The economy is threatened by another war. Unlike during the Second World War and the Korean War years, when the Sri Lankan economy benefited, this war threatens the economy in many different ways. It is to the credit of the government that it is taking steps to meet the situation as the war clouds gather. How effective these would be remains to be seen.

The unfavourable economic forces it leashes can hardly be overcome. All that a government could do is to reduce the adverse impacts especially on the vulnerable sections of the population.

The taming of prices is inherently a difficult, if not impossible task.

A prolonged war would indeed ruin the economy. If the war is brief, like the previous Gulf war, then there may be some chance of an economic revival after a lapse of about six months.

The scars of the war on the Sri Lankan economy would remain. It comes at a time when the economy is struggling to recover. It is another set back to the economy.

It was barely a month ago that we reminded readers of this column the various ways in which the country could be affected by a war. The most serious impact on the economy would be through a rise in oil prices.

Already the unstable situation has resulted in crude oil prices shooting up. In the worst case scenario of Iraq burning the oil wells in retaliation of an American attack, the increase in oil prices could be horrendous. Some knowledgeable sources predict it to rise up to US$ 80 per barrel from the current level in the thirties.

Even a price rise to US 60 would be an economic disaster. In 2001 we expended US $ 731 million on the import of oil. This was about 12 per cent of our import values and 15 per cent of export earnings of that year. This was more than the value of our exports of tea (US$ 690) in 2001.

If prices were to double-a very real possibility- then our oil imports would cost us as much as US $ 1500 million, absorbing perhaps a third of our export earnings.

If export earnings too dip, as most likely, then it would be an unbearable burden. The government is turning to South East Asian suppliers rather than the traditional Middle Eastern markets to ensure oil supplies.

This is more likely to help us obtain needed supplies of oil rather than reduce the cost, as the prices of oil irrespective of the suppliers would rise to international levels.

The increase in oil prices would seriously affect our trade balance and leave a serious dent in our balance of payments. The IMF is likely to help in the event of a balance of payments crisis. Yet the debt adds to our already high debt burden.

The higher costs of production of our industrial exports, coupled with decreased demand for them would decrease export earnings at the very time when import costs rise.

The demand for most of our industrial exports would decline for many reasons such as a decline in consumer spending, disruption of shipping and higher costs of freight. The tea export market is also likely to be affected with a decreased demand from the affected Middle Eastern countries.

Middle East remittances that are an important contribution to the balance of payments would suffer a serious setback.

This could be both immediate and for several years, till some of the Middle Eastern economies recover. These remittances are larger than our earnings from all our agricultural exports, tea, rubber coconut and other export crops.

Fortunately, not all the remittances come from the Middle East and some Middle Eastern countries may be less affected. The other conventional concern lies in war disrupting food imports as well as an increase in prices of essential food imports like wheat, sugar and milk.

Fortunately, this year's Maha harvest, due shortly, is expected to be a bumper harvest and the year's rice production is expected to exceed the domestic rice requirements. Yet we do depend heavily on wheat imports that have grown over the years to meet an increasing domestic consumption of wheat flour products. In this case too new purchases are likely to cost higher prices. Hopefully the stocks of wheat would be adequate to tide over the war period.

There could be domestic shortages, some of which would be orchestrated by traders for their benefit. These would be particularly with respect to rice, wheat, sugar, milk and other essential foods. It is here then state interventions could help.

In such a crisis situation a shift in consumption to other domestic foods like manioc, breadfruit, other grains and pulses could compensate to some extent the shortfall in imported food supplies and even more reduce the costs of food.

The impact of the impending unjust war can be frightful in as far as the economy is concerned. Yet it would be slight in comparison to the horrible human misery in several parts of the world.

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