Financial Times

Tsunami shock jolts country’s economy
The destruction wrought by last Sunday's tsunami dealt an unprecedented blow to the economy, slowing down growth, but it was also seen as an opportunity to rebuild and reunite a nation battered and divided by 20 years of ethnic war.

The multi-billion-rupee reconstruction effort, which will give a fillip to the stagnant construction industry, is expected to help revive the economy in the medium term and ensure sustained growth if the war does not resume. "The impact on economic growth is not going to be as bad as some fear," declared Channa Amaratunga, Asia Capital research analyst.

"There's opportunity here for people to work together for a united cause in the re-building effort." Economic growth will not slow down too sharply because tourism and fisheries account for less than five percent of Gross Domestic Product while other businesses like construction and retail will pick up and make up for it during the re-building phase, he said.

Although the hardest hit sectors were tourism, which is in the peak season, and fisheries, the devastation will have an across-the-board impact on the economy, and possibly lead to higher interest rates if the government is forced to borrow more to pay for the relief and reconstruction effort, analysts and business leaders said.

Agriculture too could be affected as Amparai, part of the eastern 'rice bowl', was the worst hit by the tidal waves which sometimes penetrated inland. There were fears of salinity in the soil and water bodies damaging future crops although this was not considered a long-term problem as heavy rains could dilute the salt water.

Rajan Yatawara, chairman of Hayleys, which is closely involved in agriculture, told The Sunday Times FT that the tsunami was a blow to the economy which would also have indirect effects with so many farmers and retail traders affected.

The company was still trying to assess the impact on farmers and the number of traders of fertiliser, chemicals, TV sets, and consumer goods in all the little townships that got washed away.

Lakshman Fernando, chairman and chief executive of Chemical Industries (Colombo) Ltd., which also deals closely with farmers, said distribution of pesticide, fertiliser and other farmer inputs would be affected in coastal areas with so many people displaced and large swathes of land flooded by seawater. "It is still too early to say how the coastal area paddy will get affected," he said.

Paddy production in Amparai, which accounts for almost 20 percent of the island's harvest, increased by 13.4 percent in the third quarter, the Central Bank said on Friday in its quarterly review of the economy.

"Overall, the situation is not very gloomy," Central Bank deputy governor W. A. Wijewardena told a news conference. "This should be used as a positive force to rebuild the country."

The World Bank has pledged US$ 250 million for the region out of which Sri Lanka will get $100 million. The Central Bank said the impact on economic growth in 2005 by the devastation of the tidal wave, in which there was considerable damage to infrastructure, would be "manageable".

It said the disaster would reduce economic growth by less than one per cent. Peter Harrold, World Bank's country director for Sri Lanka, said Sri Lanka is proportionately perhaps the worst hit of all the affected countries, as such a large portion of the country was affected and the bulk of the population lives on the coast.

Dr Anila Dias Bandaranaike, Central Bank director of statistics, said that the disaster has provided opportunities to do more for areas that lacked infrastructure, especially in the north and east. Building up the infrastructure in these areas will rectify some of the regional disparities and lead to economic improvement.

The government plans to make the sea belt a development belt and make use of the opportunity to relocate inland those who were living along the coast. HNB Stock Brokers said that past experiences indicate that some disasters could be converted into opportunities if the recovery is strategically directed.

They recalled the recovery experienced after Tiger terrorists bombed the Central Bank in 1999 and how SriLankan Airlines rebuilt its fleet and reorganized its operations to better position itself to take advantage of the peace dividend, after the attack on Katunayake airport.

"We feel that the focus would now deviate from the north-east conflict and war scenarios since both government and the LTTE would be more focused towards overcoming consequences of the present crisis," HNB Stock Brokers said.

Some of the hotels that were damaged already needed refurbishment, while damaged roads and property in the southern and eastern regions were in need of improvement and expansion as well.

Naren Godamunne, vice president of DFCC Stockbrokers, said the setback would be temporary but warned that the disruption might hamper government revenue collection efforts putting pressure on the budget deficit.

"Especially with tourism being a major contributor to government revenue, its revenue may fall below target." The sooner the reconstruction effort gets under way the better as it would help re-build investor confidence, Godamunne said.

There were fears that the rebuilding effort could drain further government resources and put upward pressure on the budget deficit and consequently, interest rates.

"But we think a lot of aid will come in," said Amaratunga of Asia Capital. "So we think there'll be some pressure but it's not that bad because there's a lot of foreign aid and also the corporate sector is getting proactive and contributing in a big way."

The foreign aid is likely to prevent any further pressure on the rupee. The tea trade said that although there was no damage to low grown tea estates or factories which are more inland on the coastal plain, the supply of leaf from small holders in Galle and Matara might temporarily slow down because many workers are displaced.

"We estimate that a large stock of tea in local dealers' warehouses intended for domestic sale along the southern and eastern coastal areas, where population concentration is greater, would most likely be damaged. Potential demand from these areas would be reduced sharply in the short term."

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