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Sri Lanka The Economy in the Late 1980s
Growth in GDP was estimated at 3 percent in 1987, down from
4.3 percent in 1986, and the lowest level in a decade (see
table 7, Appendix A). By 1987 it was clear that the ongoing civil
unrest was causing serious economic difficulties, mainly because
rapidly increasing defense outlays forced the government to cut
back capital expenditure and to run a large budgetary deficit.
Concern over the decline in foreign investment and extensive
damage to infrastructure mounted as sectors such as tourism,
transportation, and wet rice farming suffered production losses
directly related to the decline in security.
By early 1988, the ethnic conflict had resulted in extensive
property damage. Infrastructure damage in Northern and Eastern
provinces was estimated at Rs7.5 billion in August 1987 and was
expected to be revised upwards to include the widespread
destruction in the Jaffna Peninsula
(see
fig. 1). In the
predominantly Sinhalese areas, riots against the 1987 Indo-Sri
Lankan Accord caused damage to government property estimated at
Rs4.8 billion
(see Sri Lanka - Foreign Relations
, ch. 4).
In early 1988, future economic prospects were closely linked
to the security situation
(see Sri Lanka - Primary Threats to National Security
, ch. 5). Late the previous year, the government
succeeded in obtaining commitments from foreign nations and
international organizations to finance an extensive
reconstruction program for the 1988-90 period
(see Sri Lanka - Foreign Aid
, this ch.). If there were a pronounced ebb in the political
violence plaguing the island nation, it would be probable that
the official target of Rs80 billion foreign aid over this
three-year period would be reached. Aid on this scale, which
would be a substantial increase on the already generous levels
received, would not only enable the rebuilding of infrastructure
destroyed by the violence but also fuel growth and allow the
large trade and budget deficits to continue. Accordingly, the
1988 budget foresaw a sharp decline in defense spending and an
increase in capital expenditure. These economic plans, however,
depended on a peaceful solution to the country's political
problems. If political violence escalated in subsequent years,
not only would the government have to shift its spending back to
defense, but some of the expected foreign aid probably would be
suspended.
Data as of October 1988
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