THE Sri Lankan economy appears to be heading down as the Tamil guerrilla war heats up.
Since the Tamil Tigers broke a cease-fire in April, the government has had to pour scarce resources into the war effort, reigniting inflation and sending the Colombo stock exchange sliding. ''Twenty-five percent of the country's budget now goes for military spending,'' says David Dunham, resident coordinator for the Institute of Policy Studies in Colombo. ''It has increased the deficit and fueled inflation at an alarming rate.''
Previous conservative governments kept the Sri Lankan economy growing at about 5 percent annually from 1990-93, largely by confining the war to the north and east where Tamils are concentrated. The social democratic government of Prime Minister Chandrika Kumaratunga, which took office one year ago, faces a far more complicated political and economic situation.
During the '80s the conservative United National Party (UNP) government privatized some state enterprises, opened free-trade zones, and offered other incentives to foreign investment. It helped establish Sri Lanka as a center for low-wage garment factories. Last year, garments accounted for the second highest net export, just behind tea.
Sri Lanka has also been slowly rebuilding its tourism industry after past flare-ups in the civil war. So far this year, the government recorded 209,500 tourist arrivals, up 5.3 percent from last year. But that's only about the same level as 1982. The resumption of fighting and terrorist bombings by the Tamil Tigers has slowed what likely would have been a major leap in tourism.
''There have been two unsuccessful attempts to blow up the international airport this summer,'' says the Rev. Rienzie Perera, director of the National Christian Council. ''That's bound to discourage tourism.''
The Kumaratunga government came to power last year on a peace platform. The government and Tigers agreed to a cease-fire and held negotiations, but fighting resumed in April. In August, the government proposed a new peace package that would give greater power to Tamils in governing their own affairs. So far, the Tigers have not formally responded to the offer. They are fighting to create a separate Tamil state in the north and east of Sri Lanka. Both sides have intensified fighting in recent months, and
resumption of peace talks seems unlikely in the short run.
With money earmarked for social services and building infrastructure now poured into the war effort, inflation has shot up. After hovering at about 1 percent at the beginning of the year, in May it hit 8 percent and 13 percent by July.
Foreign companies already in Sri Lanka are maintaining their operations, but new firms appear unlikely to invest, according to Mr. Dunham. A.S. Jayawardena, secretary to the Ministry of Finance, admits that over the past year, ''There has been a slowing down of the flow of investments to the country. This is mainly seen in the share market.''
War and political instability have led to a precipitous slide in the stock market. The All Share Price Index dropped below 700, down about 25 percent from a year ago. That hurts government efforts to further privatize state enterprises, because they would sell for only a fraction of their worth in the depressed stock market.
The Kumaratunga government also faces problems from a newly emboldened trade-union movement. Under the UNP, workers lost ground economically and unions were repressed, Dunham says. The government has formulated a Workers Charter that guarantees certain rights, including requiring employers to recognize unions if voted in by their employees. The Chamber of Commerce and other employer groups promise to oppose the charter when it is submitted to parliament later this year.