The Air Tigers' recent attacks on major military and economic targets in and around Colombo are seriously threatening the Sri Lankan economy.
Given the concentration of military and economic assets in Colombo and the dependence of the economy on foreign trade and tourist arrivals, any sustained threat to the capital will have very unpleasant consequences for the country as a whole.
The first air raid by the fledgling Tamileelam Air Force (TAF) on March 26, hit the airbase at Katunayake, adjacent to the Colombo international airport. The second, on April 29, struck the oil storage facilities at Kolonnawa and Muthurajawela in and around Colombo.
Although in both cases, the physical damage was negligible, the raids should be a wake up call for the managers of the country's economy. More attacks are on the cards as the Tigers' military spokesman, Rasaiah Ilanthirayan, had publicly vowed to destroy Sri Lanka's "strategic assets" so long as the government continued to shell and bombard Tamil areas in the North and East.
If terrorist attacks increase, tourism will be the first to suffer. Last year, there were over 500,000 arrivals and the industry had raked in $ 410 million to be the third largest dollar earner. With four million passengers passing through the airport, Colombo was a major hub in South Asia.
But after the April 29 strike, Emirates and Cathay Pacific suspended their flights. Singapore Airlines stopped night flights as the Tigers' raids tended to take place at night. Australia joined some European countries in issuing an adverse travel advisory, which could affect arrivals, already down by 36 per cent over the past year. Leading hotels had begun to put off plans for expansion.
"It is unfortunate that this should happen when Colombo was becoming a major hub for transit and transhipment in this region. If the war continues, it may lose this position," said Harsha de Silva of the economic think tank LIRNE Asia.
In April, Fitch had given Sri Lanka a rating of BB- with a negative outlook as the domestic security situation posed risks to economic stability and growth.
Hike in defence spending
With the air raids exposing major chinks in the defence system, Sri Lanka is going in for expensive air surveillance, detection and night operations equipment and more aircraft. The budgeted defence expenditure for 2007 was SLRs.139 bn ($1.25 bn), a 28 per cent increase over the past year. "But this could go up to SLRs.200 bn ($ 1.8 bn) soon," says former Air Force Commander, Harry Gunatilleke.
The extra spending on defence is going to slow down developmental expenditure, especially on infrastructure. The economy is indeed growing at 7.5 per cent, but the growth is not in the vital sectors, points out de Silva. "Telecom accounted for 20 per cent while a critical sector like agriculture accounted for only 1%," he says.
Inflation is a crushing 17 per cent. "Real wages fell by 10 per cent in agriculture and 12 per cent in the services. They increased only in the inefficient and loss making public sector," de Silva says.
In the absence of fiscal discipline, the budget deficit is 8.4 per cent of GDP. And the burden of public debt is mounting. "Even taking into account the low cost of much of the debt owed to foreign creditors, it remains high by the standards of rating peers at 93 per cent of GDP. And the interest payments on the debt absorb almost 30 per cent of government revenues," Fitch said in April.
The government expects the war to be over in three years. But before that, the soaring defence expenditure may have sent the economy into a tail spin.