Post -war economic prospects:

Towards a higher trajectory of economic growth and development

By Nimal Sanderatne

(October 28, Colombo, Sri Lanka Guardian) Peace has generated expectations of moving the economy into a higher trajectory of growth. The end of nearly three decades of war and terrorism could usher in a new era of economic development. The pace of the economic acceleration would depend on the policies of the government, the response of private enterprise and the participation of people. Peace alone will not bring in the expectation of prosperity. It must be backed up by policies and actions that are conducive to economic growth. It is a period of opportunities and challenges.

The war was the most serious impediment to economic development. Peace is what the nation longed for to bring in a handsome economic dividend that could change the pace and momentum of economic development and usher in an era of economic prosperity. The war was a financial burden, a hindrance for investment and it crippled several areas of production in the economy. Undoubtedly the economy performed at less than its potential.


There is a danger in thinking that economic development could be expected as a matter of course now that the war is over. The economy will not prosper simply because the war is over. There are other preconditions that have to be put in place to generate rapid economic development. It is more constructive to view the current situation in the country as one where the main obstacles to development have been removed and an opportunity now presented to ensure that the other pre-conditions for development are put in place. The peace dividend is not automatic; it requires putting in place a number of pre-requisites that are needed for development.

The expectation of growth has been fostered further by the grant of the IMF stand-by facility of about US$ 2.6 billion. This has eased constraints in the external financing of development. The Central Bank has consequently revised the pre-peace expectation of economic growth of 2.5 percent to nearly five percent. The expectations for 2010 are even higher. Some financial analysts expect it to rise to as much as nine percent next year on the expectation of a rise in investments, the resurgence of several sectors of the economy such as tourism and the development of the north and east.

Higher rates of economic growth require higher levels of investment. The achievement of an economic growth of nine percent in 2010 would require an investment of around 40 t0 45 percent of GDP. This is clearly impossible through domestic savings alone that have been around 25-27 percent of GDP in recent years. This savings–investment gap would require substantial foreign investment. Peaceful conditions, the confidence generated by the IMF facility and the pursuance of policies to stabilise the economy and improve the economic fundamentals that the government has promised in its Letter of Intent to the IMF could provide the setting for higher foreign investment.

There are three sources of growth. First: the peace and the control of terrorism would release new energies, draw out new activities and the stunted and stultified sectors of the economy would progress towards their full potential. Second: the new environment of peace would be conducive to foreign and local investment. This would drive the economy to a higher level of production. Third: there could be a proliferation of new activities after the reconstruction and development of social and economic infrastructure in the east and north. In the longer run the economy in this region could be much more expansive than the economy of the past. It could respond to changes in global demand, exploit modern technology and take advantage of new opportunities for economic diversification. This is not a short term possibility but one that could be achieved over a three to five year period.

The initial peace dividend would come from those sectors of the economy that were directly affected by terrorism. Some of that dividend has already been realised. There would be increased agricultural production in the border areas, the north and east. Ocean fisheries that were hampered by prohibition of fishing in the security zone in the fishing areas of the north and east would once again be ones of rich harvest. It is not only the possibility of cultivation and fishing that would boost production, but the resumption of commerce between the war-torn areas and the rest of the country would enhance demand for many products. The gain would be in both directions with the South gaining from the demand for items produced there, especially consumer durables, construction materials and trade in both goods and services. These benefits could be termed autonomous as they would be brought about by private decision making and not much dependent on government actions. The repair and development of infrastructure would enhance the speed and extent of this contribution to growth. With the resumption of transport there has already been a flow of goods in both directions, south to north and north to south. Goods from the south to the north have improved the availability of essential items and even more significantly reduced cost and prices. The flow of goods is still inadequate but with an increased flow of goods, people in Jaffna would have their essentials at more reasonable prices, the quality of goods would improve and a larger variety of goods would be available. The benefits to the south would be as much for the enhanced commerce provides new markets for goods. In due course there would be a flow of consumer durables such as sewing machines, refrigerators, fans, air conditioners, television sets, radios or investment goods such as machinery that were prohibitive in price. The rest of the country would also benefit from the availability of several vegetables and fruits grown in the area including potatoes, chillies, onions grapes and mangoes and an increased supply of fish.

Tourism that once seemed a promising sector has been ravaged by the war and terrorism. There is little doubt that tourism will thrive in the new environment of peace. The full thrust of tourist expansion will not be immediate owing to the recession in developed countries. A tourist boom is in the offing at long last. The expectation is that the tourist season of 2010/11 will be a good one.

These developments are however rudimentary. The Jaffna economy must be transformed into a modern one where agriculture would be more productive and expanded and agroprocessing developed. Nonetheless agriculture would be of lesser significance in the future economy that has to be diversified. The actual potential of the Jaffna economy lies in the development of industry and services. Several industries in the North could be revived and new ones established. The revival of the Kankesanthurai cement plant, the Paranthan Chemical manufacture and the Valaiachchenai paper industry are among the industries that could be revived. Already there are plans to develop two salt urns to make the country selfsufficient in salt once again. These sources of growth would require considerable investment in new machinery and equipment and there would be a gestation period.

Several preconditions must be created to usher in a period of economic growth and prosperity. The full benefit can only be obtained if an equitable, durable and permanent political settlement is ushered in. There is the most urgent task of rehabilitation of the internally displaced persons (IDPs). This is no easy task owing to the massive numbers involved, the lack of adequate resources and the essential security scrutiny of the IDPs. Yet this has to be expeditiously and efficiently performed as the satisfactory resettlement of these people is a precondition for their contribution to the economy and enabling them to obtain a livelihood rather than be a burden on the state.

The successful rebuilding of the devastated areas and the reconstruction of economic and social infrastructure are basic requirements. This requires a massive investment that the country’s own finances are quite inadequate to mobilise for this purpose. The country is fortunate that friendly countries such as India, China and Japan have promised huge sums of money and plan to develop the North and East. However even these may be inadequate for the reconstruction. It is therefore very necessary for additional assistance from other countries. We cannot afford to lose friends who have helped us in the past.

It is most important and essential that we get our economic policies sorted out and economic management made more efficient. Otherwise much of the expected benefits would not be realised. The economy must be based on sound economic principles. Fiscal consolidation is a must for economic stabilisation and growth. The letter of intent spells out the need to rein in expenditure and increase government revenue to bring down the fiscal deficit to seven percent this year and to six percent next year. This seems an unrealistic objective and yet one that cannot be allowed to fail. There is a need to cut waste and prune expenditures to bring down public expenditure and reduce the fiscal deficit. Without such improvements in fiscal management, there is the danger of inflation that could destabilise the economy, particularly exports.

There is one serious mistake the country must guard against. That is the misconception that peace alone would be adequate to usher in this era economic prosperity. Peace provides the backdrop and environment for the pursuance of appropriate economic policies for growth. A misguided optimism without appropriate action could diminish the potential growth. At this momentous point in time we must not be overpowered by optimism that leads to complacency.

There must be a realisation that the benefits of the peace would take some time and can be reaped in full measure only if the proper economic policies are pursued. The peace has conferred on the country a new opportunity and an environment conducive for economic development. There are many pre-conditions that have to be established to usher in economic prosperity. The macro economic fundamentals have to be strengthened, inflationary pressures must be contained and institutional and legal reforms that would be favourable to economic investments are necessary. The economy will not achieve its full potential merely because the war is over. An economic policy framework conducive to development must be put in place.

-Sri Lanka Guardian