As the war nears an end new hopes for the economy are on the cards. In fact the Sri Lankan economy is in such a poor state that only peace can bring about a turnaround. This is especially so as the international economy is also in such a muddle that our own export-dependent economy would be adversely affected by the global recession in more ways than one. The end of hostilities would bring about economic benefits, mostly in the long run, though some immediate relief can be expected. However, the benefits will be substantial only if the end of hostilities lead to a durable peace and terrorist activities in the country are contained to a minimum. There is concern that with the elimination of the LTTE from the occupied areas their strategy would be to increase terrorist activity elsewhere, especially targeting economic activities.
The economic benefits that we can expect can be best analysed as falling into three categories immediate, short term and long run benefits. The short term benefits will be significant in the current context of weak economic and financial fundamentals. Then there would be the intermediate benefits that are much dependent on the durability and quality of the peace. The long run benefits to the economy would no doubt be substantial. The benefits of the peace would be negated to some extent, if the LTTE’s retaliatory action on losing its space is terrorist attacks on economic targets.
In the immediate future the economy would benefit with certain areas of the economy performing closer to their potential. Agriculture and fisheries are foremost among the expected activities that would gain. With better inflow of needed inputs to these areas at lower costs and better marketing facilities, agriculture in the North could blossom again. Agriculture in the Eastern Province and in border areas in particular could revert to normalcy and make a useful contribution, especially to paddy production in the coming Yala season. Given good weather conditions 2009 could well be a year of adequate paddy production for domestic needs thereby cutting off imports, reducing prices and decreasing imports of wheat. One of the areas that would benefit greatly is fisheries that have been affected by the restrictions imposed on fishing in certain areas owing to security concerns. The sooner these could be lifted the more the gains to fish production that could increase incomes of the fishing community and reduce the exorbitant prices of fish to some extent and reduce imports of fish products. These developments could improve the trade balance, though it would not be substantial as food imports are not much in the overall import expenditure of the country.
The other set of immediate benefits would arise from an improvement in business confidence. Better trade flows between the south and the north could boost industrial production as well. As during the Cease Fire Agreement (CFA) there could be an increase in the production of many domestic industrial exports to the North. There could also be a revival of transport services and travel to the North that would increase domestic tourism, North-South and South- North travel would also increase employment and income in travel services and hotel accommodation. There could also be an increase in some types of both private transfers and capital inflows. One has to emphasize that much of this improvement would be dependent on a peaceful environment and the elimination of terrorist activities.
There would be much more substantial gains in the intermediate period of the next two or three years. The reconstruction of the North and East would spur significant economic activity. There is a likelihood of foreign assistance for this reconstruction though too much must not be expected in the current context of economic difficulties of developed countries. The Indian Foreign Minister announced in Colombo last week that India would contribute to the reconstruction once a durable peace is established. A reasonable constitutional resolution of the minority problem by the devolution of powers for the North and East would be a necessary condition. This would be the fundamental condition that would have to be met for international assistance.
If a durable peace is in place there would be numerous gains in the long run. For so many years now the Sri Lankan economy has been battered by the war in numerous ways. The country’s finances and fiscal imbalance is to a large extent owing to the cumulative expenditure on the war. Consequently the debt burden is heavy and the cost of servicing it which absorbs as much as 90 percent of revenue has resulted in serious fiscal imbalances and distortions. The end of the war provides an opportunity to get public finances of the country on to a more even keel.Certain sectors of the economy that were seriously affected could be revived. Chief among these is the tourist industry that has slumped. It may be difficult to increase tourist earnings immediately owing to the global recession, but as the world economy emerges out of the recession peaceful conditions could attract tourists to reach the so far illusive target of a million tourists per year. The revival of agriculture and fisheries, industry, construction and new manufactures are possible areas of added value in the economy. Business confidence that has fluctuated with the security conditions in the country could be revived and inflationary pressures could be reduced significantly by bringing down the fiscal deficit.
While we have discussed the peace dividend with respect to the national economy, the most significant benefit of an end of the war and destruction would be to people living in areas of conflict. Their education, health, employment, mobility, income and livelihoods would certainly improve. That indeed is the highest peace dividend. The Sri Lankan economic engine has been performing with several of its cylinders out of action for a couple of decades. With the end of the war and a durable peace, the economic engine could fire with all its pistons. This is the vision that has evaded the country for decades. Are we on the threshold of achieving this dream?