfare policy. Moreover, some sensitive external and internal variables that directly affected the poverty and income disparity in Sri Lanka, which could not be captured in the CGE model due to technical issues and existing complexity, were selected and investigated through a multiple linear regression model. Thus, this approach ensures the research addresses the research question and objectives comprehensively, providing a more accurate and equitable analysis of poverty and income disparity in Sri Lanka.

Date of Award	2025
Original language	English
Awarding Institution	University of Dundee
Supervisor	Omar Feraboli (Supervisor) & Bill Russell (Supervisor)