Sri Lanka's 'war footing' begins to affect economy

COLOMBO (AFP): Sri Lanka's Tamil separatist war has been dragging for decades, but defense spending has begun to harden its bite on the economy after an unprecedented shopping spree by the military.

The island was placed on what the government called a "war footing" in May after Tamil Tiger rebels mounted a ferocious offensive aimed at retaking the northern Jaffna peninsula.

Since June, prices of essential goods and utilities have surged by up to 30 percent, and now the main opposition is rallying to make the cost of living a key issue in parliamentary elections later this year.

The main opposition United National Party (UNP) is organizing a public protest in the capital Colombo on Monday against the inflation, and is demanding workers receive higher wages to make up for the price increases.

"The government is blaming everything on the war, but it is due to poor economic management that we are in this sorry plight," said the UNP's general secretary, Gamini Athukorale.

The cash-strapped government has raised taxes and prices to finance its imports of urgently needed military hardware, while the country's foreign reserves dropped by an alarming 16 percent in June.

A six percent depreciation in the rupee against the dollar on June 20 is also being felt in higher prices of imported foods. A government attempt to forcibly lower the price of bread has had limited success.

In the run-up to elections in October, financial analysts believe the government may face more pressure to offer voters financial breaks. But given the condition of the economy that will be a serious challenge, they say.

Sri Lanka's exports rose 20.8 percent in the first five months of this calendar year, taking in some US$2 billion. But imports rose at nearly double that rate over the same months, increasing by 40.5 percent.

According to the central bank, that has meant a massive 985.6 million dollar trade deficit over the five months, an increase of 110 percent compared with the same period last year.

The root of it all was the sudden surge in defense spending in May.

The 2000 budget was intended to maintain the military status quo in Jaffna, which though bloody was not the crisis it is now, while encouraging the rebels to sit down to peace talks.

But treasury chief P. B. Jayasundera's forecast for defense spending to be about the same as last year has already been hopelessly dashed.

In May, the government announced it was adding at least $175 million to the original defense budget estimate of $706 million.

Defense spending is now expected to take up more than six percent of gross domestic product, compared with about 4.5 to 5.0 percent in recent years.

For many consumers that has meant higher prices.

A national security levy on all goods and services has been raised a percentage point to 6.5 percent.

Electricity rates are up six percent, and those who have failed to reduce their consumption by 20 percent over last month will face a 25 percent surcharge.

Diesel prices have been increased 20 percent, in addition to a 25 percent rise four months ago.

Transport fares are up by as much as 50 percent, while water and telephone service prices are up by 20 to 30 percent.

The cost of liquefied gas used in cooking stoves has been raised by 30 percent.