By Feizal Samath
COLOMBO, Mar 9 2001 (IPS)

Sri Lanka’s government is banking on likely peace talks with Tamil Tiger rebels to kick-start an economy slowed down considerably by the 18-year-old ethnic conflict in the Indian Ocean island nation.

Economy analysts said the government’s Mar. 8 budget was based on the hope that the peace talks, widely expected to start in May, would trigger a major economic revival, helped by an infusion of 700 million U.S. dollars in foreign aid.

The aid has been promised to support rehabilitation programmes in the conflict-torn northern region of the country.

The ethnic violence has claimed more than 65,000 lives so far and retarded economic growth, which now averages about five percent annually.

This year too, it has cast its shadow on the government’s budget that is expected to add to the woes of ordinary Sri Lankans.

On Thursday, the government imposed a further belt-tightening — at least for the next six months — on Sri Lankans, already reeling under soaring living costs in the past year.

“The government appeals to the people to refrain from demanding concessions at least for the next six months and fully co-operate with us to re-strengthen our economic fundamentals,” said Deputy Finance Minister G.L. Peiris while presenting the year 2001 annual budget in parliament.

“If peace comes, then the whole scenario changes and confidence could be restored in the economy,” said Sumanasiri Liyanage, senior economist at Sri Lanka’s University of Peradeniya.

Hopes of peace have been raised with Tamil rebels, who were demanding a separate home for Sri Lanka’s Tamil minority people all these years, now saying they are ready to discuss a devolution of powers to Tamil- majority areas.

Peiris said the country’s economic growth may slow to 4.5 percent this year from six percent last year, due to lower agricultural and manufacturing production.

Sri Lanka’s finances, dented by rising defence spending, worsened as foreign exchange reserves slumped to 950 million dollars at the end of last year from 2.5 billion dollars two years ago.

With just enough reserves for 45 days of imports, against the earlier average of three months, the Central Bank was forced, late January, to free the rupee from controls.

“Peace will trigger off a massive rehabilitation programme for the north and the east, which would boost economic activities across the country,” Peiris said.

It could also halve military spending down to three percent of the national income, he added.

The minister said that in the event of peace, integrated development plans were in place to start reconstruction and rehabilitation in the north, with an investment of about 700 million dollars, to be provided by foreign donors.

As part of the austerity measures, the government has decided to freeze public sector salaries till January 2002.

Peiris raised taxes and trimmed allowances of ministers and their deputies as part of proposals that are estimated to raise 264.5 billion rupees (3.1 billion dollars) in revenue for the government, against a projected expenditure of 387.5 billion rupees.

The government also hiked by one percent, an earlier 6.5 percent defence levy on manufacture. This is expected to further push up consumer prices.

War spending has been pegged at 64 billion rupees this year, up from last year’s earlier estimate of 55 billion rupees. But that later shot up to 85 billion rupees when the military went on a buying spree to ward off a massive Tamil rebel threat in the northern Jaffna peninsula.

Helped by an infusion of fresh arms, the army was able, in the past six months, to reverse some of the big territorial gains made by the rebels in April and May 2000.

The expected slowdown in the economy this year has been compounded by a prolonged labour dispute on tea and rubber plantations, which produce Sri Lanka’s main export.

The annual inflation rose in February to a four-year high of 16 percent. The rise is attributed to higher local and imported food prices, due to a depreciating rupee and the impact of higher prices of flour, kerosene, diesel and public transport.

Most people were expecting some relief on consumer prices, which never came.

“It was a negative budget. It is hard to believe the numbers that the government presented today,” said Dushantha Wijeyasingha, economist at the stockbroker firm, Asia Securities Ltd.

“The government will find it difficult to maintain high revenue collection as promised and taxes on cigarettes and liquor may be raised outside the budget,” he said.

Peiris also increased to three rupees, the one-rupee export tax on garments, hiked the surcharge on corporate taxes and doubled the international embarkation tax to 1,000 rupees.

The government also decided to tax gamblers by pushing up the tax on casinos to 2.5 billion from one million rupees earlier, while the tax on companies accepting bets on overseas horse races, was hiked 10 times to one million rupees.

Excerpt: