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by Muttukrishna Saravananthan

(This is a paper presented at a seminar at the University of Jaffna on January 25, 2003. The writer is a Research Fellow, International Centre for Ethnic Studies, Colombo, Sri Lanka. The views expressed in this paper are those of the author and not of the ICES. Corrections, comments and suggestions are welcome to 02, Kynsey Terrace, Colombo-8 or [email protected])

The Government of Sri Lanka (GoSL) lifted the economic embargo on the rebel held areas of the North and East (N&E) province on January 15, 2002. The economic embargo was in effect since 1990 and covered over 60 consumer goods including fuel, food, and medicine. Some goods were totally prohibited from entering the rebel held areas of the N&E province and some had quantitative restrictions. The economic embargo created an informal market for these prohibited and restricted supplies of goods in the rebel held territory, which is almost 30 per cent of the total land mass of Sri Lanka.

The economic embargo made the Liberation Tigers of Tamil Eelam (LTTE) rebels to play a dominant role in the management of the economy in the territory under their jurisdiction. This in effect created a dual economic system in the country. Whilst the rest of Sri Lanka pursues a private sector led liberal market economic model, the LTTE held territory has been pursuing a command economic model in the past 12 years.

Some of the salient features of such a command economy were severe shortage of essential and other consumer goods, rationing, hyperinflation, and the LTTE run transport, trade and productive enterprises. At long last, the economic embargo was unilaterally withdrawn by the GoSL with effect from January 15, 2002. It is now one year since the lifting of the economic embargo. The objective of this paper is two folds; one is to highlight the implications of the lifting of the economic embargo on the economy of the N&E Province. The second is to identify the factors that inhibited economic revival in the N&E province in the past year, since the lifting of the economic embargo.

After the lifting of the economic embargo in January 2002 the economy of the N&E Province got further impetus with the opening of the A9 highway on April 8, 2002. The A9 highway is the major road linking the Northern province with the rest of the country, which was closed from Vavuniya to Jaffna for vehicular and civilian traffic for about 12 years. It is important to remember that while the lifting of the economic embargo was done unilaterally by the GoSL, the opening of the A9 for vehicular and civilian traffic was an outcome of the Memorandum of Understanding (MoU) signed between the GoSL and the LTTE in February 2002 as a result of the facilitation by the Norwegian Government.

The withdrawal of the economic embargo and the opening of the A9 highway have resulted in the reintegration of the N&E economy with the rest of the country. There is free flow of goods (except arms and ammunition, explosives, remote control devices, telescopes, and pen torch batteries) from the rest of the country to the LTTE-held areas and vice versa. However, though the GoSL has withdrawn the requirement to obtain a pass for the movement of civilians to and from the LTTE held areas, the LTTE still operates a pass system, albeit a less stringent one to what was in operation before. Thus, the movement of civilians to and from the LTTE-held areas is still not totally free. The two-way flow of goods (to/from the LTTE held areas) has its gainers and losers.

The free flow of goods from the rest of the country (including imported items) to the LTTE held areas has gainers and losers. Thus, the consumers in the LTTE held areas are the major gainers and the producers in the LTTE held areas are the major losers. On the positive side, the free flow of goods from the rest of the country to the LTTE held areas has depressed the prices of such goods which benefits the consumers.

However, the prices of such goods are still higher than what it ought to be due to the taxation by the LTTE. On the negative side, the free flow of goods from the rest of the country to the LTTE held areas has badly affected the local producers of the same or similar goods. Many local producers in the LTTE held areas are deprived of their livelihood due to the inflow of cheaper and better quality Sri Lankan made and foreign made goods.

In the same line, the free flow of goods from the LTTE held areas to the rest of the country has gainers and losers. The producers in the LTTE held ares have benefitted from the opening of the entire Sri Lankan market to their produce because of higher prices they fetch now. On the other hand, the consumers in the LTTE held areas have lost out because of higher prices they have to pay now. During the time of economic embargo perishable agricultural produce including vegetables, fruits, and fish were very cheap in the LTTE held areas due to over supply. But, the prices of these perishable food items have shot up since the opening of the A9 highway. As a result the consumers in the LTTE held areas are worse off now than before.

