The Hindu Business Line : Renewed armed conflict hurts Sri Lankan economy

“My family is small, consisting of my wife and a son, studying in tenth standard. And yet, my wife and I have to work to make both ends meet,” he says.

The cost of living has gone up steeply in recent years, especially after the break-up of the truce with LTTE. Inflation has skyrocketed to around 20 per cent, he said.

The price of all essential commodities has shot up to such a level that the poor people cannot afford them.

The daily wages of an unskilled worker at present stood at SL Rs 850, but with that a “family of four could hardly pull on”.

Exorbitantly high spending on defence in recent years has left only very little for productive capital investment.

This had resulted in increasing unemployment.

Skilled workers have left the country for green pastures overseas, resulting in shortage of that category.

The country could not achieve self-sufficiency in production of rice, the staple food of the masses. Life in the interior villages is not as rosy as it is seen in the cities here, he lamented. However, education is free for all.

Model economy, actually

In fact, Sri Lanka has long been celebrated in development economics literature as a model low-income country — one that has achieved extraordinary success in attaining high levels of male and female literacy, school enrolments and health outcomes, despite low levels of per capita income, Mr Sumane said, showing a UNDP report.

Only a handful of developing countries, such as China, Vietnam, Cuba and Costa Rica, can list as many achievements as Sri Lanka on the social front, the report said.

Data from UNDP’s global Human Development Report 2004 suggests that Sri Lanka has one of the highest ranks of all the countries in Asia when its performance on the human development index is compared, relative to its performance on GDP per capita.

However, poverty in Sri Lanka is still high and widespread and the country is still classified as a low-income food-deficit country, with a relatively high global hunger index in South-East Asia.

Low wages

Poverty is another predominant factor that influences food security in Sri Lanka, the report said. Nearly 25 per cent of the work force is under-employed.

The “real” wages for unskilled workers have reduced in value to such a degree that it is worth 40 per cent of what it was in 1978.

There are huge discrepancies between urban and rural districts with the North-East particularly affected after more than 20 years of conflict.

The renewed armed conflict has shaken the majority of the people.

In fact, a virtually concerned Mr Sumane, like thousands of others, is worried about ending of the conflict, restoring peace and taking the coral-shaped Island nation with an area of around 65,000 sq km and a population of less than 20 million to prosperity.

Sri Lankan researchers have estimated that the conflict has cost the economy 2 to 3 percentage points of GDP growth annually, the growth which would have eliminated poverty in the country by now.

“Peace is the single most important thing for Sri Lanka’s economy,” Central Bank Governor Mr Nivard Cabraal was quoted as saying.

According to him, growth in the $26-billion economy is likely to be slow to 7 per cent in 2007 before picking up to 8 per cent in 2008. Government expects to keep defence spending at 3 per cent of the GDP in 2007.

The human cost of the conflict, they said, is 65,000 dead and over five lakh displaced. It has affected the North and East. 20,000 hectares of agricultural land were brought back since 2001, raising the rice production by 90,000 tonnes per year, besides restoring water supplies to 20,000 families. "The progress we made together has now been stopped in its tracks," they said.

The soaring defence expenditure has virtually stopped productive capital investment. The defence spending has shot up to $139.6 billion, almost 200-fold since 1986 when it was only Rs 6 billion. According to analysts, overall spending is estimated to go up by 40 per cent to SLRs 804.6 billion ($7.7 billion) in 2007.

They forecasted that the worst fighting after the 2002 truce would push up spending on defence and public security by 20 per cent next year. According to them, the defence outlay for 2008 may reach a whopping Rs 166.4 billion ($1.5 billion).

Tourism undermined

Poor security environment has undermined tourism earnings in 2007-08, but strong merchandise export growth as well as rapidly rising nominal GDP, will see the current account deficit fall to 3.2 per cent of GDP in 2012 from an estimated 3.6 per cent in 2007, says the Economist Magazine.

Turbulent political situation is hampering the implementation of economic reforms. Given this scenario, real GDP growth is forecast to average at 6.1 per cent a year in 2008-09, it said.

Besides, experts pointed out, $2 billion flows into the country towards remittances. The island nation's industrial production is said to have shown a positive trend this year. According to IMF, the trade deficit (balance of payment basis) widened from $1.4 billion in 2004 to $1.6 billion in 2005. In the latter year, exports increased to $6.3 billion and imports rose to $8 billion, mainly due to imports of military hardware.

Production affected

The major items of exports were garments and textiles which occupied the top slot with 44.8 per cent, tea 12.8 per cent, diamonds 4.5 per cent, petroleum products 2.7 per cent and coconut products 1.8 per cent. The leading markets were US 28.2 per cent, UK 11.5 per cent, India 9 per cent and Germany 4.1 per cent.

Major suppliers were India 18.5 per cent, China 10.5 per cent, Singapore 8.7 per cent and Hong Kong 4.2 per cent.

However, according to Sunday Times of Sri Lanka, there is clear evidence that production in several sectors of the economy was affected by the deteriorating security conditions, high rate of inflation, and the tight monetary policy.