A decade of peace


SRI LANKANS are grateful for small mercies. Free antibiotics, a kind nurse and doctors at the local government hospital not being on strike are often satisfying. For decades, Sri Lanka’s multi-cultural society has been united by these expectations and appreciation that the government would somehow provide needs like healthcare, education, jobs and retirement income. Governments fund public services, social safety nets and pensions only by taxes and levies, or by obtaining loans, all paid for by citizens, immediately or in the future. Th e view that public services, social safety nets and pensions are political largess is assayed by people’s willingness to bribe public officers to get everyday things done, like getting permission to build on your own land, admitting a child to school or having your garbage collected.


Th e cost of the inefficiency and the impact of injustice of the breakdown in law and order on society is tremendous.

HOWEVER, quantifying corruption’s reach is difficult. But recent revelations show it is pervasive, from the market for government bonds, and aircraft purchase, to tax collection. Sheer injustice of the well-connected benefiting from large scale corruption which is a cost or denied opportunity, or both, to people hasn’t always been clear. Although there are often no direct victims, people bear the cost of corruption through higher taxes, lost opportunities or inflated future debt repayments.

1However, the war that ended a decade ago had the potential to change Sri Lanka’s trajectory. To understand the scale and challenges of that opportunity, it’s critical to appreciate the context. It’s two-fold. First, the challenges faced by any post-conflict society, and second, Sri Lanka’s unique challenges. Sri Lanka’s conflict was fought around racial identity lines. This remains a delicate subject. Due to long run and complicated reasons, some people, divided on race lines, didn’t feel they belonged with everyone else. Wounds from the bloody end to the conflict, estimated to have killed up to 100,000 people in 30 years, weren’t going to heal quickly.

Every post-war country must decide between justice and reconciliation. Choosing justice means the victors will imprison or execute the losers. Elsewhere in the world, former enemies have shown that they can live together.

For Sri Lanka to seek justice for the war by imprisonment and execution of rebels isn’t realistic. It then leaves reconciliation. Sri Lanka has chosen to reconcile.

Those societies that heal the deepest conflict wounds do a few things well. First, they will commemorate all victims, whoever they are. Second, they will seek to include victors, the vanquished and everyone else with a stake, to craft a lasting solution. Third, a country will seek economic development to rebuild infrastructure, livelihoods, and hope for families that their future is going to be more secure and less hard.

Sri Lanka has disappointed its people on the first two. The defeated are humiliated and marginalised. Their dead, burial grounds and names unknown. Commemorating those who loss their lives to the war reassures survivors about the sincerity of reconciliation.

Now, a decade after the conflict, it’s apparent that Tamils killed in the final stages of the conflict will not be given a decent burial. Without it, building intercommunal trust will be hard. The window of opportunity for a power-sharing solution through a new constitution has also now passed. However, it’s not the aim of this piece to explore the abject failure to commemorate all the victims or the potential for sharing power.

2Any hope of drawing warring groups together is now pinned on the chance to share in the new economic prosperity. This economic recovery has been termed the peace dividend in Sri Lanka. On the tenth anniversary of the war’s end, it’s appropriate to discuss if Sri Lanka has benefited from a peace dividend.

What is a peace dividend?

At its narrowest definition, economic growth can be a good measure of a peace dividend. Higher growth is an outcome of higher investment. In the lead and often for poor countries, a boom in foreign investment helps bridge the lack of capacity in the local economy.

In the three years immediately after the war’s ending, economic growth averaged 8.5% a year, driven by a spurt of construction and the benefits of markets in the former war zone opening to trade and investment. However, in the five years between 2013 and 2017, the average growth rate fell to 4.2% (Chart 1). The Central Bank forecasts economic growth may have fallen to 3% in 2018, an 18-year record low.

That on the tenth year after the war’s end Sri Lanka’s downward trending economic growth hits a record low is ominous. Growth is a headline measure for a peace dividend; however, there are many factors that impact investment that ultimately generate growth.

It’s easy to despair about Sri Lanka’s plight over the 30 year war and missed opportunity during the decade of peace. In 2015, a president pledging to rid corruption overthrew the authoritarian government of Mahinda Rajapaksa, but brought no such change. Graft is still rampant. The separation of powers between the president and prime minister is vague paralysing the functioning of the government. Still entrenched old oligarchs found new collaborators for corruption in the present government. This tarring by corruption scandals stalled the reforms. A peace dividend needed a system reset for better governance, nipping corruption and economic reforms. It did not happen.

