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Truce leads to economic recovery in Lanka

COLOMBO, Sunday (AFP) - Sri Lanka's Tamil Tigers have proved ferocious in battle and have busted the national budget, but their truce with the government has sparked a dramatic turnaround in the economy.

Sri Lanka dragged itself out of an unprecedented recession and into a healthy 4.0 percent growth last year as the Liberation Tigers of Tamil Eelam (LTTE) entered their first foreign-monitored truce in February 2002.

What started off well for the Tigers, the Sri Lankan government and their peace broker Norway in September is now deadlocked over problems of delivery. Visiting World Bank Managing Director Peter Woicke said he hoped the suspension of ongoing peace talks would be temporary.

"The big money will come if there is a guarantee of stability," Woicke said. "We hope the peace process will make further progress. This country has a good potential if there is peace."

Sri Lanka's Central Bank is counting on a final peace deal not taking longer than two years to allow healthy growth to address problems of unemployment and ensure a general improvement in living standards in this impoverished nation.

The economy expanded by 4.0 percent in the 2002 calendar year after emerging from a worse than expected 1.5 percent recession a year earlier, the Central Bank said in its latest annual report.

"Ideally, we would like to have peace immediately, but taking the realities into account, we believe a final peace settlement within a year or two should help the current growth path," a bank spokesman said.

The bank's annual report forecast a 5.5 percent growth rate for this year - assuming the truce will hold.

Bank officials say there had been "spontaneous improvement" in the economy last year after the Norwegian-brokered truce went into effect.

Apart from the obvious improvement in tourism, which suffered for decades because of constant fighting between troops and Tigers, domestic prices have fallen as transport within the country became easier and cheaper.

Failure in the peace process could have serious implications, the bank warned. "Economic growth would decline to very low levels and the economy may, in fact, suffer a contraction," it said while discussing the "worst case scenario."

The government was able to save a substantial amount of money on defence thanks to the truce, narrowing the budget deficit to 8.9 percent of GDP compared to 10.8 percent the previous year.

Inflation eased to 9.6 percent last year from 14.2 percent in 2001 despite an increase in consumer demand, the bank said, adding that prices eased because of the effects of the ceasefire.

The Asian Development Bank (ADB) said it believed the government had managed to run the economy fairly well, but a lot depended on sustaining the peace process. "They have not only come out of the recession in 2001, but actually managed some growth in 2002," ADB's deputy Country Director Joseph Zveglich said.

International donors expected to pledge up to three billion dollars to rebuild Sri Lanka in the next three years at a major aid pledging conference in Tokyo in June are nervously watching the latest developments.

Japan's special peace envoy to Sri Lanka, Yasushi Akashi, warned in March that both sides must show progress in political talks if they are serious about wooing much-needed foreign cash.

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