Sri Lanka’s economy is predominantly based on agriculture. Most of the people are subsistence farmers, who make a living by growing rice on their small plots. A large export trade in tea, rubber, and coconuts is the dominant commercial activity; most businesses engaged in producing these goods were nationalized in the middle and late 1970s. The government also controlled banking and insurance, as well as mining and the manufacture of such basic goods as fertilizers, textiles, cement, and petroleum. Consumer goods manufacturing and retail businesses remained in private hands. In the late 1970s the government launched a new program to accelerate economic growth that included the elimination of various state monopolies to allow for more private-sector competition; in the mid-1980s the government sought to promote foreign investment in export-oriented industries. Beginning in the late 1980s ethnic violence strained Sri Lanka’s economy. Renewed attempts to privatize the economy, particularly the agricultural industry, began in the 1990s.

The economy that evolved in Sri Lanka under British rule consisted of a modern sector, the main component being plantation agriculture, and a traditional sector comprising subsistence agriculture. Manufacturing was an insignificant segment of the economy. Banking and commerce were, for the most part, ancillary to plantation agriculture. Nearly all foreign earnings were derived from the three staple plantation crops—tea, rubber, and coconut. The country depended on imports for nearly three-fourths of its food requirements and almost all of its manufactured goods.

In 1977, Colombo abandoned statist economic policies and its import substitution trade policy for market-oriented policies and export-oriented trade. Sri Lanka's most dynamic sectors now are food processing, textiles and apparel, food and beverages, telecommunications, and insurance and banking. By 1996 plantation crops made up only 20% of exports (compared with 93% in 1970), while textiles and garments accounted for 63%. GDP grew at an annual average rate of 5.5% throughout the 1990s until a drought and a deteriorating security situation lowered growth to 3.8% in 1996. The economy rebounded in 1997-98 with growth of 6.4% and 4.7% - but slowed to 4.3% in 1999. Growth increased to 5.6% in 2000, with growth in tourism and exports leading the way. But a resurgence of civil war between the Sinhalese and the minority Tamils and a possible slowdown in tourism dampen prospects for 2001. For the next round of reforms, the central bank of Sri Lanka recommends that Colombo expand market mechanisms in nonplantation agriculture, dismantle the government's monopoly on wheat imports, and promote more competition in the financial sector.