In sum, the lifting of the economic embargo and the opening of the A9 highway has costs and benefits to the economy and people of the N&E province. The main challenges in the province are for the local producers (who have lost out due to the influx of goods from other parts of the country) to become competitive or find alternative productive activities, and the local consumers to find means of increasing their income in order to afford to purchase the higher priced local food produce.

Unfortunately, alternative productive activities and increasing the income levels of the consumers are slow to come by due to a variety of factors. Although trade between the N&E province and the rest of the country has expanded enormously, not many new productive activities have taken place in the past one year. This has, quite naturally, resulted in disenchantment among the masses. It is important to remember that the present situation is a pause-in-conflict rather than a post-conflict situation.

Historically, agriculture was the mainstay of the N&E economy, specifically food crops, cash crops (such as chillies, onions and tobacco), and fisheries. There seems to be fundamental institutional impediments to kick start productive activities in all sectors of the N&E economy. The major objective of this paper is to identify these institutional impediments to economic revival in the N&E province.

The process by which these institutional impediments were identified was through study tours to 6 out of 8 districts in the North and East province (including both the Government held and LTTE held territories) in the past 10 months by the author. These study tours entailed meeting Government officials (central, provincial and local), LTTE officials, non-governmental officials (local, national, and international) learned people, entrepreneurs, and the general public.

Impediments

One of the major institutional impediments is the High Security Zones imposed by the Sri Lankan armed forces in the N&E province, particularly in the Jaffna peninsula, in line with the MoU. The majority of the Northern Province population lives in the Jaffna peninsula. Almost one-third of the land area of the peninsula (in Valikamam north) is classified as High Security Zone and barred for civilians, which used to house more than 100,000 people.

These people are now displaced and productive activities discontinued. This vast High Security Zone encompasses some of the most fertile agricultural lands in the peninsula. During the pre-war times the N&E province used to produce a significant proportion of the total requirement of rice, chillies, onions and tobacco of the entire country. Since the beginning of the civil war in 1983 a major proportion of rice, chilli, and onion requirements are imported from abroad.

Moreover, the Sri Lanka army occupies almost half the city centre of Jaffna. It is important to remember that Jaffna is the commercial hub of the N&E province. The occupation of prime commercial properties in the heart of the city is one of the major obstacles to business development in the peninsula. Several hotels and other private and public properties in the city are still occupied by the Sri Lanka army. Ironically, while security barriers and checkpoints in the city of Colombo have been removed since December 2001, the city of Jaffna still resembles a theatre of war.

Further, certain time and geographical restrictions on fishing still exist in the Northern Province, particularly in the Jaffna peninsula, despite some relaxation in the past one year. Fishing is one of the primary economic activities in the N&E province, and during the pre-war times used to account for two-thirds of the total fish catches of the country. However, due to severe restrictions on fishing, Sri Lanka has become a significant importer of fish in the past two decades. The restrictions on fishing in Sri Lanka have resulted in fisherpersons from India, Japan, Taiwan and Thailand encroach the Sri Lankan seas.

The A-9 highway is opened for vehicular and civilian traffic for only 10 hours a day (7.30 a.m. to 5.30 p.m.) and six days a week. This highway is closed on Sundays. These restrictions are another major impediment to economic revival in the Northern Province. The entrepreneurs in the Jaffna peninsula complain that it takes 3 days for goods to arrive from Colombo via the A-9. This is not only because of the restricted access to the highway, but also due to checking at four points by the Sri Lankan army and the LTTE (two points each).

The entire consignment is off loaded, checked and reloaded into lorries and trailers at each point. The Sri Lankan Army checks the flow of goods via the A-9 in order to ascertain whether banned items are being transported, whereas the LTTE checks are primarily for the purpose of taxation. These delays in the transport of goods via the A-9 increase the transaction cost of businesses.

The businesses in the North and East province are not entitled to engage in import/export trade directly. That is, businesses in the North and East province cannot open Letter of Credit (LC) at the banks in the province.

Hence, the traders in the province have to purchase imported goods from Colombo-based importers, which increase the transaction cost and consequently the retail prices. This is a major hindrance to external trade development in the province.

The banks in the North and East province are stringent in the disbursement of loans to farmers, fisher persons, and traders. The collateral requested by banks in the province seems to be higher than what is required in other parts of the country.

(To be continued)

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