Colombo: Sri Lanka’s fastest economic growth in 30 years is threatened by a Tamil rebel air wing that attacked oil and gas plants near the capital, Colombo, and forced the international airport to close at night.
The Liberation Tigers of Tamil Eelam (LTTE), flying light aircraft 200km from the north of the island, evaded air defences and bombed Royal Dutch Shell Plc. and Indian Oil Corp. (IOC) plants, and an air force base in two raids since March.
“Sri Lanka’s risk profile has gone up and potential investors now need to factor that in,” said Rimoe Saldin, finance director at Shell Gas Lanka Ltd, the country’s largest retailer of liquefied petroleum gas. “This is a new dimension that has to be assessed.”
The two-decade-long conflict in the South Asian island has been waged in the north and east of the country, far from industries that drive the $26 billion (Rs1.07 lakh crore) economy. The air unit, which the military says consists of five propeller-driven aircraft, has brought Colombo within striking distance of the rebels and raised questions about defence capabilities.
“The fact that the LTTE were able to fly undetected and weren’t shot down is of huge concern,” said Ravi Abeysuriya, managing director of Amba Research Lanka Ltd, an investment research outsourcing company with offices in Colombo, and also in Singapore, Costa Rica and India.
The Tamil Tigers are fighting for a separate homeland in a conflict that has killed more than 60,000 people. A 2002 cease-fire collapsed last year and two rounds of talks in Geneva failed to restart the peace process.
The rebels have an estimated 12,000 fighters, including a naval force, and revealed their new air wing in a 26 March attack on an airbase about 50km from Colombo that killed three air force personnel.
The 29 April air attack targeted a gas plant jointly run by Shell and the government in Muthurajawela, damaging fire guard equipment, and an oil storage plant in nearby Kolonnawa, jointly owned by IOC and the government.
Shell’s plant hasn’t operated to full capacity since the attack, Saldin had said in a 7 May telephone interview.
“We are very conscious that the oil installations are targets,” said K. Ramakrishnan, manager director in Sri Lanka for IOC. “A war situation could add to risk premium and increase our freight costs.”
The violence may temper Sri Lanka’s plans in August to call for bids from overseas energy companies for the rights to three offshore oil exploration blocks west of the island.
Sri Lanka, which imports all its oil, needs to secure its own supplies as costlier imports and military purchases have accelerated consumer prices. Surging crude oil prices raised Sri Lanka’s oil import bill by 25% last year to $2.07 billion.
Import costs have been boosted by a depreciating currency. The Sri Lankan rupee, which was the worst performer among 71 currencies tracked by Bloomberg, is down 3.1% so far this year.
The island nation’s Central Bank remains confident that investment in roads, ports and other infrastructure will limit the impact of escalating fighting, and maintains a 7.5% forecast for growth this year and expects 8% next year. The economy grew 7.4% in 2006, buoyed by a 10% expansion in western province, the home of the textile and clothing industries, the top export earners.
“Sri Lanka has so many economic opportunities that are not related to the conflict,” Central Bank governor Ajith Nivard Cabraal had said in a 30 April interview.
“We see many investors, particularly the people who have infrastructure projects in hand, as well as those who already have business in Sri Lanka, continuing with their investment plans.”