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Source: www.asiaecon.org |

ECONOMIC IMPACTS OF SRI LANKA'S CIVIL WAR


Sri Lanka's economy has enjoyed an average growth of about 5% during the last few years, despite suffering from the impacts of an ongoing 25-year civil conflict between the Sinhalese government and the terrorist group representing the nation's Tamil minority (LTTE) . However, prospects for the rest of 2009 look gloomy as the conflict intensifies and the international financial meltdown economically impacts Asia. Although economic growth in 2009 looks grim, the Sri Lankan government expects an economic boost in the following year as the global economic crisis slows down and the military gets closer to ending the conflict.  However,  Sri Lanka's economy has a long way to go before it can achieve sustainable long-term growth as the damages of the war are still felt, and government actions remain  insufficient to effectively re-build the national economy.


Sri Lanka’s economy has enjoyed an average growth of about 5% during the last few years, despite suffering from the impacts of an ongoing 25-year civil conflict between the Sinhalese government and the terrorist group representing the nation’s Tamil minority (LTTE). However, prospects for the rest of 2009 look gloomy as the conflict intensifies and the international financial meltdown economically impacts Asia. Although economic growth in 2009 looks grim, the Sri Lankan government expects an economic boost in the following year as the global economic crisis slows down and the military gets closer to ending the conflict. However, Sri Lanka’s economy has a long way to go before it can achieve sustainable long-term growth as the damages of the war are still felt, and government actions remain insufficient to effectively re-build the national economy.

The cost of war has significantly weighted down Sri Lanka’s economy. In 2007, the government borrowed $181,449 worth of defense loans from international financial markets, virtually double the amount used in the previous year. In 2008, the Sinhalese government designated $1.5 billion for defense, a 20% increase from last year’s budget. This year, Sri Lanka expects to allocate $1.64 billion to  war efforts, a 6.4% year-on-year increase.  War costs currently consume around 30% of the government’s budget, and has been estimated to have cost the country over $ 200 billion over the years.

The government has expected tourism to be an important growth mechanism, as it provides an important source of foreign exchange. However, the sector has been largely affected by the conflict, suffering an overall 11.7% drop in tourists for 2007, compared with the previous year. Threat of violence also caused a 31.4% year-on-year plunge in visitors for August 2008. The country expects tourism to fall a further 10% in 2009.

Infrastructure has been severely impacted by the war, as years of fighting have destroyed and neglected crucial parts of the country’s framework, which was further damaged by the 2004 tsunami.

Brain drain has also been a crucial problem, as the threat of war has resulted in an outflow of educated and expert citizens, leaving Sri Lanka with a weak base of skilled workers. Moreover, the war has killed more than 70,000 people, many of which were young adults, slashing the working force and leaving a large displaced population of children and seniors.

Meanwhile, the Sri Lanka’s economic growth is expected to reach 6% in 2009, its slowest since 2004. The national trade deficit has widened by 78% in the past year going from $3.56 billion in 2007 to $5.17 billion in 2008.

While Sri Lanka has experienced a high inflow of foreign direct investments in the first half of 2008 with $425 million, almost double received during the same period a year before, investments in the last few months have lowered due to the recent increase of intensity of the conflict. For instance, Japan, which provides two thirds of Sri lanka’s international aid, has shown preoccupation over the increased levels of conflict during the past few months and has warned Sri Lanka to contain the civil war.

Sinhalese President Mahinda Rajapakse has placed considerable effort in putting an end to the conflict by increasing military power and raising the pressure on the opposition, hoping that peace and security will result in higher investments and a more stable economy. While the end of the war may not be as near as initially hoped, the capturing of the Tamil capital of Kilinochchi by the military has prompted “end of conflict expectations” reflected on Sri Lanka’s market share which surged 5.02, closing high from a more than four-year low, the day after the news was conveyed. The national currency, which has been sliding due to changing commodity prices, has also experienced a boost due to hopes of a post-war strengthened economy.

The government also hopes that the end of the civil war will allow for the re-opening of roads and transportation leading to the Jaffna peninsula, home to 600,000 Tamils, ending years of isolation that have resulted in economic stagnation, food and fuel shortages, as well as soaring prices of essential goods.

While military victory over the LTTE would potentially bring economic growth, the government must place more efforts to ensure economic stability in the long run.

Investments on infrastructure, mainly in transportation, is crucial for the re-building of a strong economy. Education is currently lacking, as only 2% of young people attend university. Education levels and availability should be of immediate concern, as it will build a strong workforce of skilled and educated workers.

Moreover, transparency will be key to raising investments and public trust. Corruption and lack of transparency remain significant issues in the country and could substantially affect investment levels and approvals of international loans. Sri Lanka is extremely dependent on foreign assistance, with the World Bank, the Asian Development Bank, Japan, and other donors providing loans totaling $1.4 billion in 2007. Due to its inability to provide transparency, Sri Lanka has already lost its EU concessions for the following year, compromising 2% of its annual GDP growth.

The depreciation of the national currency will also lead to further instability. The current overvalued currency is draining foreign reserves and could impose severe damages in Sri Lanka’s budget.

More importantly, political solutions to the Tamil situation must be devised as the government approaches a conflict resolution. The government’s concentration purely on military action, and its failure to consider any long-term reconciliation deal with the Tamil minority, will result in long-term grievances within the country’s society. While the Sinhalese population is dominant on the island, 15% of the population are Tamil and 5% are not ethnically Sinhalese. After 25 years of ethnic conflict, the nation lies divided as racism and mistrust takes over the population, hindering any hopes of unification.

If political solutions are not ensued, there will be a great risk of a Tamil guerrilla style uprising. Analysts suggest that the Tamil minority will show their dissatisfaction by hitting economic and political targets, inflicting great damage in the country’s prospects of long-term stability. The political dimensions of the conflict must therefore be addressed in order to reach a successful end to the war.

The global economic crisis and the ongoing civil war have resulted in Sri Lanka’s high public debt load. Economists expect the country to need investments levels of around 30% of GDP and 1-8% economic growth rates in order to successfully reduce unemployment and poverty. Political instability and lack of security caused by the conflict have led to investment levels averaging around 25% in the last ten years.

Higher investment levels and growth will be determined by future actions taken by the Sinhalese government as the military approaches a victory over the LTTE. Sri Lanka’s economic prosperity primarily depends on infrastructural and educational reforms, transparency, political stability and a return to peace. It is crucial for the government to achieve unification and stability by focusing on political solutions to a sustainable long-term conflict resolution.

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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