WHILE IT FACED down a war, Sri Lanka’s economy kept growing. Around 2005, Sri Lanka’s GDP rose to a point that access to concessional debt started to reduce. By thistime, per capita GDP had passed $1,000. By 2018, per capita GDP was touching $4,000. In 2005, Sri Lanka tapped global debt markets for the first time. By 2008, commercial debt accounted for 11% of Sri Lanka’s external debt. However, by 2017, commercial debt had risen to 54.4% of our external debt (Chart 5).

3Sri Lanka took barely a decade since 2007 to issue $15.3 billion worth of International Sovereign Bonds (ISBs) or dollar bonds to investors hungry for yields. Murkier syndicated loans have been piled on top of this. A debt crisis is now real. With international sovereign bonds, Sri Lanka borrows at over 6%, and on average, these loans have to be repaid in seven years. From a Sri Lankan perspective, there are significant and simple financial advantages to borrowing from China at 2% and having an average period of 19 years to complete repayment, rather than borrowing from international financial markets at over 6% and having only 7 years to recycle it.

From 2018 onwards, Sri Lanka has to repay, on average, $4 billion annually for its existing foreign currency debt. This includes dollar-denominated Sri Lanka Development Bonds, sovereign bonds and concessional loans (Chart 3).


As a percent of GDP, government debt is now touching 83% (Chart 4 right hand axis). However, it isn’t so much new borrowing that has relative debt levels up in the years since 2012.

The rupee value of Sri Lanka’s total debt is estimated to have risen significantly in 2018, according to calculations by the World Bank, due to currency depreciation and high real interest rates (Chart 4). What the interest rate on international debt does not reveal is the explicit interest rate. Long-term Rupee depreciation is about 4% now (In 2018, depreciation was around 15%). So the explicit cost of foreign debt is higher than the nominal dollar interest.

4AS A RESULT, SRI LANKA has a problem that is difficult to address: low growth and high debt. Wearing towards consolidating spending will undermine the little economic growth it now has, and wearing towards expansionary policies (more government spending) to spark growth will add to the already high debt pile.

In other words, the path of extravagance is not available because today’s extravagance leads to more debt, and the path of austerity is also unavailable because today’s austerity leads to a lack of growth.

The overall interest cost of debt is now equivalent to 6% of GDP, or about 30% of annual government expenditure. Most of Sri Lanka’s budget defi cit is driven by the cost of debt interest service. Th e primary of the budget (the gap between government income and expenditure before loan interest) has come into the positive since 2017. Managing debt is not just about austerity and cutting expenditure, but it also has to do with stimulating economic growth.

Sri Lanka has used two strategies by default thatkept debt under check. The first is to inflate away the value of the local debt. In Chart 4, this is the ‘real interest effect’. Th e problem with this strategy is that it impoverishes the country while devaluing the local currency debt. It is also counterintuitive that inflation can reduce indebtedness, but this is in the view of the borrower and not the lender. For lenders, inflation is an effective taxation. Th e second is periods of high growth like in the three years immediately following the war’s end.

Sri Lanka’s recent economic shocks have been due to floods and drought. These now are well-known challenges that somehow the country has not managed to mitigate by anticipating and planning. The loss of productivity due to floods and droughts lower growth.

Economic shocks combined with low inflation have been a double whammy for Sri Lanka’s debt management causing the debt-to-GDP ratio to increase significantly. Chinese bilateral loans since 2012 have been at 2% interest. It’s Sri Lanka’s commercial loans that are costing around 6.5% and more, with currency depreciation that is the greater challenge.

DURING THE 20TH century, Sri Lanka’s economy was devoted to agriculture. Employment in the farming sector accounted for about 28.7% of total jobs in 2015 (down from 34.5% in 2002), followed by other services (23.3%), manufacturing (18%) and commerce (13.5%). Although it employs 28% of the workforce, farm workers only contribute 8% to GDP. Th e gains from switching workers from farming to more productive areas can be amazing for the economy. Despite these challenges, Sri Lanka’s persevering with democracy is hopeful. Unlike in the zero-sum mentality of war, functioning democracies force empathy and compromise to implement policy.

5During the last decade, emotions about a hate filled past have cooled. Race is still a delicate subject, but is often superceded by economic challenges for those living in the former warzone and outside it. Only few societies deal with post conflict as did South Africa after apatheid or Germany after the second world war. Sri Lanka isn’t one of them. Now that the humdrum postconflict work is done, like repatriating refugees and disarming former combatants, failing to provide at least a solid peace dividend stands out as an abject post conflict calamity.