Features | Economy | South Asia

Sri Lanka’s Uneven Reconstruction

Nearly a decade after the civil war ended, war-affected provinces still lag behind the rest of the country economically.

By Umesh Moramudali for
Sri Lanka’s Uneven Reconstruction

In this July 24, 2019, photo, people walk past construction sites built with foreign investment in the Galle Face sea promenade in Colombo, Sri Lanka.

Credit: AP Photo/Eranga Jayawardena

A few weeks ago, the Sri Lankan government declared open the Jaffna International Airport located in the northern part of the country, which was severely affected by the three-decade domestic conflict that came to an end in 2009. The airport finally resumed its operations after four decades and the government was very keen to show that post-conflict development is satisfactory in Northern Province, the province most affected by the fighting.

It has been a decade since the end of the civil war between the Sri Lankan Army and the LTTE, which claimed a separate state for Tamils living in northern and eastern parts of Sri Lanka. The LTTE movement was defeated in May 2009 with the death of its leader Prabakaran and the Sri Lankan government claimed that they took control of all the areas controlled by the LTTE. Since then, the story of the post-conflict era has been one of development, whether political, social, or economic. For example, the Northern Provincial Council election was held in 2014 for the first time after two decades. In terms of economic development, there were a number of efforts to develop infrastructure in conflict-affected areas, after much was destroyed during the conflict.

After the war, there were large scale infrastructure development initiatives carried out in Northern and Eastern Provinces. These programs resulted in a significant increase of the provincial GDP in conflict-affected areas. In Northern Province, infrastructure development programs during 2009-2013 cost 221 billion Sri Lankan rupees.

These investments, although public sector driven (and of course debt driven) clearly boosted regional growth. According to data from Sri Lanka’s Central Bank, Northern Province recorded a provincial GDP (PGDP) growth rate of 25.9 percent in 2012. The PGDP growth of Northern Province from 2010 to 2012 was 25.2 percent, almost 10 percentage points higher than the national average of 16.2 percent. The contribution of Northern Province to the country’s GDP increased to 4 percent in 2012 from 3.4 percent recorded in 2010. However, whether this growth was sustained and whether the benefits were distributed to the majority of people in the conflict-affected areas is contentious. Data indicates that the average growth rate in Northern Province slowed to 10 percent during 2014-2018 period along with the sluggish growth in the overall economy.

Recovering from a three-decade long conflict is not easy. Rapid infrastructure development doesn’t quickly boost up the growth. By today, Northern Province has a fairly well connected road network in addition to the renovated rail track. Kandy-Jaffna road was renovated and is frequently used by the public and a few trains run from Jaffna to Colombo daily. Yet, despite the enhanced connectivity, Northern Province’s contribution to the GDP remained 4.1 percent in 2018, indicating that state-driven infrastructure development has failed to sustain the growth momentum in the region.

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While there has been a rapid infrastructure development in conflict-affected districts, it remains a question whether such development has sufficiently benefited the poor and distributed the fruits of development across every segment of the society. Even a decade after the end of the war, Northern and Eastern Provinces remain the regions with the highest poverty headcount ratio. While the country’s poverty headcount ratio – the proportion of the population living below the poverty line — was 4.1 percent in 2016, Northern and Eastern Provinces had poverty headcount ratios of 7.7 percent and 7.3 percent, respectively. According to data from the Department of Census and Statistics, all four districts with double-digit poverty headcount ratios are in Northern and Eastern Provinces. It is true that poverty in these districts has come down during the last few years. However, the question remains whether the reduction of poverty is sufficiently proportionate to the investment in infrastructure development.

In comparison to Northern and Eastern Provinces, the poverty headcount ratio in Uva Province has come down significantly. Uva Province recorded the highest poverty headcount ratio — 15.4 percent — in 2013 while Northern Province came in at 10.9 percent. By 2016, however, Uva Province’s poverty headcount ratio was a mere 6.5 percent while the Northern Province ratio was 7.7 percent.

