Business | Features
Sri Lanka's economic recovery faces hurdles
Full intergration of minorities remains a challenge for Colombo
- By Joe Leahy, Financial Times
- Published: 00:00 November 14, 2009
Colombo: The colonial archways in Colombo's Fort business district are pasted with bills advertising a local film, The Road From Elephant Pass. The hero, a stone-faced army officer in sunglasses, stares out in front of the heroine, a Tamil Tiger fighter with whom he falls in love.
Until this year the film was as close as most Sri Lankans could have expected to get to Elephant Pass, a former army base that connected the government-controlled Jaffna peninsula at Sri Lanka's northern tip to territory once ruled by the Liberation Tigers of Tamil Eelam to the south.
With the military defeat of the rebels in May, the government is expected before long to open Sri Lanka's north-south highway, the A9, to civilian traffic in a move that will signify the country's reunification. Businessmen, at first sceptical that the war had ended, are becoming bullish and predicting an economic boom.
Rohan Fernando, managing director of HVA Lanka Exports, a large tea exporter, says: "It's been so sudden. It's like we went to sleep and we woke up and [the war was] finished."
No one underestimates the political challenges facing Sri Lanka. It needs to resettle almost 200,000 Tamil refugees living in overcrowded detention camps and to foster political reconciliation between the ethnic Sinhalese majority and the Tamil minority.
The Tigers have also bounced back before in their 26-year war for a separate homeland in Sri Lanka's north and east.
Benchmark index
This time it seems that investors at least are convinced the war is over. Since May 19, when the army displayed on television the body of Vellupillai Prabhakaran, the Tiger leader lying beside a lagoon, the Colombo Stock Exchange's benchmark index has doubled in value.
Still dealing with the economic shadow of the conflict, the government in Colombo was forced to go to the International Monetary Fund for help. But the IMF approved a $2.6 billion (Dh9.54 billion) aid package in July and sentiment appears to have taken a decisive turn since then.
Economic indicators point to improving conditions. Inflation has dropped from a six-year high of 28.2 per cent in June 2008 to a record low of 0.7 per cent in September. The Sri Lankan rupee has strengthened and foreign reserves have doubled to $5 billion.
Credit agencies have upgraded Sri Lanka's debt rating outlook and a $500 million sovereign dollar bond issued by the government last month was 13 times subscribed by international investors.
P.B. Jayasundera, Treasury secretary, points out that, even during the conflict, gross domestic product per capita rose from $1,000 to $2,200 between 2004 and 2009. "I can see the economy easily generating 6-8 per cent growth in the medium term," he says. Ajit D. Gunewardene, deputy chairman of John Keells Holdings, the hotels, property and ports conglomerate, goes further. Sri Lanka might now be able to realise its dream of becoming the "Hong Kong of south Asia", he says.
Colombo's port, strategically placed on shipping lanes between Europe and China, plans to expand capacity to 16 million 20ft equivalent units a year over the next decade and focus on trans-shipment of goods to and from India and Pakistan. By that measure of container cargo capacity, this would become south Asia's biggest port.
No dream world
Gunewardene expects tourism, the hardest-hit sector during the conflict, to rise 30 per cent year on year in 2010.
John Keells is spending $4.5 million refurbishing a hotel in Trincomalee, in the once Tiger-dominated east, and plans to build a five-star resort there. "Everything's not 100 per cent, that's for sure. We are not living in a dream world," Gunewardene says. "But the fact of the matter is that people are tired of war."
Infrastructure is being built. Sri Lanka Telecom, the state-controlled fixed line group, is investing Rs3.5 billion in a fibre optic link along the A9. Greg Young, chief executive of Sri Lanka Telecom, says: "There's obviously a lot of commerce reopening in the northern areas. We are seeing very substantial calling patterns by customers."
There remain many hurdles. With presidential and parliamentary elections expected early next year, voters are focusing on painfully high interest rates of more than 20 per cent, a legacy of last year's inflation. In response, Mahinda Rajapaksa, the president, ordered state banks last month to slash rates.
The government also needs to address western concerns about its human rights record.
The European Union is poised to remove tariff privileges, known as GSP Plus, that favour Sri Lanka's garment industry, which, as the island's biggest export earner, brought in $3.47 billion last year. Sri Lanka's long-term prosperity, though, will hinge on the issues touched on in The Road From Elephant Pass. Can the Tamils and Sinhalese coexist in peace?
Gunewardene of John Keells says: "The reality is the wounds are still raw. It has been, after all, 30 years of war. We all have to work at reaching out. Ultimately, it will be the economy that will integrate us."
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