ECONOMY-SRI LANKA: Growth is on Track Despite War

By Feizal Samath Reprint | | Print |

Feizal Samath

COLOMBO, Jul 28 2000 (IPS) - The good news for Sri Lanka is that economic growth is on track despite the ongoing ethnic conflict. But the bad news is that its growth rate would have doubled without the war, say the country’s top economic officials.

The economy will grow faster this year, although the escalation in the battle between Sri Lankan troops and Tamil Tiger rebels is draining government funds, says the Central Bank governor, A.S. Jayawardene.

Sri Lanka’s gross domestic product (GDP) is expected to grow by between five percent and 5.5 percent this year, against last year’s 4.3 percent, Jayawardene told IPS in an interview.

Yet the nearly two decade-old ethnic violence, which began in 1983, is driving investors away and hurting the country’s growth prospects.

Without the war, the growth rate of the Sri Lankan economy could have doubled and the country could have become a South Asian financial and manufacturing centre, he added. “The potential we have lost due to the war is considerable,” Jayawardene said.

Tamil Tiger rebels are demanding a separate home for the minority Tamils in this Indian Ocean island nation, alleging discrimination by the majority Sinhalese.

According to Jayawardene, the war is expected to push up defence spending by up to 62 billion rupees (805 million U.S. dollars) this year, up from 49 billion rupees (636.4 million dollars) last year.

This would exceed the government’s earlier spending target of 52 billion rupees (675.3 million dollars) for this year. The government’s annual military expenditure has ranged from about 45 to 50 billion rupees (584 to 649 million dollars) in the past decade.

Recently, the government of President Chandrika Kumaratunga has been trying to get Parliament’s support for constitutional reforms designed to devolve power to the regions and help end the conflict.

A deal had reportedly been reached between the ruling People’s Alliance (PA) of Kumaratunga and the main opposition United National Party (UNP), on providing regional autonomy to the Tamils in the north and the east.

But the deal, worked out during four months of talks between the two opposing political parties, has been rejected by the Sinhalese nationalist groups, Tamil rebels and Tamil political parties.

The UNP itself is threatening to abandon support for the new constitution if the government, according to newspaper reports, pushes it through Parliament next month without public debate.

Parliament ends its six-year term on Aug 24 and polls are due in November, putting pressure on the government to make headway in the internal conflict.

Meantime, the country’s officials are trying to ease the effects of the war on the economy and keeping a close watch on how it fares.

The central bank governor projected the budget deficit to rise to 8.5 percent of GDP from 7.5 percent in 1999, overshooting a 7.6 percent target.

However, he also said that the government has been able to control expenditure and “not resort to runaway spending.” “The treasury is making every effort to contain the budget at these levels,” he said.

But the central bank estimates the average inflation this year to almost double to seven to eight percent because of sharply rising living costs.

Independent economists believe that the government’s budget has been thrown off course by huge rises in defence spending, increased fuel prices and lower spending on development. They also expect lower growth figures than those projected by the Central Bank.

“We believe economic growth would be down to 4.7 percent this year mainly due to lower construction activity while inflation would reach double digits from single digit levels,” said an analyst at a local brokerage firm, who did not want to be identified.

In the first half of the year, the economy grew by six percent, helped by rising garment and tea exports and improved rubber prices.

Overall, exports rose by 21 percent in the first five months of this year, with the biggest chunk of exports going to the United States, according to central bank figures.

Sri Lanka is the world’s biggest tea exporter, accounting for about 20 percent of total global exports. Although it accounts for just two percent of world rubber exports, it is the world’s largest maker of industrial lyres.

Other engines of economic growth include textile and clothing exports, gem mining and tourism.

According to Arjuna Mahendran, a Sri Lankan economist based with the research firm SG Securities in Singapore, the high spending on the war has made it difficult for the government to get into new sectors, especially the boom in information technology.

“The war is crippling the whole investment rate of the economy with direct investment accounting for about 18 percent of GDP while indirect investment is languishing far behind,” he told IPS.

The internal conflict has also dented tourism, a sector that employs about 100,000 people and is the number two earner in the country’s services industry. It contributed 53 percent of GDP last year.

Sri Lanka boasts several picturesque beach resorts, colonial hill stations and historic sites, but its northern and eastern coasts are off-limits to tourists because of the war.

Only about 400,000 tourists visited Sri Lanka last year although the country can play host to one million visitors a year.

Meanwhile, soaring prices of fuel and staple food such as sugar, rice, vegetables and wheat flour, are adding to inflationary pressure.

The state-run Ceylon Petroleum Corp. has hiked diesel and household cooking gas prices by 40 percent this year, while power tariffs rose 10 percent in May.

In the first five months of the year, Sri Lanka imported petroleum products worth 42 million dollars, more than double the amount in the same period last year.

While economists expect domestic oil prices to remain stable in coming months as global prices fall, a fall is unlikely because the government, which heavily subsidises diesel fuel for consumers, would lose money if it lowered prices further.