REPORT

Investment on defence paid off - Central Bank Governor

The cost of Sri Lanka's "war on terrorism" was a vital investment by the Government and the people, said Central Bank of Sri Lanka Governor Ajith Nivard Cabraal.

Making a presentation to the commission of inquiry on Lessons Learnt and Reconciliation he said that many previous Governments did not pursue "defeat of terrorism by military means" with enthusiasm, because of the perceived massive "cost" that it was supposed to entail, and the tough economic decisions that needed to be taken, as a consequence.

Governor Ajith Nivard Cabraal

Hence, an analysis of the cost of the military effort during the past four years, 2006 to 2009, may be a useful guide for the future.

Contrary to popular belief, Sri Lanka has spent just about four percent of its GDP on defence over the four years, 2006 to 2009. For a country that has been plagued by terrorism, this quantum of Government spending on defence, indicates restraint and thrift in waging the counter terrorism effort.

He said the final results where Sri Lanka emerged as the first country to defeat terrorism, shows that Sri Lanka has been able to spend its resources in an efficient and productive manner.

For the four years 2006-2009, the cost incurred by Sri Lanka on the LTTE war was US $ 5.5 billion.

This included costs of aircraft, ships, tanks, ammunitions, other equipment, training, food for soldiers and uniforms. In contrast the cost incurred by the US Government on training of their forces in Iraq and Afghanistan amounted to US $ 39 billion, he said.

When terrorism was finally defeated, an extraordinary amount of economic benefits accrued to the return to the high economic growth trajectory - eight percent.

There is a greater efficiency in allocation of all economic resources.

Improved political and economic stability and investor confidence, new opportunities being seized by the private sector and improved fiscal management leading to better micro-economic fundamentals are some of these economic benefits, he said.

"These benefits would clearly indicate that the investment on defence has paid off," he said.

The Governor also said terrorism funding was key to the launch of successful terrorist attacks and the continuation of the LTTE agenda.

There were massive local and overseas inflows of funds supporting the terrorism effort in Sri Lanka. Some of the LTTE's local fund raising main sources were their illegal system of tax collection, ransoms for kidnappings and gold and jewellery contributions. They also operated their own network of banks.

Monthly contributions from the diaspora, fund raising events, illegal drugs distribution, credit card scams and human trafficking are some of the LTTE's international fund raising methods, he said. They used legitimate channels and underground methods to transmit the funds.

The response to financing of terror had to be global as well as local, he said.

Freezing of suspected accounts promptly to disrupt the terror financing network, practising an advanced level of financial intelligence, sharing information among FIVs of the world, using global identification systems of terror financing and money laundering patterns and formulating necessary new laws and regulations are some of the responses to terror financing. However, the terrorist financiers tried to be a step ahead through resorting to new schemes and obtaining powerful covers and continued to practise certain discovered schemes, but with new names.

They often used the weakest links such as negligent banks, sympathetic officers or inefficient processes, clogged legal and prosecution processes to make them slow. The terrorist financiers developed their own intelligence to get "tipped off" when counter action is contemplated by the authorities, he said.

He said many so-called "economic interventions" seemed to be attempts to indirectly pressurize Sri Lanka to halt or dilute the final humanitarian effort. Examples are the threat of GSP+ concessions withdrawal at sensitive times delay in the approval of IMF-SBA.

"It is vital that we maintain sound macro-economic fundamentals in the future so as to provide a "cushion" for external shocks, so that such threats could be confidently faced," he said.

Massive global mis-information campaigns were carefully designed to affect Sri Lanka's economy, funding sources, cost of borrowing and country ratings.

Hence, a massive effort had to be launched and maintained to convey the positive features of the economy. Even in the future, these efforts have to be continued, in the interest of economic stability, he said.

Upgrading of country ratings, removal of war risk premia , relaxation of travel advisories, investor sentiment and oversubscribed international bond issues and no fall-out from GSP+ withdrawals are some the successes the country has achieved, he said.