These statistics raise concerns regarding the way in which post-conflict development benefited (or failed to benefit) the poor in conflict-affected areas. Poor households in the north seem not to have benefited from the development methods. Instead, a large number of low-income people have fallen into a severe micro debt crisis. People obtain loans at very high interest rates from micro finance institutions and some ended up committing suicide. During the last two years, the government and the Central Bank intervened to curtail the damage of an already widespread crisis. Earlier this year, the Central Bank imposed an interest rate cap of 35 percent for micro finance loans, which is still three times the personal lending rate of commercial banks. The crisis was so bad that bringing the maximum rate down to 35 percent was seen as an achievement, since the interest rate for some micro finance loans was as high as 200 percent.

The Northern Province development plan prepared by a group of experts outlined several concerns regarding post-conflict development and claimed that post-conflict reconstruction strategies have not met expectations. Economists observe that several factors have contributed to the failure of post-conflict development to meet goals.

First, the development programs did not provide sufficient support to small-scale companies, which are the backbone of the economy in Northern Province. Then it was highlighted that development programs did not really focus on enhancing the skills of the people in the region. Furthermore, there is the issue of institutional capacity in the region. Although branches of government institutions were set up in conflict-affected areas, including a branch of the Central Bank, it takes a substantial amount of time to develop the capacity of institutions and integrate them into the local socioeconomic dynamics.

These issues are reflected in statistics regarding the conflict-affected areas. The unemployment rate in Northern and Eastern Provinces remains high, indicating the lack of job creation during the post-conflict era. Almost a decade since the end of the war, most of the districts in Northern Province have the highest unemployment rates in the country. According to the Labor Force Survey conducted by the Department of Statistics in Sri Lanka, the unemployment rate in Jaffna remains high. In 2012, when the Labor Force Survey was first conducted after the end of the war, the unemployment rate in Northern Province was 5.2 percent and by 2018 it had increased to 5.7 percent. The story is similar in Eastern Province, where the unemployment rate increased from 4.9 percent to 6 percent.

Data also shows that the contribution of Northern and Eastern Provinces to GDP remains low showing the lack of dispersed economic activity. In Sri Lanka, a significant portion of economic activity is concentrated in Western Province, where the commercial capital of the country, Colombo, is also located. Western Province accounts for 38 percent of GDP and the remaining 60 percent comes from the eight other provinces. Northern Province provides the lowest contribution with 4.1 percent and Eastern Province is not much higher at 5.7 percent. Despite infrastructure development, tax concessions, and various other incentives, business expansion in Northern Province remains unsatisfactory.

Against this backdrop, a new economic framework has been suggested to ensure more equitable and sustainable development in conflict-affected Northern Province. Accordingly, there will be more focus on supporting small- and medium-scale enterprises along with providing the required skill training for the youth. Also suggested was a focus on agriculture and particularly support for agricultural producers to connect with global markets. One must not forget that agriculture is the traditional method of income for most people in the area and for some it means more than finding a living.

For Sri Lanka, the development of the north is not merely an economic matter. It is more of a political and social question. Ties between the Tamil minority-dominated Northern Province and the Sinhalese majority-dominated Sri Lankan government have long been strained. Although the LTTE was defeated, the idea of having a separate state for Tamils has not entirely been buried. The process of reconciliation is still being carried out and though it may not seem obvious, equitable economic development can play a significant role in reconciliation. Historical evidence suggests that in Sri Lanka, unequal wealth distribution, high unemployment rates among young people, and low wages were significant contributory factors for the youths to take up arms. Although there is no such risk at the moment, reconciliation will not last without equitable and sustainable economic development in Northern Province.

Umesh Moramudali is an economic researcher focus on public debt dynamics and economic development in Sri Lanka. He is currently pursuing M.Sc in Economics at the University of Warwick.