The End of the War: Tips for the economic revival of Sri Lanka

By Prof. Sunil Wimalawansa

(July 30, Melbourne, Sri Lanka Guardian) Sri Lanka is one of the oldest democracies in Asia. It is of historic importance that the Sri Lankan Armed Forces systematically and completely eliminated from its soil, the Tamil Tiger (LTTE) infrastructure, violence, and its three decades of terrorism. The Sri Lankan Armed Forces was successful in overcoming both internal and external terrorism; thus, thirty years of carnage by the Tamil Tiger terrorism was finally over.

Current Economic Situation:

Over the past five years, the Sri Lankan government’s defense spending has sky-rocketed and its army’s strength has doubled within the past three years, to over 230,000 troops. These facts, taken together with the tremendous amount of money spent this year by the Central Bank of Sri Lanka to “protect” the Rupee (the official currency of Sri Lanka), has led to a rapid depletion of the country’s foreign-currency reserves. The latter is now the lowest ever recorded in Sri Lankan history, and thought to be adequate to cover only five weeks of imports into the country, thus heading for a non-sustainable deficit. However, this will be eased by the recent allocation of a US $1.9 billion (plus the additional $700 million) loan to Sri Lanka by the IMF, and the Rupee is likely to gain strength. However, it is unfortunate that this has been blocked for several months by the Western “super-powers” as a part of a self-interest political game.

In global terms, the dollar amount of this loan is minute, but its impact on Sri Lankan economy will be enormous. To give an example, in contrast to the $1.9 billion IMF loan to Sri Lanka, the United States Treasury borrows 2.45 billion dollars in foreign capital “every work day” (mostly from China, Japan and Brazil), and this is in fact increasing every month.

Overcoming Economic Difficulties:

Many people ask why some Western countries desperately tried to block this critically important IMF loan to Sri Lanka (in the usual and mythical pretense of a human rights issue) that is in fact considered as a humanitarian-related loan. It is ironic that Sri Lanka has a better human rights record than many of these courtiers that tried to block this loan. This fund is necessary for the infrastructure development that was destroyed by the LTTE, and to rehabilitation of over 200,000 internally displaced people (IDPs). Similar development programs are also necessary in the Eastern region of the country to resettle a large population of individuals of all ethnic groups that were displaced by the terrorism.

Nevertheless, there is no excuse for the Sri Lankan government to monetize. This would not only further devalue the local currency (the Rupee), it would eventually become impossible the Central Bank to protect it, and would lead to hyper-inflation. Consequences of such monetization would be to not only retard post-war economic and social growth of the country; it would also precipitate the fall of the economy into a “death-watch” mode. The government is currently “walking a tight rope” on this issue, and must be wise in preventing negative outcomes from happening on both sides. A mistake at this stage can be very expensive in the long run. To overcome these issues, the Sri Lankan Government should generate funds internally, preferably by borrowing from its own citizens and expatriates. Implementation of the latter program (i.e., the new scheme of Treasury Bills and bonds) is significantly hampered by the lack of clarity, complexities, inherent inefficiency, and the poor communication from all four entrusted Sri Lankan Banks. The second option is to borrow from outside entities such as the World Bank, IMF, and other funds. Monetization must be the absolute last resort for the country.

Annihilation of the LTTE will certainly lead to positive change, because the LTTE never represented the aspirations of Tamil community. The damage done by the LTTE terrorists to Sri Lanka’s economy, people, and reputation as a democratic nation, will take many years to recover from. On a positive note, albeit slower than one would prefer, the reconstruction and rehabilitation processes are currently underway.

Sri Lanka is a multi-ethnic society and a number of ethnic groups have been peacefully living together comfortably for generations. This is in part due to the inherently tolerant Sri Lankan culture, and its fundamental agricultural and other infrastructures which are already in existence. Moreover, it has a one of the highest literacy rates in the world due to decades of free schooling system, and extensive free health care system. The latter however, has been suffered lately in part due to insufficient investments and neglect of preventative services.

Political Status:

Some politicians who inflamed the situation for personal gain, and the LTTE were responsible for the destruction of the peace and harmony of the country. Thankfully this is past history; the government now has the responsibility to ensure that it will never be allowed to repeat in any form.

Following the success of the elections in the Eastern region, it is expected that the government will soon hold an election in the North for its provincial government, thus re-establishing the democracy had been lost as a consequence of LTTE terrorism. With the use of IMF funds, it is expected that the government will embark on a massive and wise infrastructural development in this region, thereby creating thousands of job opportunities. It would be efficient and productive if the government would rely on (and allow) the private sector to accomplish this. It will be successful, only if these funds are utilized properly without pilferage and wastage as witnessed by some previous projects.

A long term vision is necessary:

Resettlement of IDPs in the same manner as there were before, without properly planned infrastructure facilities would be a fundamentally flaw. Sri Lanka lost a golden opportunity following the tsunami during reconstruction of the affected regions (as well as not following the international debt-forgiveness program). Instead, the government should take the opportunity to acquire the entire affected area, develop the basic needs (e.g., pipe borne water supply, sewage disposal, play grounds, electricity, hospitals, schools, etc.) and distribute parcels of lands for housing and agricultural work to those previously and currently displaced people alike in an equitable manner.

Such planned model villages and towns in the region would consist of a mixed population. Facilities for agriculture and the local industries would enable ample employment and enhance a sustainable local economy. Then the entire region will develop rapidly and become prosperous. With that it would provide the much needed political and social stabilization and the peace in the long term. Tsunami reconstruction-associated mistakes must not be repeated during the reconstruction/resettlement of IDPs of all ethnic groups in the North Central, North, and in the Eastern provinces during this golden opportunity.

In spite of irrational international criticisms, it will generate tremendous credibility for the country and the government to return democracy to the Northern region, as it successfully did in the Eastern province in Sri Lanka recently. This would demonstrate a convincing blueprint for healing. The elections of the Eastern province were won by a coalition led by Minister Karuna, a former terrorist himself, but progress was somewhat tainted by allegations of intimidations. The chief-minister, Mr. Chandrakanthan, a former LTTE child-soldier and comrade of Minister Karuna, continues to present similar issues. In spite of these concerns, peace has arrived to the Eastern region after the terrorists were defeated over two years ago. A refined version of this model could be applied to the Northern provinces of Sri Lanka as well.

In the absence of a powerful local proxy, the government is contemplating having another controversial Tamil ally, Douglas Devananda, elected as its Chief Minister. In contrast to Mr. Karuna, Mr. Devananda seems to have broader support from the Tamil community. He is the current Minister for Social Welfare, but thought to be somewhat unpopular in Jaffna. Nevertheless, what is important now is that the area becomes fully liberated from LTTE terrorism, and to permanently transform it into a democratic and peaceful region. However, economic and social development, and proper law and order are essential ingredients to sustain this peace. These areas should never be allowed to revert back to terrorism (politically or otherwise) nor to a violence-prone, unrepresented, pro-LTTE or similar provincial governments.

-Sri Lanka Guardian