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The pace and extent of the country’s economic recovery after the Easter Sunday terrorist attacks will depend on how swiftly security is restored and the country made safe. Once there is confidence that such an attack is not likely to recur, the economy could return to its normal levels of economic activity and production.

A resurgence of the economy could be expected when there is certainty that terrorism is eliminated, as was the case in 2009, after the end of the prolonged civil war. However, the scars of the terrorist attacks would remain.

The elimination of terrorism must be accompanied by communal and religious harmony and effective good governance.

In retrospect

This weekend’s quiet celebration of Vesak with religious observances is reminiscent of Vesak 1971 after the insurgent attacks.  That too was on Easter Sunday in April 1971.

The main impact of the 1971 insurgency was a change in economic policies and much higher defence expenditures. The land reforms of 1972 and 1974 that reduced tea production and became a huge fiscal burden were in response to the insurgency. Land reforms were not in the July 1970 election manifesto.

The insurgency coupled with a period of economic hardship contributed to the country’s brain drain that had begun after the 1958 ethnic riots and continued at higher pace owing to the July 1983 ethnic riots, terrorist attacks and prolonged civil war.

Brain drain

No doubt the country’s capacity for economic development was seriously weakened by these waves of brain drain.  The current insecure conditions in the country are likely to accelerate the brain drain and weaken the capacity for economic development in the long run.

Unaffected economic activities

Several key sectors of the economy have not been adversely affected by terrorism. These activities can continue without a hindrance. Among them is agriculture that can continue uninterrupted. This year’s bumper paddy harvest, if followed by a good Yala harvest, would ensure the country’s self-sufficiency in rice and reduce wheat imports even though some areas in the East may be somewhat affected. Food crop cultivation is also mostly unaffected.

Most export manufactures are not affected. They should attempt to increase their exports as export markets are not affected. ICT services, too, could continue to expand, as in recent years. These unaffected economic activities should redouble their efforts to support the economy.

Tourism

The most severely affected economic activity is tourism. The industry was poised to earn US$ 5 billion when the terrorist attacks took place. Tourist earnings are expected to dip to US$ 3 billion. However, if secure conditions prevail from now on and there is a perception of peaceful conditions, there could be a significant recovery at year’s end, which is the commencement of the next tourist season.

Furthermore, the effect of the fall in tourism on the balance of payments will be mitigated by the lower import requirements of tourism.

Balance of payments

The terrorist attacks will have an adverse impact on the balance of payments and the external reserves. The fall in tourist earnings, drop in foreign investments and capital outflows are likely to weaken the balance of payments. On the other hand, reduced import expenditure and increased agricultural and manufactured exports could lessen this setback. Prudent fiscal policies could assist in ensuring that the deterioration in the balance of payments is contained.

Fiscal slippage

Fiscal slippage is likely. Inevitably, expenditure on rebuilding the destroyed churches, compensation for the large number who have died and the thousands injured that the government has promised would result in increased public expenditures that were not budgeted. Furthermore, the slowdown in economic activity owing to the insecure conditions would reduce output and decrease revenue.

For these reasons fiscal slippage is likely unless appropriate measures are taken to reduce other expenditure and increase taxation. This is necessary, as fiscal slippage will have adverse midterm and long term repercussions on economic stability and growth. This is however very unlikely.

Affected activity

Several economic activities that have backward linkages with tourism and other services are affected adversely.  Travel, hotels, guest houses and other tourist accommodation, restaurants, arts and crafts, gem and jewelry sales would have a setback owing to lesser tourist demand.

Economic recovery

Fortunately, the process of economic recovery is not one of rising from the ashes, as the foundations of the economy are unscathed. It is a slowdown in the economy, not a breakdown or demolition of the economy’s production capacity. Therefore economic recovery could be swift once the security conditions are restored.

However the impending elections and political motivations of the government are not conducive for sound economic policies in the long run interests of the economy.

Resilience

The economic consequences and the process of economic recovery this year would, however, be very different. The country has faced severe setbacks in the past and demonstrated a commendable resilience to recover.  Compared to some of the past reversals, the task of economic recovery this time is less challenging. It rests on eliminating the new terrorist threat and building confidence that the country is secure and peaceful.

Surveillance

The ongoing extensive search operations have disclosed a wide network of terrorist activities. The security services ability to track them down and eliminate them should ensure that such a terrorist attack would not recur and is not possible.

Reforms

These actions of the security forces have to be coupled with laws, regulations and reforms to eliminate communal and religious tensions. Once such conditions are established economic activity could reach their earlier momentum as the foundations of the economy are unaffected.

It is a golden opportunity to forge a unity among the ethnic and religious communities. We must not miss the opportunity. However, this is the more difficult task owing to political motives, corruption and ethnic and religious extremism.

Preconditions

While all religious leaders have emphasised in no uncertain terms the need for religious and ethnic harmony and civil society underscored this imperative, the stumbling block appears to be the narrow intents to take political advantage of the conditions. The nearness of elections compounds the problem.

The restoration of law and order, elimination of terrorism, ensuring ethnic harmony and good governance would be vital for economic recovery. It is also important to prevent any ethnic or religious backlash to ensure that the economic recovery is not impeded. The capacity for economic recovery would depend very much on the political leadership and implementation of economic policies.

Conclusion

No doubt the terrorist attacks have slowed down the economy and may have an adverse impact on the balance of payments, the fiscal outcome and short-term and mid-term economic growth.

However, it is not a breakdown of the economy. The economy could be resuscitated with the restoration of secure conditions, law and order, an enlightened political leadership, social harmony and a people’s resolve to work harder.