"We admit terrorism has an impact on us," the Central Bank of Sri Lanka Governor Ajith Nivard Cabraal acknowledged on July 25, 2007, but, he added further, "with or without terrorism, Sri Lanka is on a growth path."
Despite significant economic impact, the recent escalation in violence in Sri Lanka has failed to derail the nation's economy, with the country expected to record its fastest growth in nearly three decades, according to the Central Bank.
The conflict with the Liberation Tigers of Tamil Eelam (LTTE) has claimed at least 6,015 lives between January 1, 2005 and August 2, 2007. Millions have since been forced to live as Internally Displaced Persons in different parts of the country. Nevertheless, the Central Bank disclosed on July 25 that it was projecting a 7.5 per cent growth for 2007, reportedly the highest in 29 years. Sri Lanka's economy reportedly grew by 7.4 per cent in 2006, largely driven by the telecom, garment and banking sectors. On an average, economists believe that the conflict cuts at least two to three per cent off the annual growth rate.
With USD 530 million already received in foreign direct investment (FDI) this year, total FDI is projected to substantially exceed the total of USD 600 million in 2006. Further, USD 2.3 billion were received as foreign remittances in 2006, up from 1.9 billion in 2005. Most of the money from overseas has gone into telecom and IT-related services, distantly followed by garments and the construction of high-rise properties. Foreign reserves were up at USD 2.8 billion in April 2007, from USD 2.5 billion in April 2006. All these are conventional indicators of a booming economy, emboldening the claims that the Sri Lankan economy has not been ‘derailed’ due to the escalation in violence.
The reality of this growth, despite the escalation in fighting, is corroborated further by the fact that the LTTE has realized that, to defeat the government Forces, it needs to cripple the economy. It is currently aiming to direct major attacks on military and economic targets. In an interview on July 12, 2007, the LTTE’s political wing leader S.P. Thamilselvan declared, "Our targets would be, in the future, major military and economic structures of the government of Sri Lanka, as peace was not possible with President Mahinda Rajapaksa. They will be targets which help the government sustain its military operations and military rule. For instance (our) attack on the oil installations. That is one of the targets that will cripple the economy of Sri Lanka as well as the military capability of Sri Lanka, so such will be the tactic." He was referring to the April 29 incident in which a LTTE aircraft bombed oil and gas storage facilities in and around capital Colombo. The outfit dropped two bombs at the Muthurajawela gas storage facility of Shell and another two bombs at the main oil storage depot at Kolonnawa.
"This is a conflict that the country has learnt to live with," asserted Agost Benard, credit analyst at Standard and Poor's in Singapore. According to him, "Businesses still invest, factories still produce. The main reason is because the conflict is localized."
But there is a disconnect between a booming economy and escalating violence. On the flip side, inflation is currently pegged at 17 percent, the unemployment rate is at 6.2 percent, there is a budget deficit of 8.4 per cent and defence spending is at USD 1.3 billion. The Sri Lankan Rupee (LKR) has fallen by around three percent this year against the dollar, while other currencies in the region have risen. The tourism industry has taken a hammering, and there is widespread apprehension among the people of difficult times ahead. Economist Harsha de Silva thus notes, "Inflation will continue to soar as long as overall governance is poor, budget deficits are high and the state continues to spend lavishly on oil, fertiliser and food subsidies."
The relative economic growth is also imbalanced. Saman Kelegama, Executive Director of the Colombo-based Institute of Policy Studies, observes that, "While the western province, led by the city of Colombo, is booming, with its share of GDP rising to 48 per cent from 40 per cent in the last decade [2006 figures], the north and east, mostly under Tamil Tiger control, remains a development backwater… Because the north and eastern provinces have been battered, their supply capacity has reduced." The dominance of Western Province in economic activity is according to the Central Bank "a consequence of having major infrastructure centres such as ports and airports, financial houses, major import and export organizations and other service providing establishments including telecommunication."
