Sri Lanka hype runs out as economy struggles

COLOMBO (AFP) - After crushing Tamil rebels four years ago Sri Lanka expected to become South Asia's tiger economy, but exuberance has given way to mediocre growth and fears of more trouble ahead.

The country was almost broke when troops defeated separatist Tamil Tigers in May 2009, but Colombo predicted that ending 37 years of bloodshed alone would jump-start the economy and make Sri Lanka the "Singapore of South Asia".

"Sri Lanka had a sudden opportunity at the end of the war, but we failed to leverage that," said opposition lawmaker Harsha de Silva.

"Our policies were not conducive to attracting global investor attention."

Mr De Silva, who is also an economist, said the government's reliance on state enterprises and the renationalistion of several privatised ventures in 2011 was a "knockout punch" that discouraged investors.

The record 8.0 and 8.2 percent growth rates in the first two full years after the war gave way to a much slower 6.4 percent last year - slower than during some of the war years.

The government has predicted growth of around seven percent for 2013, but sources in the International Monetary Fund say that is too optimistic.

The IMF, which bailed out Sri Lanka with a US$2.6 billion (S$3.2 billion) rescue package when foreign reserves hit rock bottom at the end of the war, is warning of a looming debt crisis and rising inflation.

On the eve of the celebrations marking the killing of Tamil Tiger leader Velupillai Prabhakaran on May 18, 2009, ending a protracted guerrilla war, the IMF country's representative, Koshy Mathai, cautioned Colombo on the economy.

He said Sri Lanka's revenue collection was among the lowest in Asia, public investment was also among the lowest and national debt at 80 percent of GDP was far too high.

Mr Mathai has urged Sri Lanka to reform hugely loss-making state enterprises, including the electricity monopoly which raised tariffs by over 65 percent, a move that has sparked widespread protests from trade unions.

Ms Charu Lata Hogg of the London-based Chatham House thinktank said most Sri Lankans had yet to enjoy the peace dividend.

"Iniquitous development, sustained military expense... and an escalating price rise have together ensured that the life of the ordinary Sri Lankan has not improved," she told AFP.

Colombo is also under pressure from the West to probe alleged war crimes by its troops and to seal an autonomy deal with minority Tamils to ensure there is no sliding back to war.

Unhappy with the lack of progress on this front, the European Union has withdrawn tariff concessions from President Mahinda Rajapakse's government.

Weaker exports coupled with higher imports saw Sri Lanka face one of its most lopsided balance of payments in 2011 with the trade deficit hitting a record US$10 billion. It prompted a devaluation and an interest rate hike.

The central bank admitted last week that all was not well and it was cutting its key lending rate by 50 basis points in a bid to revive growth.

The end of the war saw a revival in tourism, with hotels more than doubling their rates as the number of visitors to the tropical Indian ocean island broke the one million barrier.

Mr Murtaza Jafferjee, an analyst at Colombo-based JB Securities, said tourism was important, but its contribution to GDP was minor compared to the struggling manufacturing and agricultural sectors.

"Tourism is important... but it's not going to save the economy," he told AFP.

Independent economist Channa Amaratunga said the global slowdown had also affected Sri Lanka.

"There is a lot of infrastructure work in war-affected areas, but the private investment is not enough," Amaratunga said.

"There were unrealistic expectations of 10 percent growth at the end of the war. It is more tempered now."