Asia Times: Colombo banking on peace to revive growth


	March 10, 2001	atimes.com

India/Pakistan

Colombo banking on peace to revive growth
By Feizal Samath

COLOMBO - Sri Lanka's government is banking on likely peace talks with Tamil Tiger rebels to kick-start an economy slowed down considerably by 18 years of ethnic conflict.

Economic analysts said the government's March 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 US$700 million in foreign aid. The aid has been promised to support rehabilitation programs 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 5 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 cooperate with us to re-strengthen our economic fundamentals," said Deputy Finance Minister G L Peiris while presenting the 2001 annual budget in parliament.

"If peace comes, then the whole scenario changes and confidence could be restored in the economy," said Sumanasiri Liyanage, a 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 6 percent last year, due to lower agricultural and manufacturing production. Sri Lanka's finances, dented by rising defense spending, worsened as foreign exchange reserves slumped to $950 million at the end of last year from $2.5 billion two years ago. With just enough reserves for 45 days of imports, against the earlier average of three months, the Central Bank was forced in late January to free the rupee from controls.

"Peace will trigger off a massive rehabilitation program for the north and the east, which would boost economic activities across the country," Peiris said. It could also halve military spending down to 3 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 to be provided by foreign donors.

As part of the austerity measures, the government has decided to freeze public sector salaries until 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) in revenue for the government, against a projected expenditure of 387.5 billion rupees.

The government also hiked by 1 percent, an earlier 6.5 percent defense levy on manufacturing. 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 labor dispute on tea and rubber plantations, which produce Sri Lanka's main exports.

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 materialized. "It was a negative budget. It is hard to believe the numbers that the government presented today," said Dushantha Wijeyasingha, an 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 1 million rupees, while the tax on companies accepting bets on overseas horse races, was hiked 10 times to 1 million rupees.

(Inter Press Service)