The World Bank report, Sri Lanka Development Forum: The Economy, Regional Disparities, and Global Opportunities (January 2007), notes that the recent acceleration in growth can be partly attributed to large aid flows for Tsunami reconstruction and to rapid growth in domestic demand. The economic growth experienced by the Western Province, and to some degree the South coast, is "masking stagnant or backwards trends in the North and East. While 92 per cent of households in the Western Province have electricity, for example, only 66 per cent do in the North Central region. And while 46 per cent of those living in the Western Province attend secondary school, that number has fallen to 31 per cent in the East." Although it is estimated that the conflict has reduced overall GDP growth by 2-3 percent for the country as a whole, the North and East have suffered the brunt of its impact, particularly in terms of access to basic economic infrastructure which, according to available statistics, is worse than in other poor provinces, the report stated.
The seven percent plus growth rate amid a revival of the war is, in fact, a clear indication of the increasing economic marginalization of the north and east. And the recent conflict intensification has only worsened life for the already poor people of the north and east. An August 3-Associated Press report on life in parts of the north thus stated: "A partial economic blockade of the rebel areas that has been in place for nearly a year has badly damaged the economy. Unemployment has exploded, incomes have fallen and the price of everything from chicken to baby formula has soared… With no fuel, the electrical system has shut down. Only hospital generators and small generators run by the rebels and powered by smuggled fuel are still running… Construction has also ground to a halt with a government ban on importing cement and other building materials to the area."
The tourism industry has seen some adverse impact. The tourist inflow fell 30 percent to 30,810 in June 2007 in comparison to 44,066 in June 2006. According to Central Bank data, earnings from tourism fell by 14.8 percent between January and April 2007 to USD 130.8 million, compared with the same period a year earlier. Although Central Bank Governor Cabraal claimed that "tourism never earned us more than USD 500 million a year," he admited that "negative publicity about the war is a problem when trying to drum up business abroad. It affects investor confidence, tourism, forcing people to put off plans to start projects until things are better."
The long-drawn ethnic conflict has meant that Colombo has had to redirect vast amount of resources towards rebuilding destroyed roads, bridges and other critical infrastructure, rather than initiating an up-gradation and consolidation process – key factors of a developing economy.
The LTTE’s subversive infrastructure of smuggling, drug trafficking, extortion and collection of illegal taxes also adversely impacts the economy. According to a 2006 report on the Website of the Ministry of Defence of the government of Sri Lanka,
It is believed that the LTTE daily collects more than (Sri Lankan) Rs. 900,000 in the form of illegal tax and other revenue in this road (A9). From Omanthai in the cleared area [area under government control], an average of 7,000-8,000 civilians and 1,000-1,200 vehicles cross the stretch of land daily. Records revealed that the LTTE extortions to be an estimated sum of Rs. 200-300 million from Jaffna bound cargo passing from its entry-exit point in Pallai. The estimated illegal tax revenue for the LTTE from the goods sent to Jaffna through A-9 road from June 01st to 19th is Rs. 65,721,821. LTTE also earned Rs. 285 million from goods to Jaffna, during March-April, on the festive eve of the Sinhala-Tamil New Year.
Jane's Intelligence Review disclosed in a report on July 19, 2007, that the annual profit margin accrued by the LTTE is in the vicinity of USD 300 million (over LKR six billion). The outfit collects huge amounts from the Tamil Diaspora in the US, Canada, Europe – particularly including Britain, France, Italy, Denmark, Switzerland, Australia, Norway, Sweden and Finland – and in several other countries, through LTTE credit card rackets, money laundering and weapons procurement networks. With so much of ‘black money’ in circulation, the ‘white’ economy is bound to suffer.
Current Sri Lanka Armed Forces' (SLAF) military successes, however, have the potential to yield some advantages, according to some commentators. Kelegama thus observes: "If the government gets more control over the east, it can be uplifted closer to other provinces… The people, who are sick and tired of the war, will appreciate economic activity increasing."
With vast stretches of land cleared of the LTTE in the North and East, agricultural activities are bound to increase. government control over these areas can enhance trade because, being an island nation, most of the trade activities are carried on over the seas, on which the LTTE had greater control till its recent reverses. It remains to be seen whether the government is able to consolidate its hold, build the infrastructure of governance and the economy, or whether a wounded LTTE will hit back with fury to jeopardise the current and amazing story of economic resilience in Sri Lanka.
Ajit Kumar Singh is Research Assistant, Institute for Conflict Management. Courtesy, the South Asia Intelligence Review of the South Asia Terrorism Portal