Closed economy in the north, opened during ceasefire

Lead economist from Lirneasia Dr. Harsha De Silva, said the benefits of the ceasefire agreement (CFA) for the people living in the north and east were many. With the 6-year long ending last week, he feels the people in this region will again descend into an economic crisis. De Silva said there was a parallel economy which existed in the north and east during the time of the CFA. "At the same time, Sri Lanka had a free market with an open economy linked with the rest of the world, giving the people particularly in the western province the ability to leverage those economic policies," De Silva explained. "All the while, we had a closed economy in that area. For all intents and purposes, there was a parapet wall or an electric fence around that region. Theoretically, they were strangulated and restricted."

De Silva referred to a study done by the Peace Secretariat in August 2005 when the A9 was open, looking at economic development pre-ceasefire (1997 to 2001) and post-ceasefire (2002 to 2003). "The most significant finding was the growth," he said. The GDP growth in the pre-CFA in the north was on average, 3.4% annually. It grew to 12.6% in the post-CFA period. Similarly, in the east, pre-CFA GDP growth was 4.6% and post CFA GDP growth stood at 10.1%. In the north central province, pre-CFA GDP was -0.2% but post-CFA was 8.2%. However, in the western province, the statistics are much different. In the pre-CFA period, GDP growth in the western province was 6% and post CFA was 6.2%. In the southern province, pre-CFA GDP growth was 5.5% and post-CFA was 5.4%.

"That goes to show that whatever the CFA did didn't really matter to the economies of the western, southern and central provinces," De Silva said adding that people in the western and southern provinces don't realize the benefits of the ceasefire because it makes no difference. De Silva also said that increased paddy production from 65,000 metric tons per year to 138,000 metric tons per year in the north in the pre and post CFA period was responsible for the dramatic growth.

Principal researcher from the Point Pedro Institute of Development, Dr. Muttukrishna Sarvananthan said undoubtedly, the CFA resulted in economic recovery at the national level and economic boom at the regional level in the conflict affected and adjoining provinces. "The national economy recorded negative growth (-1.5%) in 2001 for the first time in post-independence history with the CFA economy rebounding to 4% growth in 2002 and 6% in 2003," he said. "With the change of government in 2004, political instability and partial resumption of conflict in the east in the aftermath of the breakaway of Karuna, the growth rate in 2004 declined to 5.4%. With the massive tsunami relief and rehabilitation activities during 2005 the economy grew by 6% in that year. In 2006, despite the resumption of the conflict, massive tsunami reconstruction work propelled the economy to record 7.4% growth, the highest ever after 1979. In 2007, the economy is expected to have grown by around 6.5% in spite of a high intensity civil war."

At the regional level, during the early ceasefire period (2002-2004), the northern, eastern and adjoining north central provinces recorded the highest economic growth rates among all the provinces, Sarvananthan said. Their average annual growth rates were higher than even than that of the most prosperous western province. "Due to the long economic embargo (1990-2001) there was a huge pent up demand for consumer goods and consumer durables which were facilitated by restoration of power supply and telecommunications, in the eastern and northern provinces."

According to Sarvananthan, agriculture, industry and the services sectors all benefited by the CFA. Removal of restrictions on fishing and removal of landmines from agricultural lands boosted growth. Due to major infrastructure and housing reconstructions in the aftermath of the CFA, the construction and utilities (power and water) sub sectors of the industrial sector boomed. Wholesale and retail trade and telecommunications sub sectors experienced the greatest growth in the services sector.

Sarvananthan said tourism (both domestic and international) also improved, particularly in the east. The Tamil diaspora invested a lot on real estate (condominiums) and housing reconstruction in and around Colombo and in Jaffna. However in 2006 and 2007, no fundamental structural changes took place due to political uncertainty and the ongoing violence.

A high ranking official from the government Peace Secretariat who spoke on the condition of anonymity said that after 2004, the CFA ceased to exist. During 2002 to 2004, the GDP in the northern province quadrupled and the GDP in the east doubled, he said. However, the combined overall contribution from the north and east to the national GDP is 7.2%, having very little impact.

The growth in this area was mostly due to agriculture and fishing. Agriculture and fishing in the north grew by 32% and 19% respectively. In the east, agriculture and fishing grew by 4.3% and 4.9% respectively from the pre-CFA agreement. Unemployment also dropped from 13% to 9% in the north and from 16% to 10% in the east.