Sri Lanka's economy reels after raid

Attack could cost one-sixth of government revenue

By BBC News Online's Jeremy Scott-Joynt

At best, the attack on Sri Lanka's only international airport and a military base next door by separatist Tamil Tiger guerrillas has cost the impoverished country $350m.

At worst, it could set the economy back years, Sri Lankans fear.

The $350m is the sum the government estimates it will cost to replace the eight military jets also lost in the attack. Three brand-new Airbus jets belonging to state flag carrier Sri Lanka Airlines, were burnt to cinders, while a further three were badly damaged.

But the country is trying to get new loans from international donors to counter an economic collapse, which has seen reserves of foreign currency fall to dangerous levels, which the attack could put in jeopardy.

Sliding forecasts

The damage to the national coffers is extreme. The $350m cited is half the annual defence budget, which itself takes up a third of total government revenue.

Even before the attack international analysts had downgraded their forecasts for Sri Lanka's economic growth this year to 3% from 4.5%.

Kumaratunga: facing political unrest

The country's continuing political instability was the root cause. President Chandrika Kumaratunga closed parliament in June till 7 September, after her government lost its parliamentary majority when one of her coalition partners defected to the opposition.

And Sri Lanka's central bank is painting an even gloomier picture. It said growth in the first quarter of the year was just 1.3%, down from 6.6% year on year.

The attack saw at least 18 people killed, most of them rebels.

It came on the anniversary of anti-Tamil race riots in 1983, seen as the trigger for the 18-year insurrection by the Liberation Tigers of Tamil Eelam (LTTE), or Tamil Tigers, for a homeland in the north of the country.

Bitter history

1948: Ceylon becomes independent from Britain

1976: Liberation Tigers of Tamil Eelam (LTTE) formed

1983: Tamil race riots trigger civil war

1987: Indian premier Rajiv Gandhi sends Indian peacekeeping force. More than 1,000 die

1990: Indian troops depart

1996: Government retakes Jaffna stronghold in north

The incident has dealt a blow to economic activity in Sri Lanka, with the stock market sinking as share trading slows to a trickle and foreign dealers stay away.

"This is disastrous, said Ken Balendra, chairman of the state-run Bank of Ceylon.

Urging all political parties to put aside their differences for the sake of the tattered economy, he said the country could "sprint like Singapore" if they could co-operate.

The government has already pledged to replace the planes it has lost, with the equipment likely to be sourced from Pakistan, China and Israel.

Middle Eastern airline Emirates - which now owns 40% of Sri Lankan Airlines - has yet to comment on how it will fill the gap in its own schedules and replace the aircraft it has lost.

Staying away

In the meantime, the most obvious damage is to the tourist industry, which until yesterday was experiencing its best period for some years, according to the Ceylon Tourist Board (CTB).

June saw a record 28,000 foreign visitors, up 30% on the previous year.

"This attack is going to have a great big impact on the industry," said CTB Chairman Renton de Alwis. Around 30 tour operators have cancelled planned holidays, the board said.

It could take as much as six months to recover, according to Mr de Alwis.

But doubts are also surfacing about just where the money might come from to replace the planes lost.

New money?

The Sri Lankan media says that even the 600m Sri Lankan rupee (£4.7m) cost of a non-binding referendum on the new constitution, due on 21 August, is unsupportable.

And the chances of sourcing new money from outside look slim.

First quarter economic growth

2001: 1.3%

2000: 6.6%

In April the International Monetary Fund agreed a new tranche of loans worth about $253m, and the following month the government said it was expecting further money in the near future under more flexible terms.

But economists and political analysts in Sri Lanka doubt that a further tranche is likely to be available soon.

Despite government denials, it is widely believed that the first loan came with sweeping conditions including commitments to a public sector salary freeze, tax hikes on goods and services, and further privatisations.

But the political situation means that little progress has been made. And the chances of finding fresh inward investment and buyers for the privatisation process are seen as slim in the current climate.