Sri Lanka's Civil War Spares Economy

Industrial Base in West

by Abusha Ondaatjie and Paul Tighe, Bloomberg News, April 23, 2007

Sri Lanka, facing a return to civil war between the army and Tamil separatists, is maintaining its fastest growth in 30 years because the fighting is taking place far from industries driving the $26 billion economy.

``This is a conflict that the country has learnt to live with,'' said Agost Benard, credit analyst at Standard & Poor's in Singapore. ``Businesses still invest, factories still produce. The main reason is because the conflict is localized.''

The worst fighting since a cease-fire was declared in 2002 erupted a year ago in the north and east, halting efforts to end the two-decade struggle by the Liberation Tigers of Tamil Eelam for a separate homeland in areas it controls.

Sri Lanka, which is also recovering from the Dec. 26, 2004, tsunami, saw its gross domestic product grow 7.4 percent last year, buoyed by a 10 percent expansion in Western province, the home of the textile and clothing industries, the biggest export earners. Two rounds of peace talks last year in Geneva failed to make any progress toward ending the conflict in the South Asian island nation of 20 million people.

The Central Bank of Sri Lanka maintains its 2007 growth forecast of 7.5 percent. Manufacturing, which includes tea processing, rubber-based products and construction, grew 7.2 percent in 2006 from a year earlier, while services, such as cargo handling and telecommunications, expanded 8.3 percent.

Sri Lanka's garment industry, responsible for about 4 percent of the economy, supplies for brands such as Gap Inc., Banana Republic and Marks & Spence Group Plc.

Overseas Investment
The island last year attracted record overseas investment of $600 million, mostly from garment makers and telecommunications companies in the capital, Colombo, which is also located in Western province.

Dialog Telekom Ltd., Sri Lanka's biggest mobile-phone operator and a unit of Telekom Malaysia Bhd., said in February full-year profit rose to a record after spending about $150 million expanding its network to increase customers.

The benchmark Colombo All-Share Index reached a record 3016.42 on Feb. 13. The index fell to 2729.21 points on March 16 and has since recovered about 1.5 percent.

``Entrepreneurs know what risks to take and foreign investment players who are active, already know the situation,'' said Saman Kelegama, executive director of Sri Lanka's Institute of Policy Studies. ``Because the north and eastern provinces have been battered, their supply capacity has reduced.''

Tourist arrivals fell in eight of the 10 months since June as visitors stayed away from Sri Lanka's white-sand beaches, ancient Buddhist sites and hill resorts as a result of travel advisories from countries such as France and Italy, citing the conflict. Tourism is Sri Lanka's third-biggest revenue earner.

Tamil Tigers
The Tamil Tigers, estimated to have 12,000 fighters, have their headquarters at Kilinochchi in the northern Jaffna region. They also have a 4,000-strong naval force, known as the Sea Tigers, who are based in the northeastern Mullaitivu area.

The LTTE, classified as a terrorist group by the U.S., European Union and India, says the Tamils, who make up less than a fifth of the population, are discriminated against by the majority Sinhalese.

The army inflicted defeats on LTTE forces this year, overrunning 16 rebel camps in the northeast in January and earlier this month seizing the eastern region around Batticaloa after taking control of the main road link for the first time in 14 years.

The LTTE accused the government of trying to impose a military rather than a political solution to the conflict.

Government forces suffered defeats in the north, including the loss of at least 74 soldiers in battles in the Jaffna peninsula on Oct. 11.

Tired of War
``If the government gets more control over the east, it can be uplifted closer to other provinces,'' said Kelegama. ``The people, who are sick and tired of the war, will appreciate economic activity increasing.''

Fighting around Batticaloa last month forced an estimated 95,000 civilians to flee to join 60,000 people already in refugee camps in the region, according to the United Nations.

Almost 4,000 people have been killed in violence in the past 15 months, compared with 130 deaths related to the conflict in the three previous years, the Sri Lanka Monitoring Mission, which oversees the 2002 truce, said in February.

Almost half the 30,000 Sri Lankans killed in the 2004 tsunami disaster lived in the north and northeast where the LTTE said it raised its own funds to build homes for survivors in areas under its control.

The rebels say navy operations and stepped up air force attacks are preventing the Tamil community's main fishing industry recover from the tsunami.

President Mahinda Rajapaksa, elected in November 2005 with a mandate to renegotiate a peace treaty with Tamil separatists, increased spending on the army, navy and air force by 44 percent this year to a record 139 billion rupees ($1.3 billion).

Sri Lanka expects to receive $4.5 billion in overseas aid in the next three years for highways, expanding the Colombo port, and building its second coal-fired power plant in the northeastern port town of Trincomalee, the government said on Jan. 30.

To contact the reporters on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net ; Paul Tighe in Sydney at ptighe@bloomberg.net .