Hostilities between Tamil separatists and the Sri Lankan government are nearly over, and security is certainly welcome for helpless civilians caught in the crossfire of a decades-long civil war. While fighting has wreaked havoc on the Sri Lankan economy, the island nation has still sustained growth of around 4.5% over the past decade despite shocks such as the 2004 tsunami.
An end to the conflict portends record economic growth and foreign investment for the country. Bloomberg reported last week that the Colombo All-Share Index, Sri Lanka’s benchmark, has shot up an astonishing 17% since the beginning of 2009. So far, it’s this year’s best performer of the 90 similar indexes tracked by Bloomberg.
Indeed, the governor of Sri Lanka’s central bank recently said the economy may grow 6% this year. As the rest of the world faces recessionary forces not seen in a generation, such a forecast is telling of the importance of peace for economic growth.
Illustration: Jayachandran / Mint
There are signs, too, that an end to conflict could lower inflation, which was more than 20% in 2008. Excess government spending, particularly to combat the Liberation Tigers of Tamil Eelam, is partly to blame.
An end to the conflict will have secondary, positive effects for the nation’s economy. About 800,000 Sri Lankans live abroad, sending home at least $1 billion in remittances. The extraordinary remittance-fuelled sector is surely related to Sri Lankans fleeing insecurity. An end to violence—and hopefully, much of the terrorism it breeds in the country—would likely encourage many Sri Lankans to return, or stay home, investing in infrastructure and entrepreneurship.
The Sri Lankan stock exchange hopes to begin trading derivatives at the year’s end. Such advanced financial instruments would likely unleash potential that has been constrained by an unfriendly investment climate.
Despite positive developments, optimism must be tempered as Sri Lanka’s export-oriented economy will still be hit hard by the global recession. In 2008, at least 25% of exports were sent to the US and 13% to the UK. The Sri Lankan export market in textiles, tea and precious stones will likely take a plunge as Western consumers are less inclined to buy its wares.
Nonetheless, a cessation of violence certainly foretells positive economic development, and prosperity, for Sri Lankans.
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